Who suffered most and least from the Lehman crash
Andrew Sheng says a full measure of the costs of the crisis points to the regulatory gap to be closed
As we approach the fifth anniversary of the Lehman Brothers crash in September 2008, we might well ask: have we fixed the problems?
Last month, the Federal Reserve Bank of Dallas published a staff paper estimating the costs of the 2007-2009 financial crisis. The conservative estimate came up to 40 to 90 per cent of the United States' 2007 output, roughly US$6 trillion to US$14 trillion.
The Dallas Fed paper argued that it is important to measure the costs of the past crisis in order to weigh it against the cost of policies intended to prevent similar episodes in the future. After all, the running cost of financial regulation is like the price of an insurance premium against future disaster.
If the premium is too high, you might not want to insure against the risks of an uncertain future cost. But if the future costs of crisis are disastrous, then you might be willing to pay a high insurance premium. The only problem with more complex regulations today is that they may also slow down the whole economy tomorrow, which is a "lost opportunity".
The Dallas Fed researchers estimated the costs of the crisis by adding lost output, cost of national trauma and lost opportunity, and cost of the government support required.
Lost output is the common "output gap": how much goods and services were not produced due to the crisis. The 2007 output loss was estimated at between 40 and 90 per cent of gross domestic product.
The second estimate was the cost of reduced wealth. From the third quarter of 2007 to the first quarter of 2009, US household net wealth dropped by US$16 trillion. However, the Dallas researchers wanted to look at the loss of human capital due to unemployment, which rose to a peak of 10 per cent during the crisis and is still high now. This cost was estimated at 90 per cent of 2007 output.
