By Eleazar David Melendez
Huffington Post, February 14, 2013
The 2008 financial crisis cost the U.S. economy more than $22 trillion, a study by the Government Accountability Office published Thursday said. The financial reform law that aims to prevent another crisis, by contrast, will cost a fraction of that.
“The 2007-2009 financial crisis, like past financial crises, was associated with not only a steep decline in output but also the most severe economic downturn since the Great Depression of the 1930s,” the GAO wrote in the report. The agency said the financial crisis toll on economic output may be as much as $13 trillion — an entire year’s gross domestic product. The office said paper wealth lost by U.S. homeowners totalled $9.1 billion. Additionally, the GAO noted, economic losses associated with increased mortgage foreclosures and higher unemployment since 2008 need to be considered as additional costs.
The report, five years after the collapse of mortgage-focused hedge funds in late-2007 set off a yearlong banking panic and a deep recession, was published as part of a cost-benefit analysis of the Dodd-Frank financial reform law of 2010. The GAO tried to determine if the benefits of preventing a future economic meltdown exceeded the costs of implementing that law.
“If the cost of a future crisis is expected to be in the trillions of dollars, then the act likely would need to reduce the probability of a future financial crisis by only a small percent for its expected benefit to equal the act’s expected cost,” the GAO concluded.
Federal agencies have spent some $1.1 billion in implementing the law, the report found. Financial companies, and therefore the wider economy, will shoulder some costs, although the GAO noted “no comprehensive data are readily available on the costs that the financial services industry is incurring to comply with the Dodd-Frank Act.”
It’s unclear whether the report will mollify critics of the Dodd-Frank law.
Sen. Mike Crapo of Idaho, the top Republican on the Senate Banking Committee, said he was “concerned that the regulators do not understand the cumulative effect of the hundreds of proposed rules.”
“There is a bipartisan concern that some of the Dodd-Frank rules go too far and need to be fixed,” Crapo said during a Banking Committee hearing Thursday on implementation of the law.
The GAO noted it was not the first to estimate costs of the financial crisis. Non-profit financial reform advocacy group Better Markets last year pegged the cost of the crisis at $12.8 trillion, but warned many economic costs were impossible to measure.
“The consequences of such losses to a society are indeterminable, but potentially very far-reaching and long-lasting,” the Better Markets report stated.
Dennis Kelleher, CEO of Better Markets, on Thursday praised the GAO report, saying in a statement that while “Wall Street and its many allies baselessly complaining about the cost” of Dodd-Frank, “they never mention that it was Wall Street’s reckless investments and trading that caused the biggest financial collapse since the Great Crash of 1929 or the trillions of dollars in costs they inflicted on our country.
“That economic wreckage can still be seen from coast to coast in unemployment, foreclosed and underwater homes, lost retirements and educations and so much more,” Kelleher said.