Economics of the financial crisis: Any lessons for the pandemic downturn and beyond?

Abstract

The world economy entered the third decade of this century with uncertainties and challenges of COVID-19 pandemic before it had fully recovered from the lingering aftereffects of the financial crisis. The financial crisis ended a period of overall global economic growth and price stability during which globalization and its principles of trade, economic and political liberalization were widely held as the emerging international economic and political order. In domestic economy, most countries favored supply-side economics and monetary policy in a free-market setting. This paper appeals to economic logic and empirical evidence to critically study external and internal economic processes and policies particularly of major world economies to identify what caused the unanticipated onset of the banking crash and why the ensuing persistent downturn defied remedial measures. It concludes that major trading powers departed from their declared commitment to free trade and its basic rules with no effective institutional safeguards and deterrents. Internally, absence of efficient monitoring and supervi-sion of workings of nominal and real sectors allowed anomalies to develop within the market economy unnoticed. As regards inefficacy of policies against several years of stagnation, the paper discusses asymmetric performance of monetary tools and problematic application of fiscal policy to suggest revisiting supply-side and Keynesian approaches against their past performance and forge an eclectic kit of analytical and policy tools alongside the necessary organizational reforms.