What Are the Indirect Costs of the Financial Meltdown and Bailouts?

Question: There are endless comments in the news lately about the banks paying back “every penny” of the “costs” of the financial meltdown. In any civil proceeding that I know of, when a plaintiff asks for damages pursuant to someone’s actions, DOWNSTREAM consequences are always a critical part of the calculation. (It’s not just the amputee’s hospital bills, it’s impairment of earnings for the rest of his/her life!)

When you think of the damage caused just to the United States by the financial meltdown (take long-term unemployment ALONE), the indirect costs largely caused by the “financials” are so astonishingly huge that they make the amount of the TARP truly laughable. (Here’s one of many estimates concerning DIRECT costs covertly spent buying up garbage assets, etc., etc.: U.S. taxpayers alone will spend some $9.7 trillion in bailout packages and plans, according to Bloomberg.) And that’s not even considering downstream damages. Why is the magnitude of the reality never discussed by you or any other news program?

Paul Solman: For one thing, it’s tough to calculate. Just because Bloomberg reports “some $9.7 trillion in bailout packages and plans” does not make it so. (Nothing against that wonderful fudge adjective ‘some’ before figures, BTW; we ourselves use it easily and often.)

Look, if an economy is not at full employment or capacity, as now, then it’s wasting precious resources — people and prior investments (like factories) — and maybe even making them less useful in the future, due to demoralization or disuse. Print a trillion dollars, put some of those resources back to work…Is that a net cost?

But let’s grant the argument:

The economy DID take a huge hit in lost output. And leaving aside whether or not output is the best measure of our well-being, let’s grant that it surely means something. So then the question becomes: How much of our loss should the banks be held accountable FOR? All of it? 42 percent?

No guilt assigned to wanton borrowers? Lax regulators?? The ratings agencies??? Maybe we should charge Alan Greenspan for keeping interest rates too low, though I’ve never been much moved by that argument myself. How about clawing back bonuses from the business cycle?

All I’m saying is, if most economic reckonings are back-of-the-envelope, the one that estimates the cost of the crisis and who should pay it is more nearly — I don’t know — under-the-stamp.