Wednesday, June 6, 2012

The True Costs of Bank Crises

In March 2010 Andrew Haldane, Executive Director for Financial Stability at the Bank of England, estimated that the financial crisis that began in 2008 will ultimately cost the world economy between $60 trillion and $200 trillion in lost production (link). The methods he used to reach his conclusions require a number of assumptions, but so would any effort at assessing the broader damage. And to his point, counting the cost of bank crises in terms of costs to the banks alone substantially misrepresents the economic harm that recurrent crises cause.

When J.P. Morgan announced last week that it had lost $2 billion from derivatives transactions gone awry, later revised to $3 billion and rising, the mainstream press reiterated the framing that this is a cost to be borne by the bank and that it indicates what the rest of us might be expected to contribute if another banking crisis erupts. The implication is that future crises are possible, ignoring that we are collectively still paying for the last crisis. And again, to Mr. Haldane’s point, the costs to Wall Street are nearly irrelevant when considering the total costs of banking crises.

This all proceeds from the premise that the broader economic order, of which the banks are a part, is a viable form of economic organization. Given that the current order is radically environmentally unsustainable, it is tempting to imagine that the lost production that Mr. Haldane is counting as a cost of the financial crisis has a silver lining in slowed environmental degradation. Read More