Financial crises and epidemics

April 19, 2020

Epidemics and financial crises are different beasts. But they are eerily similar underneath — The dynamics, the politics, the mistakes and the learning all are the same.

There are four stages of financial crises.

First, denial. There is no crisis, only a temporary hiccup and things will soon be back to normal. The authorities waste precious time since the best and cheapest way to deal with a crisis is early.

Second, weary recognition. Yes, there is a crisis, we have to do something, but let's not go too far. We have to keep the economy going.

There is nothing to be learned from those who have been through it before. The politicians and all the experts say "Trust us. This is a unique event, we are the best, and we will lead you out of it."

Third, a panicky overreaction. "Oh my God, there is a crisis. What can we do? Let's try everything". 80% of the cost of financial crises is caused by overreaction.

Finally, postmortem. Do we learn from the crisis or not? Probably not. Perhaps three-quarters of the time, we forget crises as quickly as possible and learn nothing.

I am not an epidemiologist, but the way be Corona crisis is playing out fits well into the financial crises patterns I have studied.

Some countries are quite good at dealing with financial crises. We saw that in 2008, when the Asian and Latin American countries that had suffered so many crises before respond optimally in 2008. The European countries had not seen a crisis in two generations and it showed.

It's the same in the 2020 Corona crisis. The Asian countries learned from their recent epidemics, why they are doing so well today.

The worst are those European countries led by panicky and absent politicians and arrogant incompetent scientists, like the UK.

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