Unsurprisingly, a majority of international relations scholars polled in May characterized the international response to the coronavirus as not very effective. Compared with 2008, the system has not worked.
The thing about the coronavirus pandemic, however, is that its effects have spilled over across a wide array of issue areas. And there has been one arena where international coordination has been, in some ways, superior to what happened in 2008: global finance.
The Bank of International Settlements released its annual 2020 report. A key theme is that the response by central banks to the crisis has been pretty darn good: “The response has generally been swifter, bigger and broader-based than it was for the [2008 financial crisis]. The authorities have deployed monetary, prudential and fiscal policies in a concerted way that probably has no historical precedent.” A glance at interest rate cuts, asset purchases, lending facilities and liquidity provisions confirms that assessment.
Indeed, the BIS notes archly that “in some respects, the success of central banks in calming markets and shoring up confidence has even helped spark some market exuberance: at the time of writing, equity prices and corporate spreads in particular seem to have decoupled from the weaker real economy.” The injection of liquidity has even helped arrest the crisis in emerging-market borrowing.
Why has the financial response been better? There are three big reasons. The first is that in this area — in contrast to every other dimension of the crisis — the United States has been the unparalleled leader. The Federal Reserve acted quickly to inject liquidity into the system and reopen swap lines with other key central banks. This helped to reassure jittery financial markets.
The second is that the 2008 financial crisis and its aftermath left banks and regulators better placed to cope with the current crisis. For one thing, banks simply have more capital on hand compared with 2008, in no small part because of the Basel III core banking standards and other domestic regulatory moves. This meant less panic at the outset. Furthermore, central banks inherited an array of emergency measures, from lending facilities to quantitative easing, that they could activate when the emergency became acute. If 2008 exposed the brittle nature of global finance, the 2020 response has demonstrated resiliency.
Finally, the elephant in the room is that it is simply much easier for central bank presidents to cooperate compared with other government officials. Central banks like the Fed are designed to be politically insulated. Even President Trump has acknowledged that he cannot fire Jerome H. Powell no matter how much he wants to get rid of him. Central bankers face far fewer domestic political pressures to cooperate.
The lessons to draw from this seem pretty obvious. Experience with past disasters can help with resilience for future ones. Technocrats free from political pressure sure seem to be outperforming more populist modes of governance. And U.S. leadership during a crisis really, really helps.
The last lesson is a cautionary warning — this cannot necessarily last independent of further cooperation. In May, Powell warned that while monetary policy could avert a liquidity crisis, fiscal authorities would need to act to avert a solvency crisis. Unless Congress acts quickly, unemployment benefits threaten to run out, and state and local governments will find themselves in a financial bind.
Powell is hardly alone in that warning. According to FiveThirtyEight’s Amelia Thomson-DeVeaux and Neil Paine, “economists think that a refusal by Congress to extend unemployment benefits or bail out state and local governments is just as likely to hurt the economy as local economies staying open in spite of COVID-19 spikes — or even closing because of the virus.”
In 2008, the subprime mortgage bubble led to a financial crisis that affected the real economy. In 2020, the real economy has affected global capital markets. So far authorities have helped to avert disaster. Without progress against the pandemic, however, this salve will only be temporary.