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Sallie Krawcheck speaks at TechCrunch Disrupt NY 2016.
- While the coronavirus crash feels similar to the 2008 stock market crash, it's not fundamentally the same, says Sallie Krawcheck, former CFO at Citi and founder and CEO of investing company Ellevest.
- While the 2008 crash was a slow burn, the coronavirus' economic impacts have been swift and the causes are much different, says Krawcheck.
- The unprecedented nature and health concerns of coronavirus add a layer of complexity this time, she says, and the recovery path for this crash is unclear.
- While Krawcheck says there are differences, she also says there's one similarity: The economy will eventually recover.
- Read more personal finance coverage »
Sallie Krawcheck was chief financial officer at banking giant Citi until September 2008. On the front lines, she had an inside view of the events leading up to the crash that triggered the Great Recession.
This time around, a very different cause makes it difficult to compare. Unemployment is at unprecedented levels after massive layoffs, and the uncertainty of the coronavirus pandemic's effects on business caused markets to tumble around the world.
"Every financial downturn is different, and every financial downturn is the same," Krawcheck, now the founder and CEO of investing company Ellevest, told Business Insider. Here are the key differences she sees between what's happening to the stock market today and the crash that triggered the Great Recession in 2008.
The coronavirus crash happened faster than the 2008 crash
From her position behind the scenes at a bank, the 2008 crash didn't look very sudden. "It actually started in the spring of 2007," Krawcheck said. "It was almost a slow motion tsunami washing over the markets and over the big banks." The fall of Lehman Brothers, which Krawcheck calls the "crescendo" of the crash, didn't happen until fall 2008.
"This one has happened so much more quickly," Krawcheck said.
The Great Recession was a man-made disaster
The causes of the two market crashes are vastly different. The coronavirus crash's causes are straightforward: The economy is shuttered due to stay-at-home orders, and non-essential businesses have made massive layoffs due to closures. High unemployment and uncertainty on top of health concerns are causing fallout throughout the economy and world.
The cause of the 2008 crash leading to the Great Recession was more complex. Selling impossibly profitable mortgage-backed securities following the popping of the housing bubble created a disaster that was, in a sense, man-made. Banks were over-leveraged, keeping a high debt and asset-to-equity ratio. As the big banks began to fold, the whole economy felt the waves. "It was too much time at the party," Krawcheck told Business Insider.
This time around, an invisible, natural force is grinding markets to a halt. On top of the economic issues of the coronavirus, the health worries around the coronavirus add a layer of complexity, Krawcheck said.
Markets are reacting quicker to public policy than they usually do, and policies are being made quicker
Krawcheck said that this time around, the government's actions are quicker to affect the stock market. And the government is stepping in quicker with policy. "There's this real-time conversation between the markets and Washington DC, which typically happens in a slower fashion," she said.
The day after the coronavirus stimulus package passed, the stock market re-entered bull market territory. Then, President Trump's comments on projected virus spread caused the Dow Jones industrial average to fall over 900 points. Markets have soared and fallen incredibly quickly with each passing policy, comment, and projection.
In the past, the two have operated much more independently, sometimes not affecting each other at all. In 2008, this was the case. She explained, "The market will say, 'We're going into recession. Look, the yield curve is inverted,' and the policymakers will say, 'We're going to ignore it.'"
"This is different from 2007 and 2008 because the policy makers are fully engaged," she continued.
No one knows what the recovery will look like - but recovery seems certain
Everything in this pandemic and the subsequent economic crisis is unprecedented. Krawcheck said that's another key difference.
"In previous recessions, the economy would flow in a more moderate pace," she said. "This isn't a roller coaster going down. This is the Tower of Terror dropping us. It has a sense of violence."
As for the recovery, it's hard to tell what it will look like. "There's no historic comparison. Will the recovery be V-shaped, will it be U-shaped, will it be L-shaped? We don't have a way of knowing," she said.
The coronavirus crash feels reminiscent of 2008, with high unemployment rates and ripples throughout the economy. But there are big differences in its cause and the way it's being handled that will change the way the economy will emerge from it.
"In a way, this feels worse," Krawcheck said. "But I think when you're in it, it always feels worse."
But, she added, there's hope: "The US has recovered from every single recession and depression."
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