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The Cost Of The Financial Crisis: $14 Trillion (Or More)

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"The Cost Of The Financial Crisis: $14 Trillion (Or More)"

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wallstreetWhen the housing bubble popped, dragging down the global economy with it, it was clear that much was lost. But figuring out just how much in dollar terms is a difficult task. A new report from the Federal Reserve of Dallas attempts to do just that and estimates that the country lost 40 to 90 percent of one year’s economic output was lost, depending on assumptions about what growth would have been without a crisis, which comes to somewhere between $6 trillion and $14 trillion in 2012 dollars lost thanks to the 2007-2009 recession. That means about $50,000 to $120,000 per household.

The report gets to this figure by assuming that the crisis is to blame for an enormous loss of economic output, a big decline in people’s wealth, negative effects of unemployment such as skills atrophying, an increase in government spending to stem the crash, and other costs.

The authors note, however, that this is a conservative figure that leaves out many factors. The psychological consequences were very negative but hard to quantify, and other less tangible consequences mean that the cost is likely higher than just one year’s economic output. Meanwhile, if output grows at just 2 to 3 percent over the next decade, as is expected, the loss rises to 65 to 165 percent of one year’s output. And the report doesn’t include a look at the spillover of the crisis to the global economy.

In fact, the estimate of economic loss would more than double if the drop in household wealth and the subsequent decline in consumption were taken into account. But the authors caution that other factors could have contributed to the decline in consumption, such as tighter lending conditions.

The paper also notes that the crisis had many negative consequences that may not come with a price tag. It points to surveys of wellbeing that show that the costs of joblessness have extended beyond just a loss in income and impacts both the jobless and the employed.

The authors say they undertook the exercise to be able to weigh the costs of new government policies that are intended to prevent another crisis against the cost of the last one. The Dodd-Frank financial reform bill was one step meant to do just that, yet since it was passed lawmakers, banks, and lobbyists have been working hard to undermine it. The rules that reign in the risky bets known as derivatives could be undermined. The biggest banks can’t prove that they are no longer too big to fail. They’ve also been pretty successful in watering down the Volcker Rule, meant to make sure risky bets for profit aren’t backstopped by taxpayer dollars. Meanwhile, industry lobbyists have been working beside lawmakers, many of whom take Wall Street cash, to weaken the bill.

While banks warned that implementing the new rules would come with a high cost, their profits have roared back, having nearly recovered completely since the crash. Yet the economic cost of their misdeeds continues to impact the average American.

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