If you want to have a big political battle in Washington, start yelling about people freeloading on food stamps, but if you actually care about where the real money is, look at the massive wreckage being done by the Wall Street boys and incompetent policy makers in Washington.
JAN. 21, 2014
On Sept. 15, 2008, the investment bank Lehman Brothers collapsed after a long struggle to avoid bankruptcy, paralyzing the world’s financial networks and tipping the United States economy into an abyss from which it has not yet fully emerged.
More than five years later, there is still no answer to perhaps the most critical question raised by the man-made disaster: How much did it all cost?
In July, three economists at the Federal Reserve Bank of Dallas, Tyler Atkinson, David Luttrell and Harvey Rosenblum, gave it a shot, at least as far as the United States economy goes.
Their analysis — cautious and tentative, critically dependent on debatable assumptions — underscores how difficult it is, still, to accurately tally the costs of the most severe economic catastrophe since the Depression of the 1930s into a coherent, conclusive measure of loss.
“It is not difficult to understand why such accounting exercises are rare,” they wrote. “They require comparing a world in which no financial crisis occurred to what actually happened and what is likely to transpire.”
Most strikingly, their examination offers a panoramic view of the variety of ways in which the financial crisis diminished the nation’s standard of living. At a bare minimum the crisis cost nearly $20,000 for each American. Adding in broader impacts on workers’ well-being — an admittedly speculative exercise — could raise the price tag to as much as $120,000 for every man, woman and child in the United States. With this kind of money we could pay back the federal debt or pay for a top-notch college education for everyone.
The portrait of loss, tentative as it is, suggests that even the most far-reaching measures might be justified to ensure it never happens again. But you wouldn’t know that from the current debate.
In December, the American Bankers Association sued to stop a provision of the Volcker Rule, part of the Dodd-Frank financial reform law, and intended to stop banks from engaging in risky trading on their own account.
It pretty much won, convincing regulators that forcing banks to get rid of a complex debt security used by smaller institutions to raise capital would impose immediate and unnecessary costs on small community banks.
Separately, the Securities and Exchange Commission has taken a legal battering at the hand of business-friendly judges arguing that the agency has not adequately assessed whether the benefits of its rules justify the costs. This has largely stopped the agency’s rule-making.
Regulators creating international banking standards in Basel, Switzerland, have also faced a drumbeat of criticism from bankers who argue that proposed rules to increase the capital cushion international banks must amass to buffer against losses would slice 3.5 percent from the world’s economic output and cost 7.5 million jobs.
This month, as American regulators watered down the Volcker Rule in response to the bankers’ lawsuit, regulators in Basel agreed to soften some of their capital requirements, too.
Over all, almost half the rules required by the Dodd-Frank legislation have yet to be written. But the financial industry would love to slow regulation further. “Our goal is to press the pause button on the multitude of regulations and rules, to give the industry time to digest them,” said James Ballentine, executive vice president for congressional relations for the banking association. “The industry should have an opportunity to determine what is working and what is not.”
The bankers’ points are not necessarily wrong. Regulation does impose costs. Some banking rules and regulations might make loans scarcer or more expensive. Restrictions on banks’ businesses are likely to eat into their profitability.
Nonetheless, the legal attack on the new regulation is disingenuous. Increasing the industry’s costs and reducing its profits is an objective of the regulation overhaul, not a bug. The goal is to ensure that banks internalize the costs of their risky business rather than have them borne by the rest of society.
“Regulatory agencies are being sued to prevent that the law be put in place because it will cause the industry that crashed the world to lose money,” said Dennis Kelleher, who heads Better Markets, a nonprofit formed after the financial crisis to press for stricter regulation of the banking sector. “But Congress made the decision of who was going to bear the costs.”
Indeed, even if financial regulation imposes broader economic costs, what matters is how they measure up against the benefit of preventing another financial disaster.
The position taken by bankers, business-friendly judges and many Republicans in Congress is that every new financial rule must justify its existence based on a narrow monetary tally of costs and benefits. But the approach ignores the far greater benefits promised by the entire regulatory package.
To start, the economists at the Dallas Fed modeled how much economic activity would be lost by the time the nation returned to its growth path before the crisis. In their study, they initially assumed that the economy would return to its previous path by 2023, and concluded that the total loss would amount to 40 percent to 90 percent of a year’s worth of economic output. That’s about $6 trillion to $14 trillion in today’s money — or $19,000 to $45,000 per person.
Others have used different methods and come up with similar estimates. Better Markets estimated that the crisis cost $12.8 trillion in lost output. Last year, the Government Accountability Office estimated that the price tag could range from a few trillion dollars to over $10 trillion.
But what if the path is not recovered so quickly? So far, the economy has made up little if any of the ground it lost. Perhaps the shock from the crisis slowed the nation’s growth rate for good.
Under a more pessimistic assumption, the Dallas Fed economists estimated that the cost could be 65 percent to 165 percent of annual output. The upper limit amounts to about $25 trillion, almost $80,000 per American.
But even that might be an underestimate. Using a different method of analysis, the economists also looked at how Americans cut back on purchases of consumer goods. They concluded that the expectations of the lifetime income of working age adults fell by almost $150,000, on average.
Most tallies stop there. But that is not because this covers the entire fallout from the crisis. Rather, it is because the rest is even harder to measure.
Consider joblessness, which damages physical and mental health and breeds poverty, which contributes to crime. It affects the structure of families. Only about 500,000 new households were formed each year from 2007 to 2010, a third of the average pace during the previous decade.
It is impossible to put an accurate dollar sign on these social costs. Still, the economists at the Dallas Fed tried.
Recent research suggests that a jobless worker’s well-being declines 15 times as much as would be justified by the loss of income alone. Based on that number, Mr. Luttrell, who remains at the Dallas Fed, and Mr. Atkinson and Mr. Rosenblum, who have left, concluded that the unemployment spike between 2008 and 2012, which reduced aggregate wages by $900 billion, had the same effect on workers’ well-being as having lost $14 trillion, approximately another year of economic production in the United States.
Finally, estimates of the costs of the crisis would be incomplete without an assessment of the government’s role. And the Dallas economists borrowed an old estimate by the International Monetary Fund that direct support above and beyond the previously existing public safety net totaled 82 percent of the nation’s G.D.P. — about $12.6 trillion. This is about the size of the federal government’s debt to the public.
While all those numbers shouldn’t be taken at face value, the damages potentially add up to a staggering total. Even acknowledging that they are imprecise, speculative proxies of the true costs of our financial mess, they underscore how estimates of loss based solely on lost G.D.P. are far too conservative.
The Fed economists refrained from adding up the disparate costs from their analyses — which could risk double-counting losses. But simply adding the cost from the drop in well-being of the unemployed to the impact on G.D.P. would take the price tag to up to $120,000 a person. And that still leaves out many other measures of loss.
Every time you hear about the need to balance the costs of new financial regulations against their benefits, it might do well to think about that.