Markets Plunge. Economies Stall. Panic Spreads. It All Feels Very 2008.

On Friday, world leaders were readying measures aimed at dispelling that impression. In Washington, the Trump administration and Congress neared agreement on a spending package to help workers and companies harmed by the pandemic. In Berlin, Chancellor Angela Merkel said Germany would set aside its longstanding aversion to debt while spending as needed to preserve public health and protect businesses.

But those actions — while a potentially crucial source of relief for people and businesses — cannot snuff out the basic threat to the world economy. Only the containment of the pandemic can achieve that. And that objective unavoidably involves worsening the economic straits in the immediate term.

Much as in 2008, markets have been plunging because investors have grown terrified of every variable as imaginations run toward dark places. In normal times, markets process gradations of risk, pricing stocks and bonds according to the probability that something bad could transpire. In times of panic, markets avoid all risk as existential.

That psychology was so fierce in 2008 that nearly every market threatened to break down. The world is nowhere near that level of panic now, even as stock markets dropped further on Thursday than any day during the global financial crisis.

But some elements appear more perilous.

Investors grasp that the traditional crisis response — central banks dropping interest rates — is effectively inoperative. Rates are already so low in the United States, and negative in Europe and Japan, that pushing them lower yields scant benefits. Cheaper credit does not bring workers back to factories or shoppers back to malls so long as the virus remains a threat.

As the U.S. Federal Reserve, the Bank of England and the European Central Bank have intervened with emergency measures, each has precipitated a fresh plunge in stock markets. The central banks sought to boost confidence by demonstrating their resolve. But markets divined a different message: The world was on fire, and the fire department was out of water.

Article source: https://www.nytimes.com/2020/03/13/business/coronavirus-global-economy.html