Costs and Consequences of the Financial Crisis

The goal of the Dallas Fed report “How Bad Was It? The Costs and Consequences of the 2007-’09 Financial Crisis” was to garner a cost estimate of the Great Recession to compare with the cost of policies intended to prevent similar episodes.

The financial crisis was associated with a huge loss of economic output and financial wealth; psychological consequences and skill atrophy from extended unemployment; an increase in government intervention; and other significant costs.

There are four sections to the report:

The first section estimates the gap between a counterfactual—— what gross domestic product (GDP) would have been had the …financial crisis never occurred—— and realized GDP.

The second section focuses on the reduction in living standards. The authors examined the change in wealth instead of output. It implies that the cost of the crisis was more than double the 40% to 90% estimate, based on output loss alone. 

The third section considers the consequences of the crisis that are not quantifiable dollar terms. The psychological consequences of the crisis are very negative, even if they are not easily measured.

The fourth section discusses the path government policy followed after the financial crisis and the consequences of the federal debt.

The full report can be found here.