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Vol. 8, No. 7 • september 2013­­


Assessing the Costs and
Consequences of the 2007–09
Financial Crisis and Its Aftermath
by David Luttrell, Tyler Atkinson and Harvey Rosenblum

There are few
estimates of what
society gave up due
to the crisis: Our
conservative estimate
is $50,000 to $120,000
for every U.S.


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
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 halfcentury, 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.
The crisis consumed an enormous
sum of financial and housing wealth. U.S.
household net worth plunged $16 trillion,
or 24 percent, from third quarter 2007 to
first quarter 2009. In addition, it wiped out
a huge amount of “human capital,” both
current wage income and discounted
future wage income; that is, a household’s

Economic Letter


Rebound in Per Capita Output Weaker than in Previous Cycles

Real GDP per capita
index, 100 = cycle peak

Average of prior cycles

Still 12% below
average recovery


–3 –2 –1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Quarters after peak

NOTE: The shaded area indicates the range of major recessions since 1960, excluding the short 1980 recession.
SOURCES: Bureau of Economic Analysis; Census Bureau; authors’ calculations.

expectation of potential earning power.
If the effects of the crisis are permanent,
the path of consumption observed since
2007 suggests that the cost of the crisis
may be more than double the $6 trillion
to $14 trillion estimate. The results of both
the output-loss and path-of-consumption
approaches are presented in Table 1A.2
Some of the harder-to-quantify impacts
of the crisis, shown in Table 1B, are the
consequence of extended unemployment,
reduced opportunity and increased government presence in the economy.
Even taking into account the likely
overlap of estimates in Table 1A and 1B,



the total cost of the crisis easily exceeds
the value of the nation’s output for an
entire year.

Explaining the Output Loss
The $6 trillion to $14 trillion base
estimate of lost output following the
crisis depends on assumptions about
the economy’s trend rate of growth and
whether an oil-price shock in 2008 might
have caused a mild recession anyway.3
This estimate of the aggregate cost of
the crisis covers 2008 to 2023, when output is assumed to fully return to trend.
Ultimately, there is no way to know

Different Approaches to Measuring the Crisis’ Cost

A. Looking at Lost Output and Forgone Consumption

Cost in 2012 dollars

According to
path of output

According to path
of consumption

$6 trillion–$14 trillion

$15 trillion–$30 trillion



National trauma
and lost opportunity

government support

Up to $14 trillion

$12 trillion–$13 trillion

Up to 90%


Percent of 2007 output

B. Other Harder-to-Quantify Outcomes

Cost in 2012 dollars
Percent of 2007 output


for sure what path output would have
followed or even if the financial crisis
caused the output drop. The standard
assumption is that trend growth would
have continued at a pace similar to that
in the preceding period. From 1984 to
2007—a period often referred to as the
Great Moderation due to its relative
economic and price stability—the average annual growth rate of gross domestic product (GDP) per capita was 2.1
Conceivably, historically high crude
oil prices were partly responsible for
the contraction that followed, and trend
growth overstates what output would
have been. The cause of the oil shock,
however, may be inseparable from the
roots of the financial crisis. A globalimbalances narrative posits that an influx
of overseas demand for U.S. financial
assets fueled an unsustainable creation
of structured credit products (financial
instruments such as mortgage-backed
securities) that pushed real (inflation
adjusted) interest rates lower. This connection between financial flows and
various hard-asset commodity prices—
including the crude oil price spike—
sowed seeds of instability in 2007–08.
The estimated gap between what GDP
would have been absent the financial crisis and realized GDP is shown in Chart 2.
The graphic also captures the possibility
that an oil-shock recession would have
occurred regardless of the crisis.
The forecast (represented by the red
line in Chart 2) provides a reasonable
middle ground between the extremely
unlikely, immediate return to trend and
the uncertain, perpetual output loss
implied by a continued modest pace
of economic growth (represented by
the blue line in Chart 2). In addition to
impacting the amount of U.S. goods and
services produced, the 2007–09 bust
triggered (or is at least associated with)
a worldwide downturn. A similar outputloss exercise for world GDP excluding the
U.S. results in an estimated $8.1 trillion
loss just through year-end 2012.

Trauma and Reduced Capacity
While the recession was an economic
phenomenon, its impact went beyond a
sizable drop in output or consumption.
The adverse psychological consequences

Economic Letter • Federal Reserve Bank of Dallas • September 2013

Economic Letter
are enormous, even if they are not easily
Nonfarm payrolls fell by more than
8.7 million, or 6.3 percent, and the
number of unemployed climbed to 14.7
million over the course of the recession,
peaking at 10 percent of the nation’s labor
force in October 2009. Further, many
workers faced extended bouts of unemployment or left the labor force altogether. The ranks of the underemployed
(those who want a job but can only find
part-time work) and frustrated job seekers (those who become discouraged and
give up looking for work) rose to 12 million, a 94 percent increase. In July 2013,
four years after the recession is deemed
to have ended, labor underutilization
remains intractably high: 11.5 million
people are unemployed and an additional 10.6 million are underemployed or
Branches of economics that survey
broader measures of life satisfaction
apart from income have confirmed the
intuition of the nonpecuniary costs of
unemployment—for example, the psychological effects of stress and feelings of
diminished self-worth.4 In addition, higher unemployment has spillover effects on
the rest of society: decreased job security
for the employed as well as higher taxes
to fund the transfer payments to the jobless and the underemployed. While the
psychological toll of a weakened economy may be small for employed workers
relative to the unemployed, the aggregate
societal consequences can be significant.5
Although subjective well-being can
be hard to quantify, one study estimated
a cost of as much as $14 trillion from loss
of security in the workforce due to rising
unemployment.6 This figure represents
the lost income of the unemployed, the
value of the loss of subjective well-being
among the unemployed and the negative spillover effects on the employed,
including the adverse effects of high
unemployment on future income and job
A job is a path to dignity and a sense
of accomplishment that is paramount
to personal progress. Optimism regarding perceived opportunities—the notion
that the future will be better than the
present—is a crucial source of motivation for job seekers and job keepers. The



Output Loss Is Large Even with Optimistic Forecast

Real GDP, billions of 2009 dollars

Trend (constant GDP per capita growth)


Oil-shock-induced recession




Forecast return to trend
Blue Chip consensus forecasts
Output loss
from oil shock:
$2.1 trillion


Output loss
from financial crisis:
$11.7 trillion


’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21 ’22 ’23

SOURCES: Bureau of Economic Analysis; Census Bureau; Blue Chip Economic Indicators; authors’ calculations.

crisis deflated this sense of security and
optimism for many—reflected in a downward revision to households’ permanent
income, some of the decline in the labor
force participation rate and a slower pace
of household formation observed from
2007 through 2011. Individuals change
these behaviors when they reassess their
medium- and long-term prospects and
do not like what they see.
A stark legacy of the recession and
the lackluster labor market is reduced
opportunity and deterioration captured
in subjective measures of well-being.
Since the recession’s onset in December
2007, more citizens believed their income
would be lower in the future than thought
it would be higher. This is the first time in
any recession since the 1960s that income
expectations turned negative.7

Unintended Consequences
The crisis resulted in a significant loss
of trust in government institutions and
the U.S. capitalist economic system. In
the Fraser Institute’s Index of Economic
Freedom global ranking, the U.S. fell from
second in 2000 to 18th in 2012. The assessment by the economics and public policy
think tank is based on 42 variables that
involve aspects of government size, property rights, money soundness, international trade freedom and regulation.8 The
lower ranking reflected perceptions of lesssecure property rights, bigger government,
increased regulation of businesses and
favoritism accorded to special interests.

A crisis of confidence portends a
loss of public trust. Saving the system
from complete collapse—especially with
extraordinary government assistance,
including bailouts to a handful of giant
financial institutions—reinforced a perception that public support exists primarily for large, interconnected, complex
financial entities. Deemed “too big to
fail,” these financial intermediaries lacked
discipline and accountability leading up
to the crisis and proved largely immune
to the downside of their excessive risk taking. This special treatment violated a basic
tenet of American capitalism: All people
and institutions have the freedom to succeed and also to fail based on the merits
of their actions. In a way, the 2008–09
bailouts exacted an unfair and nontransparent tax upon the American people.9
Although unprecedented fiscal and
monetary action in the throes of panic
during 2008–09 may have prevented a
full-blown depression, such intervention
did not come without significant costs.
Society must deal with the consequences
of a swollen federal debt, an expanded
Federal Reserve balance sheet and
increased regulations and government
intervention for years to come. Direct
government support for the U.S. financial sector totaled approximately $12.6
trillion, or more than 80 percent of 2007
GDP—a sum over and above what was
provided via precrisis Federal Deposit
Insurance Corp. deposit insurance limits and the Federal Reserve’s traditional

Economic Letter • Federal Reserve Bank of Dallas • September 2013


Economic Letter

monetary policy operations and lenderof-last-resort functions.10
The degree to which the cost of public policies’ unintended consequences
should be attributed to the crisis is not
obvious. However, aggressive countercyclical fiscal and monetary stimulus
would not have been implemented if not
for the crisis, and thus the unintended
consequences are largely attributable to
the crisis. Government funds allocated to
fighting the effects of the crisis couldn’t be
spent on other items such as infrastructure
and education that enhance the nation’s
capital stock—its productive capacity.

At Least an Entire Year’s Output
The 2007–09 meltdown produced
a huge downshift in the path of economic output, consumption and financial
wealth. The nation has borne additional
costs arising from psychological consequences, skill atrophy from extended
unemployment, a reduced set of economic opportunities and increased government intervention in the economy.
Assuming the financial crisis is the root
cause of all that dislocation, an estimate
of the crisis’ overall cost must be weighed
against the potential costs of policies
intended to prevent similar episodes in
the future.
We conservatively estimate the loss of
national output as a result of the financial
crisis and its aftermath at between $6
trillion and $14 trillion. The high end of
this range is equal to nearly one year of
U.S. output. Including broader and moredifficult-to-quantify measures that reflect
the lingering trauma experienced by millions of Americans pushes these costs still


higher—possibly to as much as two years’
worth of forgone consumption.
Given this range of estimates, the tepid
economic recovery and the collateral
damage sustained, it is crucial to implement effective policies that avoid future
episodes whose magnitude could exceed
even the staggering costs and consequences of the most recent financial crisis.
Luttrell is a senior economic analyst and
special assistant to the president, Atkinson
is a former senior research analyst in the
Research Department and Rosenblum is
executive vice president and director of
research at the Federal Reserve Bank of

For an in-depth explanation of our cost estimates, see
“How Bad Was It? The Costs and Consequences of the
2007–09 Financial Crisis,” by Tyler Atkinson, David Luttrell
and Harvey Rosenblum, Federal Reserve Bank of Dallas
Staff Papers, no. 20, July 2013. For an analysis of systemic
risk and the recent financial crisis, see “Understanding the
Risks Inherent in Shadow Banking: A Primer and Practical
Lessons Learned,” by David Luttrell, Harvey Rosenblum and
Jackson Thies, Federal Reserve Bank of Dallas Staff Papers,
no. 18, November 2012.
These cost exercises use a 3.5 percent discount factor
(considered a mid-range discount rate) to calculate the
present value of future forgone output in fourth quarter 2007,
the business-cycle peak.
West Texas Intermediate crude oil prices doubled over the
12 months prior to July 2008, reaching a nominal record
high of $145 a barrel. See “An International Perspective on
Oil Price Shocks and U.S. Economic Activity,” by Nathan
Balke, Stephen P.A. Brown and Mine Yücel, Federal Reserve
Bank of Dallas, Globalization and Monetary Policy Institute
Working Paper no. 20, September 2008.
“The Economics of Happiness,” speech by Ben S. Bernanke at the University of South Carolina Commencement
Ceremony, Columbia, S.C., May 8, 2010.

Economic Letter

is published by the Federal Reserve Bank of Dallas. The
views expressed are those of the authors and should not
be attributed to the Federal Reserve Bank of Dallas or the
Federal Reserve System.
Articles may be reprinted on the condition that the
source is credited and a copy is provided to the Research
Department of the Federal Reserve Bank of Dallas.
Economic Letter is available free of charge by writing
the Public Affairs Department, Federal Reserve Bank of
Dallas, P.O. Box 655906, Dallas, TX 75265-5906; by fax
at 214-922-5268; or by telephone at 214-922-5254. This
publication is available on the Dallas Fed website,

The Bureau of Labor Statistics reported 144.3 million
employed and 11.5 million unemployed people as of July
2013. Approximately one-sixth of government outlays—
expenditures out of general federal tax revenues—fund
“means-tested programs” and tax credits that provide cash
payments or assistance for health care, food, housing and
education to households with relatively low income. These
expenditures impose indirect costs on those U.S. residents
who pay federal income tax.
See “New Measures on the Costs of Unemployment:
Evidence from the Subjective Well-Being of 2.3 Million
Americans,” by John F. Helliwell and Haifang Huang,
National Bureau of Economic Research, NBER Working
Paper no. 16829, February 2011.
See note 1, Figure 8 in Atkinson, Luttrell and Rosenblum.
See Economic Freedom of the World: 2012 Annual Report,
by James Gwartney, Robert Lawson and Joshua Hall
(Toronto: Fraser Institute, September 2012).
See “Choosing the Road to Prosperity: Why We Must End
Too Big to Fail—Now,” by Harvey Rosenblum, Federal
Reserve Bank of Dallas 2011 Annual Report, March 2012.
See “Fiscal Implications of the Global Economic and
Financial Crisis,” International Monetary Fund Staff Position
Note, June 9, 2009.

Richard W. Fisher, President and Chief Executive Officer
Helen E. Holcomb, First Vice President and Chief Operating Officer
Harvey Rosenblum, Executive Vice President and Director of Research
E. Ann Worthy, Senior Vice President, Banking Supervision
Mine Yücel, Vice President and Director of Research Publications
Anthony Murphy, Executive Editor
Michael Weiss, Editor
Kathy Thacker, Associate Editor
Ellah Piña, Graphic Designer

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