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Tuesday, September 10, 2013

Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath

How much did the financial crisis cost? This is from a Dallas Fed Economic Letter:

Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath, by David Luttrell, Tyler Atkinson and Harvey Rosenblum, Vol. 8, No. 7, September 2013, FRB Dallas Economic Letter: A confluence of factors produced the December 2007–June 2009 Great Recession—bad bank loans, improper credit ratings, lax regulatory policies and misguided government incentives that encouraged reckless borrowing and lending.
The worst downturn in the United States since the 1930s was distinctive. Easy credit standards and abundant financing fueled a boom-period expansion that was followed by an epic bust with enormous negative economic spillover.
Despite extensive reviews of the causes and consequences of the most recent financial crisis, there are few estimates of what it cost—the value of what society gave up. Such a figure would help determine the relative expense of policy proposals designed to avoid future crises. Any estimate of the toll exacted is bound to be incomplete—for example, there may be future expenses not yet recognized—so it’s useful to calculate a range of likely costs.[1]
What Society Gave Up
One way to measure the cost of lost output is in terms of how much worse off society is relative to a baseline trend that might have existed absent the crisis. Such an exercise is crucial to grasping the magnitude of what occurred and the effects of the still-emerging recovery. Output per person as of mid-2013 stood 12 percent below the average of U.S. economic recoveries over the past half-century, corroborating a large body of literature suggesting that recoveries from financial crises are slower than rebounds from typical recessions (Chart 1).
Our bottom-line estimate of the cost of the crisis, assuming output eventually returns to its precrisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household, or the equivalent of 40 to 90 percent of one year’s economic output. This seemingly wide range of estimates is due in part to the uncertainty of how long it might take to return to the precrisis growth trend. However, output may never return to trend—the path of future output may be permanently lower than before. If that’s the case, the crisis cost will exceed the $14 trillion high-end estimate of output loss. ...

    Posted by on Tuesday, September 10, 2013 at 06:03 AM in Economics | Permalink  Comments (24)


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