Tuesday, July 30, 2013

Great Recession Cost United States Up to $14 Trillion

To those apologists that claim that the megabanks have repaid their TARP loans, thus no harm no foul for the egregious bubble behavior that precipitated the mortgage crisis, the Dallas Fed has just released a report that estimates that the crisis will end up costing the U.S. between $6 trillion and $14 trillion in lost economic output.  According to economists Tyler Atkinson, David Luttrell, and Harvey Rosenblum, the study estimates the difference between actual and projected economic growth and the growth that likely would have occurred had the crisis never taken place.  These economists called their estimate "conservative," noting that quantifying the trauma of job loss, rising unemployment, and the "burden of unemployment" likely makes their estimate a "drastic understatement" of the cost of the crisis.

In addition, Barron's reports that the "second great contraction" in the U.S. strained the federal government's resources and capabilities by adding to the level of government debt. . . .  "Some critics of big banks, such as the Massachusetts Institute of Technology’s Simon Johnson, have argued that the lost output and tax revenues caused by the financial crisis strengthen the case for stricter regulation of banking.  Richard Fisher, the president of the Dallas Fed, is a prominent critic of too-big-to-fail banks and has called for Wall Street’s biggest banks to be broken up."

From the report:  "The “Second Great Contraction ”in the U.S. was the result of a confl‡uence of factors: bad loans made by banks, ratings agencies falling down on the job, lax regulatory policies, misguided government incentives that encouraged banks to be reckless in their lending, and even monetary policy that kept interest rates too low for too long.

The Second Great Contraction, the worst economic downturn since the 1930s, was unusual because it stemmed from an easing of credit standards and an abundance of …financing that had fueled the prior expansion. This fuel also helped create imbalances— an overextension of mortgage …financing and capital market fi…nancial intermediation. A housing collapse and credit shocks, culminating in a fi…nancial crisis, hit the economy as these fi…nancial practices generated new losses. Home construction plunged, the stock market crashed, commodity prices tumbled, job losses mounted, credit standards tightened, and short-term funding markets seized up."

The culmination of this morass is lost economic output between $6 and $14 trillion dollars.  Indeed, repaying TARP loans appears to only be the tip of the iceberg that the Wall Street banks owe the citizens of this nation as far as restitution and penitence is concerned.

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