The United States lost $648 billion in income and 5.5 million jobs due to the financial crisis from October 2008 though the end of 2009, turning what was predicted to be a brief and mild downturn into one of the longest and deepest recessions since the 1930s, according to a new report commissioned by the Pew Financial Reform Project.
The average household lost $5,800 in income during that 15-month period, representing about 7 percent of its expected income. For the median household, that loss represented about 9 percent of income. For some perspective, it is normal for income to fall 2-3 percent during a bad recession. Wage earners lost $360 billion, or about 4 percent of their wage income, due to unemployment and lower earnings.
Pew's report estimates that 5.5 million jobs were lost due to the crisis, out of a total of 8.4 million lost during the Great Recession.
The report was written by Phillip Swagel, the top economist at the Treasury Department at the end of the George W. Bush administration, when the crisis was unfolding. Swagel is now a visiting professor at Georgetown University and director of the business school's Center for Financial Institutions, Policy and Governance.
Swagel measured the difference between what the Congressional Budget Office was forecasting just days before the crisis exploded at the end of September 2008 and what actually occurred. Most people would say the crisis had already begun by that month, but Swagel said that the broad economic effects had not been that large. Those effects became particularly clear and clearly linked with the financial crisis in mid-September, with the failure of Lehman Brothers, he said.
Swagel concedes that income and employment could have been influenced by other factors during the period he studies, but he said it seems clear that the financial crisis was the dominant factor.
Separately, Swagel notes that CBO estimates the U.S. government has lost $73 billion in aid under the Troubled Asset Relief Program and related programs. This doesn't include some $91 billion lost in the rescue of home lenders Fannie Mae and Freddie Mac, and a net loss of about $3 billion in the shutdown of Bear Stearns.
Swagel also estimates the amount of wealth lost from July 2008 to March 2009, beginning when the crisis was intensifying and ending when stock markets had started to recover. He doesn't make as strong a link with the financial crisis, however, since it is much harder to know what would have happened to home values and stocks absent a crisis.
Homeowners lost $3.4 trillion in home value during those nine months, representing an average of $30,300 per household. If there was a speculative bubble in home prices, however, how much would values have dropped absent a crisis? Swagel says it is hard to say. Home values had actually been dropping since mid-2006.
Stock market wealth declined 40 percent from July 2008 to March 2009, when it became clear that the Obama administration was getting a handle on the crisis, said Swagel. This represented the loss of $7.4 trillion in wealth. This would work out to an average of $66,200 per household, but since stocks are highly concentrated among a very small number of wealthy households, it doesn't really say much about how much the average household might have lost in stocks or mutual funds. According to an authoritative survey of consumer finances by the Federal Reserve, the median value of stock market wealth for a household was $35,000 in 2007. Losing 40 percent of this amount would be $14,000.