What Can the Credit Crisis Teach Us About Flu Pandemics?
Long before swine flu hit, Timothy Geithner testified to Congress about the danger of a strange new epidemic. “Contagion spreads,” he warned in 2008, “transmitting waves of distress to other markets.” The contagion was loan defaults, and Bear Stearns was patient zero. The Fed’s bailout of Bear, he hoped, would slow or stop the spread of defaults across the financial system.
Around the same time, Yale economist Robert Shiller published an essay in The Atlantic calling the housing bubble an epidemic of “infectious exuberance,” which threatened to collapse into one of “irrational pessimism and mistrust.”
Now that we’ve seen this financial pandemic come to pass, and have lived through the first wave of a new influenza epidemic, it’s a good time to ask what, if anything, the financial crisis can teach us about handling the flu.
First, both crises were predicted far in advance, but still managed to surprise us when they hit. Ignoring a drumbeat of warnings from experts, Wall Street was still caught off guard by the drop in home prices and wave of mortgage defaults that followed. While we were watching for avian flu, swine flu spread from Mexico around the globe so quickly that sealing our borders against it would have been “akin to closing the barn door after the horses are out,” to borrow a phrase from President Obama.
Both the credit crisis and a flu pandemic are problems of risk management. Banks, overestimating the health of the economy, kept too little cash on reserve to cover their liabilities. Likewise, experts warn that hospitals are too short on staff and beds to handle the surge of patients they will receive in a flu pandemic. Running with such a small margin for error in the face of a looming crisis wasn’t good for banks. It’s a lesson we should be quick to learn for our hospitals.
Second, while the news cycle is short, flu pandemics and financial crises are long. We’re used to catastrophes like Hurricane Katrina or the 9/11 attacks, where the initial shock is over in a day. But the Wall Street meltdown stretched on for months, dissolving into a recession that could last for many more. The flu isn’t much quicker. The Centers for Disease Control expect a flu pandemic to pass in waves across the country for a period of 3 to 12 months. Just because the swine flu seems to be in remission now doesn’t mean we’ve dodged the bullet yet.
Finally, blurring the line between the flu and the recession even further, there’s good reason to think a flu pandemic could inflict almost as much damage to the world economy as the Wall Street crisis has. One recent estimate put the cost of the financial crisis at $50 trillion worldwide. Gary Becker writes that a serious flu pandemic could inflict an additional $20 trillion in losses.
The good news in all this is that individual actions do matter. The mortgage crisis was stoked by homeowners willing to over-borrow themselves into poor financial health, and merrily spread by traders chasing risky rewards. As the crisis mounted, panicked investors drove stock prices down from over-valued highs to under-valued lows. If there’s a silver lining to this recession, it’s that consumers are being more cautious, saving more, and borrowing more wisely.
Likewise, the course of a flu pandemic will be affected by the actions each of us take. When a flu pandemic hits, it will be important to follow public health guidelines: wash your hands, cover your mouth, stay home from work if you’re feeling sick, and stay away from crowded places. Even simple things like social distancing (keeping about three feet between yourself and those around you) can be a powerful weapon against the spread of flu.
Systemic shocks like recessions and disease pandemics are by definition overwhelming to even our most powerful institutions. But they emerge from individual actions, and taking ownership of your little corner of the crisis isn’t just therapeutic, it’s good for everyone.