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.
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