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Dallas Fed: Bottom-line cost of 2007–09 financial crisis estimated at $6 trillion to $14 trillion

For immediate release: July 29, 2013

Cost of crisis may be greater than the value of one year’s output when hard-to-measure factors are included

DALLAS—The 2007–09 financial crisis cost the United States an estimated 40 to 90 percent of one year’s output, a conservative estimate that may rise when factoring in additional negative consequences of the crisis, according to the latest issue of the Federal Reserve Bank of Dallas’ Staff Papers.

In the new issue, “How Bad Was It? The Costs and Consequences of the 2007–09 Financial Crisis,” Tyler Atkinson, David Luttrell and Harvey Rosenblum find the crisis cost an estimated $6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household.

However, alternative measures suggest the costs of the crisis are even greater—likely more than the equivalent of one year’s output, according to the authors.

The loss of U.S. total wealth from the crisis—including human capital, the discounted flow of future wage income—may range from about $15 trillion to $30 trillion, or 100 to 190 percent of 2007 output, the authors find.

Other factors such as national trauma, job loss and lost opportunity must be considered too when accounting for the cost of the crisis, the authors note.

“A stark legacy of the recession is extended unemployment—a lackluster labor market that is associated with the deterioration in mental and physical health, including reduced subjective well-being among both the unemployed and employed,” they write.

The unintended consequences of government interventions rank as a major cost from the financial crisis, the authors state. U.S. government debt would be trillions lower if not for the crisis and increased federal debt reduces capacity to respond to another crisis.

“If the U.S. enters another economic contraction while debt levels remain high, the federal government might face a no-win situation—either continue deficit reduction despite a contracting economy, or accumulate even greater debt and risk increasing what could become unmanageable interest costs,” the authors write.

In addition to fiscal policy concerns, the Federal Reserve’s accommodative monetary policy stance, “stuck at the zero bound and stretching into the unknown territory of extended asset purchases,” is another implicit cost of the crisis, the authors state.

Atkinson is a senior research analyst and Luttrell is senior economic analyst and special assistant to the president at the Dallas Fed. Rosenblum is executive vice president and director of research.


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