Simon Johnson, MIT professor and former IMF chief economist, joins ‘Squawk Box’ to discuss the banking crisis, why it’s inappropriate to compare it to the 2008 meltdown, and what lessons can be drawn from the current turnmoil….(read more)

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Former International Monetary Fund (IMF) chief economist, Olivier Blanchard, has recently shared his views on why the current banking crisis is unlike the 2008 meltdown. In his opinion, the differences between these two crises are significant, and thus the responses needed to address the current crisis will have to be different as well.

Firstly, Blanchard highlights that the 2008 crisis was triggered by the collapse of the housing market and was centered around the United States. On the other hand, the current crisis has been caused by the COVID-19 pandemic, which has affected the entire world, causing countries to shut down their economies to contain the spread of the virus. Therefore, the measures needed to address the current crisis must focus on the global scale rather than the US alone.

Secondly, Blanchard posits that the sources of vulnerability are different in the two crises. In 2008, the vulnerability came from the housing sector, where banks made risky loans that they could not sustain when the market collapsed. In contrast, the current crisis has exposed the vulnerability of the entire financial system and has made it clear that the existing regulatory framework may have been inadequate in addressing the risks posed by non-bank financial institutions.

Finally, Blanchard notes that the actions taken to deal with the 2008 crisis were different from what is needed today. In 2008, policymakers bailed out the banks and provided liquidity to the markets, which helped stabilize the system. However, the current crisis requires a different approach, with policymakers needing to prioritize ensuring that firms can survive through the pandemic rather than simply bailing them out. Additionally, policies need to focus on the broader economy, such as providing support to small businesses and households, and not just the financial system.

In conclusion, Blanchard’s insights into the differences between the 2008 and current banking crises highlight the need for policymakers to adopt a different approach. Given the global scale and nature of the current crisis, policies will need to prioritize the broader economy rather than just the financial sector. As we navigate through this crisis, it is essential to learn from the lessons of the past and develop strategies that address the unique challenges presented by the current situation.