Did the Financial Crisis Cost Us $12.8 Trillion?

How much did the financial crisis cost us? Having an answer would be good to know because the financial industry complains—as you would expect—that stricter regulation of their practices will carry an economic cost. And so it might. But is the cost greater or less than the benefit?

Better Markets, a group dedicated to lobbying for stricter financial reform, has an estimate of $12.8 trillion. That’s a lot. Where’d they get it? Well, first they totaled up the 2008-2018 “output gap,” the total amount of lost production due to the recession, and found it was $7.6 trillion. Then they threw in an extra $5.2 trillion as the amount of output we would have lost if not for the “extraordinary fiscal and monetary policy actions” undertaken to prevent collapse.

This is a nice number to have on hand, but I’m not sure how much sense it makes conceptually. If the Federal Reserve hadn’t acted to boost the economy in the early aughts, the relatively mild recession associated with the collapse of stock prices would have been much worse. But that doesn’t mean the tech investment bubble of 1999 was “really” super costly. The mild recession that really happened is in fact what really happened. Counting countercyclical policy as a cost is confusing—what’s costly is the countercyclical policy you don’t do.

That said, $7.6 trillion is still a huge number. And that gets us back to the real analytic divide that is between folks who think better supervision of the financial system could have prevented this catastrophe and folks who think that’s backward and it’s the catastrophe in the real economy that’s put banks under.