The Costs of the 2007-2009 Financial Crisis

This paper reviews the costs to the US economy resulting from the Financial Crisis of 2007-2009 and its aftermath. The estimates of the costs depend to a large extent on how long it will take the US to return to a more normal path of growth in economic activity. If growth returns to pre-crisis trends in 2015, the cost of the crisis in terms of lost output could be as little as $6 trillion, about 40% of annual US output. If the return to pre-crisis trends takes considerably longer, the cost of lost output could total $30 trillion, almost two years of human effort down the drain. Including estimates of the reduced opportunities and economic trauma faced by the generation of those impacted by the crisis, as well as the costs of monetary and fiscal policy extremes that were used to address the crisis, adds significantly to the burdens stemming from the crisis. Given the enormity of these costs, it is critically important that the policy errors that led to the Financial Crisis not be repeated.