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Financial Crisis Cost U.S. $12.8 Trillion Or More: Study

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The 2008 financial crisis cost the U.S. economy at least $12.8 trillion, a new study found -- and that's a "very conservative number," according to the authors.

The study, timed to coincide with the fourth anniversary of the Lehman Brothers bankruptcy, is a direct counter to the banking industry's relentless warnings of the potential costs of new financial regulations.

The cost of letting the banks wreck the global economy again is far, far higher.

The crisis-cost estimate, generated by Better Markets, a non-profit group lobbying for financial reform, is only a measure of actual and potential lost economic growth due to the crisis. It does not include many other costs, including the costs of extraordinary government steps taken to avoid "a second Great Depression." It does not include unquantifiable costs like the "human suffering that accompanies unemployment, foreclosure, homelessness and related damage," the authors noted.

The study also does not include figures related to any damage done to American productivity by long-lasting, widespread unemployment, which is eroding the ability of Americans to earn money and posing a threat to future economic growth.

"Lower growth means, among other things, less innovation and, therefore, less technological progress," the study's authors wrote. "The consequences of such losses to a society are indeterminable, but potentially very far-reaching and long-lasting."

The study mentions, but leaves out of its $12.8 trillion estimate, the $11 trillion or so in household wealth that was vaporized by the crisis and an estimated $8 trillion hole that might be blown in the federal budget deficit between 2008 and 2018 as a result of the crisis.

Banks would like you to know that they are suffering, too, of course. The stock prices of the biggest five U.S. banks have lost more than $500 billion in market value since the crisis began. The industry has been docked more than $2 billion in crisis-related penalties.

And the banks constantly warn that new regulations could disrupt financial markets and slow economic growth. The Better Markets study points to one frequently-cited estimate, that the "Volcker Rule," which prohibits banks from proprietary trading, could cost the bond market $315 billion in "liquidity" on its own.

The banking industry's whiner-in-chief, JPMorgan Chase CEO Jamie Dimon, on Tuesday warned again of the risks of too much reform. Here's DealBook:

The United States, he added, has the "best, widest, deepest and most transparent capital markets in the world." Cautioning against needless reform, Mr. Dimon said, "Let's make sure we keep that before we do a bunch of stupid stuff that destroys that."

The man who just oversaw a $6 billion trading loss on credit derivatives continues to lecture the rest of us against doing a bunch of stupid stuff.

In any event, you can stipulate that Dimon has a point -- there are costs to reform. But it is impossible to argue that these costs are anywhere close to the horrific damage the banks have shown they can do to an economy when they're allowed to do whatever they want to do.

Banks might also quibble with Better Markets' $12.8 trillion figure, which is admittedly a little hard to wrap your head around. One part of the number is easy to understand -- it's the amount of potential gross domestic product that has already been lost due to the crisis and recession. A second part is based on economic models, predicting future lost GDP through 2018. That's obviously squishier, as economic models helped us into this mess in the first place. But together these two components make up $7.6 trillion of the $12.8 trillion cost estimate.

The other $5.2 trillion cost is a measure, again generated by economic models, of how much economic damage we avoided through stimulus packages and Federal Reserve rate cuts and bond-buying and emergency lending and the like. That one's even squishier, because you're hanging a number on a counterfactual.

But given all of the costs this study does not even try to estimate, $12.8 trillion is arguably in the ballpark. And the cost is clearly larger than any costs we might incur by trying to keep banks from causing such damage again.

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