July 31, 2013

How Bad Was Financial Crisis? $30 Trillion Lost Bad: Dallas Fed

The cost of the crisis may top the value of one year of the country’s economic output when hard-to-measure factors are included

The 2007–09 financial crisis cost the United States about 40-90% of one year’s economic output—at least, according to a report released Monday by the Federal Reserve Bank of Dallas.

In “How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis,” Tyler Atkinson, David Luttrell and Harvey Rosenblum describe how they came up with the estimated $6 trillion to $14 trillion preliminary cost of the crisis, which represents some $50,000 to $120,000 for every U.S. household.

“A stark legacy of the recession is extended unemployment—a lackluster labor market that is associated with the deterioration in mental and physical health, including reduced subjective well-being among both the unemployed and employed,” the three authors write.

The total loss of U.S. wealth tied to the crisis, after negative consequences on human capital and the discounted flow of future wage income are included, may range from about $15 trillion to $30 trillion, or 100 to 190% of 2007 output, the authors find.

Other factors, such as national trauma, job loss and lost opportunity, should be taken into consideration as well, when accounting for the cost of the crisis, the authors note.

Fiscal-Related Fears

The unintended consequences of resulting government intervention also must be measured, the authors state, since U.S. government debt would be trillions lower if not for the crisis and increased federal debt reduces capacity to respond to another crisis.

“If the U.S. enters another economic contraction while debt levels remain high, the federal government might face a no-win situation–either continue deficit reduction despite a contracting economy, or accumulate even greater debt and risk increasing what could become unmanageable interest costs,” the Fed Reserve Bank of Dallas experts explain.

Furthermore, the Federal Reserve’s accommodative monetary policy stance, “stuck at the zero bound and stretching into the unknown territory of extended asset purchases” is another implicit cost of the crisis, they note.

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