2007-2009 Financial Crisis Cost Tax Payers $30 Trillion

2008 has come and gone and feels like a distant memory. The economy is back on its feet and the banks which were basically devastated because of the crisis or responsible for creating the crisis are in the best of health.

So it begs the question: "How Bad Was It? Well, I just finished reading a research paper from the Federal Reserve Bank of Dallas; entitled: How Bad Was it? The Costs and Consequences of the 2007 to 2009 Financial Crisis." And in the report, the researchers estimate that the recent financial crisis cost our nation $6 to $14 trillion in losses using standard estimates but using other reasonable assumptions, the loss may be closer to $30 trillion if you add in other long term costs directly related to the financial crisis. So what is this loss relative to the size of the U.S. economy? As of the latest figures the size of our economy is over 16 Trillion dollars. So the loss was huge. More on this later.

Breaking down the $6 to $14 trillion loss estimate is based on a differential - between what the economy is and what it could have been without the financial crisis - so, of course, this estimate is based on a lot of assumptions - but even so, it's the first analysis I have seen on the cost of the financial crisis. And it's important because it tells us how expensive... government policy decisions can be... for American taxpayers... because if you divide that cost across all tax-paying American households, it translates to $50,000 to $120,000 per US household at the basic level. And that's just a conservative estimate.

The study also points to a dramatic drop in total wealth due to lower wages as a result of the jobs disruption caused by the crisis - with US household net worth down $16 trillion from mid 2007 through the beginning of '09 - because roughly one-fourth of all household wealth evaporated in a matter of month. How did it evaporate? Through lower portfolio values, lower home prices, lower money in the bank which shook household confidence severely. And on this point - the point of total wealth and net worth - seniors were hit particularly hard - not only from the drop in the value of their stock and bond portfolios, but through the lower interest rates which were necessary to keep the economy afloat. I don't have to tell you how this low interest rate policy represented a significant loss of income.

In addition to the financial impact, there are also the psychological costs of joblessness beyond lost income. During this recession, more than 8.7 million workers lost their jobs and faced extended bouts of unemployment. By June 2009, 12 million working Americans were either unemployed or underemployed - with low paying or part time jobs that were below their skill level - and many became so discouraged that they just stopped looking for work altogether. This creates psychological burdens that go far beyond lost income - burdens-such as the cost of being forced out their homes for not making mortgage payments, having to forcibly split family units to make ends meet, and so on.

Data also shows that the average number of households formed - through marriage or partnership - dropped to a third from 1.5 million per year to merely half-a-million - mostly because many working-age children who would normally go out and stay independent, opted instead to staying with their parents to weather the downturn.

Also consider that this lack of employment has meant more unemployment payouts by the government - the government uses borrowed money which increases government debt just at a time when less tax money is coming in. This causes government debt and budget deficit levels to expand as the Government scrambles to get money to people who don't have jobs.

So while the government did step-in with unprecedented fiscal and monetary action to prevent a full-blown depression, such intervention had significant costs such as a swollen federal debt, an expanded Federal Reserve balance sheet and increased regulation for years to come, which attempts to put in place new banking controls so a similar crisis would not happen again.

So when you add it all up in dollar terms, the loss will likely be closer to $15 to $30 trillion from wealth reduction, with up to $14 trillion more for national trauma and lost opportunity and $12 - $13 trillion in extraordinary government support. And that's without counting the repercussions of this crisis abroad.

The Dallas Fed report also cites damaged public trust in government-supported institutions and the capitalist economic system - where too big to fail financial companies that precipitated the crisis were given massive dole-outs and preferential protection - and walked away largely unscathed by the crisis they were largely responsible for creating/// while losses, unemployment and significant lifestyle disruptions were disproportionately borne by taxpayers.

So, coming back to the question of how much the crisis cost in easier to understand terms, The Dallas Fed puts the loss at 40 to 90 percent of the entire 2007 output of the United States.

Putting it another way, we lost about 1 whole year of economic output. One whole year.

This is basically why the economy has taken so long to recover back to its former levels, and no one knows exactly how long it would take to totally heal from such a devastating blow.

So when collective circumstances and actions - such as bad loans by banks, rating agencies failing to do their jobs, lax regulatory policies, reckless lending, low interest and easy credit - when these collectively cause havoc, they impact the economy over the long run and we all pay a very significant price - individually and collectively as a nation. So my hope is that my listeners - American taxpayers - understand that policy decisions and private actions tremendously impact our lives and it pays to be sure that your own financial house is in order. You may be able to count on the economy for a while, buts it's entirely up to you to understand what is in your control and what is not. And to make the right money decisions to protect you from events that are not IN your control.

This means creating a savings pool, investing wisely, spending reasonably and thinking and preparing for the future. If you had done this well, the distressing circumstances which almost brought America to its knees, may not have had as devastating effect on you as it did on so many others. And this, my friends, is what it means to live your one best financial life.

at 5:30 PM
Back to Top