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Will the Next Financial Crisis Cost More than $14 Trillion?

The psychological aspects of an economic depression and deflation include pessimism and caution. Creditors, debtors, producers and consumers become oriented toward economic conservation instead of expansion. This puts downward pressure on prices.

Are we moving toward that psychology now?

Well, you decide. A recent paper by economic analysts at the Federal Reserve Bank of Dallas alludes to our nation's psychology in the aftermath of the worst economic downturn since the Great Depression. The bank's report says that the financial crisis wounded the economy much more severely than many observers realize.

Our bottom-line estimate of the cost of the crisis, assuming output eventually returns to its precrisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household, or the equivalent of 40 to 90 percent of one year's economic output. This seemingly wide range of estimates is due in part to the uncertainty of how long it might take to return to the precrisis growth trend. …

The 2007–09 meltdown produced a huge downshift in the path of economic output, consumption and financial wealth. The nation has borne additional costs arising from psychological consequences, skill atrophy from extended unemployment, a reduced set of economic opportunities and increased government intervention in the economy.

– Economic Letter, "Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath," Vol. 8, No. 7, Federal Reserve Bank of Dallas, September 2013

You can read the entire report by following this link:
http://www.dallasfed.org/research/eclett/2013/el1307.cfm

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