Losses incurred by the financial crisis of 2007-2009 could exceed $10 trillion, and the effects could linger for years to come, according to a just-released report by the Government Accountability Office (GAO).
The GAO says in its report that studies estimating the losses of financial crises based on lost output—value of goods and services not produced—suggest losses associated with the recent crisis could range from a few trillion dollars to more than $10 trillion.
The crisis also resulted in large declines in employment, household wealth and other economic indicators, the report says, with some studies suggesting the crisis could have “long-lasting effects.” For example, “high unemployment, if persistent, could lead to skill erosion and lower future earnings for those affected.”
Since the crisis began, federal, state and local governments have also faced greater fiscal challenges, the report points out, “in part because of reduced tax revenues from lower economic activity and increased spending to mitigate the impact of the recession.”
The report—written at the request of Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Rep. Michael Capuano, D-Mass.—is called “Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act.”
Johnson said in a statement after the report’s release that “nearly five years after the failure of Bear Stearns, the devastation caused by the financial crisis is still with us.” The “truly staggering sum” of losses since the crisis is “a stark reminder of the need to fully implement the Wall Street Reform Act” and minimize the risk of another costly crisis, he said, noting that one of his priorities will be to “continue to work with the financial regulators to ensure that the new law is implemented to promote financial stability and protect consumers.”
But GAO stated in its report that “quantifying” the Dodd-Frank Wall Street Reform and Consumer Protection Act’s benefits since being passed into law in 2010 is “difficult.”
While Dodd-Frank’s “reforms could enhance the stability of the U.S. financial system and provide other benefits, the extent to which such benefits materialize will depend on many factors whose effects are difficult to predict,” GAO said.
“According to some academics, industry representatives, and others, a number of the act’s provisions could help reduce the probability or severity of a future crisis and thereby avoid or reduce the associated losses. These include subjecting large, complex financial institutions to enhanced prudential supervision, authorizing regulators to liquidate a financial firm whose failure could pose systemic risk, and regulating certain complex financial instruments.”