Bank Of England Estimates Global Output Losses From Financial Meltdown At Up To $200 Trillion

Tyler Durden's picture

Not much commentary needed here:

Counting the Systemic Cost

One important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking?

There is a large literature measuring the costs of past financial crises. This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP.

What about the present crisis?

The narrowest fiscal interpretation of the cost of crisis would be given by the wealth transfer from the government to the banks as a result of the bailout. Plainly, there is a large degree of uncertainty about the eventual loss governments may face. But in the US, this is currently estimated to be around $100 billion, or less than 1% of US GDP. For US taxpayers, these losses are (almost exactly) a $100 billion question. In the UK, the direct cost may be less than £20 billion, or little more than 1% of GDP.

Assuming a systemic crisis occurs every 20 years, recouping these costs from banks would not place an unbearable strain on their finances. The tax charge on US banks would be less than $5 billion per year, on UK banks less than £1 billion per year. Total pre-tax profits earned by US and UK banks in 2009 alone were around $60 billion and £23 billion respectively.

But these direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively.

Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisis-induced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate. If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost.

By way of illustration, Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent - 100%, 50% and 25%. It also assumes, somewhat arbitrarily, that future GDP is discounted at a rate of 5% per year and that trend GDP growth is 3%. Present value losses are shown as a fraction of output in 2009.

As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

Full depressing speech.

Haldane BoE Speech 3.31

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
AndItsGone's picture

And it's gone!



cougar_w's picture

Only if you think it was ever there. They pull this stuff out of their asses, along with the monkeys.

I will never believe the word or accounting of an economist or banker ever again ever ever like never or never ever for ever and ever I mean totally never again ever. On any topic. Anything at all. Ever.

Cathartes Aura's picture

+10 (and then some)

delurking first timer here, thanking all at ZH

for the stellar work, and brilliant commentary.

a pool of sanity in a flood of crazy.

Hephasteus's picture

Hi. I need a map of a cat.

ED's picture

Hi. I just so happen to have a map of a cat. Which locale were you particularly interested in?

Hephasteus's picture

LOL. I didn't think anyone would get that one.
That's from Surely You Must Be Joking Mr. Feynman. He took a friends zoology class and was in the library looking for a map of a cat. The librarian finally figured it out and said "You mean a zoological chart." But there was a running joke around campus about some old freshman looking for a map of a cat.

ED's picture

Feynmans a good read ;)

Lndmvr's picture

And the point is??

Traianus Augustus's picture

I thought this was a global financial melt "UP" that we were experiencing?

10044's picture


WaterWings's picture

Here's some literature to remind you how lucky you are to be "Free and Clear".

equity_momo's picture

Thats alot of taxes.

Justin Credible's picture


That's the best response in this thread - LMFAO!

Stranger's picture

Depends how much inflation you factor in.

Cognitive Dissonance's picture

"Bank Of England Estimates Global Output Losses From Financial Meltdown At Up To $200 Trillion"

Clearly I'm not fully acclimated to the insanity yet because I saw the headline as $200 Billion and said to myself, what's the big deal? It was only upon clicking the link did the $200 Trillion come fully into focus.

My clients are completely lost at sea with these numbers and the implications for them. It just doesn't register. I try using word pictures to explain what a Trillion is, including pallets of money stacked so high but it just doesn't mean much because there is no reference to their daily lives.

In fact, this is one of the reasons the Fed, CONgress and other assorted scoundrels, minions and banksters are getting away with this. The numbers themselves are a traumatic blunt force and everyone is wandering around suffering from PTSD.

Conrad Murray's picture

" I try using word pictures to explain what a Trillion is, including pallets of money stacked so high but it just doesn't mean much because there is no reference to their daily lives."


If you haven't seen this before, it's worth a look:

tpberg7's picture

Excellent graphic CM.

I purchased several one hundred trillion dollar Zimbabwe notes that I have been spending freely by giving them to friends as a novelty.  America is moving towards this vision you have given us.


ED's picture

That's some cold, hard cash right there. Cold and hard alright

Cognitive Dissonance's picture

Thank you. I've bookmarked the page and will make good use of it.

B9K9's picture

CD, I try to explain to savers that their "savings" wouldn't exist if there weren't any debtors. (Equity investors share the same predicament - credit drove consumption [sales].) Since debtors are all in default, that means the value of the savings is also a big fat -0-.

So everyone is back where they started. That's why these types of analyses are ultimately meaningless. If I sell you my cat for $200 trillion and you default, am I $200 trillion the poorer?

The whole point of the exercise, which has been repeated endless numbers of times over the past 5-6 millennia, is to have a contractual agreement whereby certain lenders take possession of the underlying collateral.

The power elite's game is upset only if the 'losers' don't hand over any real wealth assets or drive the money-lenders out of the country. Both options have been utilized many times in the past, but infrequently enough to make the potential payoff to the power elite worth the time & trouble.

Iceland appears to be choosing the option of not handing over assets. I presume Ireland will follow, then the PIGS, etc. Eventually all the rest will follow, including the UK & USA. Which is why I advise anyone with real assets to follow the giants by converting to physical gold and store it offshore (with looming capital controls, it may already be too late) either in Switzerland and/or Israel.

These two countries will ultimately prove to be the safest havens - protected either by mountains and/or nukes, and willing to use them to defend their (ill gotten) wealth.

Ragnarok's picture

The problem with hoarding large (+25M) amounts of gold is the trade-off between secrecy (having stolen by your gov't) and security (having stolen by everybody else).  Personally I would hide (bury, pour in cement) a couple million where only I knew and could access quickly if I had to run.  The rest I would need to find a country with a small population that upheld its property rights and was not subject to US/UK/EU pressures.


Assume for the moment I come from a country that does not have claim on my world income, what's a list of countries that fit that description?

B9K9's picture

Secrecy and security are only problems for you & I. How many freighters filled with gold are currently off-loading in Haifa - all under protection of Mossad? How many private airplanes are landing in Zurich under cover of darkness?

Having been in both countries and having met different types of security personnel, I can assure you they don't fuck around. Both countries have very long time-frames and respect the rule of law.

They let the USA run around playing macho-man, but the smart money stores its wealth in places that will be amongst the last ones standing.

Even if you're not a J (where do you think the oil rich sheiks store their gold?), they respect contracts and will allow you to withdraw your gold if you (a) manage to get it there, and (b) manage to get yourself there.

Ragnarok's picture

Thanks for the input, any other countries that would maybe make your list lower down? Or is it when it comes to gold and wealth one shouldn't fuck around.

B9K9's picture

Get out and see if they will accept you as an honorary J. If you're operating above 125, they may think you're worthwhile to keep around as a pet. It's got nothin' to do with religion. It's all about teaching the stupids who's really in charge.

My parents got caught in the Yom Kippur war while visiting on vacation. They think it's a little dicey, but I told my dad he's smart enough to be entertaining. The thing about Israelis is they really don't fuck around.

That little country is gonna be the last one standing, along with most of the world's gold safely tucked away.

WaterWings's picture

They sure are pulling US around with a nose ring.

dark pools of soros's picture

really??  so we can stop protecting them like Ron Paul has requested since they 'don't fuck around' and 'will be the last one standing'  what a joke..  we pull their shield away and they are flatten in a week

jm's picture

...getting away with this.

With all due respect, I don't think you get it either.  I'm honestly not trying to offend you. 

Like it or not, most businesses can't operate purely out of cash-flow.  Without credit they go belly up.  The world needs a financial system, and just letting it all burn up in November 2008 would have ended the banking system.

Banks collapse, then businesses go belly up, and a big chunk of formerly working, now out of a home people become angry and hungry fast. 

This guy has a vantage point that tells you what lies over the edge, although he may be exagerating to strengthen his agenda.  He has a nearly insurmountable credibility problem.  But he is right in principle if not in the figures. 

Everyone is too busy being pissed to figure out that this multi-decade problem is too big for slogans like "throw the bums out."   

So throw out all encumbents.  Nationalize any bank whose MTM assets and equity doesn't cover liabilities.  You won't get any argument from me.

But if you think that this disaster is all clear, QE only benefitted the chosen few, and didn't have a beneficial effect for all our asses, you're just dead wrong.

mikla's picture

With all due respect, I don't think you get it either.  I'm honestly not trying to offend you. 

Like it or not, most businesses can't operate purely out of cash-flow.  Without credit they go belly up.

Yes -- businesses need access to capital (capitalization).  They could use credit, or sell shares-of-future-profits to get the capital they need.

The complaint against today's system is that it's done through fraud:  You come to me, asking for capital.  I "give" you money that I don't actually have.  So, you must pay that back, plus interest (I win, getting dividend on something I never had), or you stop paying me back and I then claim all your assets (house, property, vehicles, equipment, etc.)

It's strange, but that's how the current system functions:  I have nothing to give, but no matter what, I will be rich with your interest payments or rich by claiming your assets, without me actually contributing anything.

But if you think that this disaster is all clear, QE only benefitted the chosen few, and didn't have a beneficial effect for all our asses, you're just dead wrong.

You're asserting that we've avoided reckoning.  No, all that's happened is that the taxpayers are now explicitly subsidizing the ponzi while "the few" quietly exit, before the house comes down.

There *was* a time when the taxpayer did not back Fannie & Freddie.  You're saying we got a benefit by backing them.  Nope.  You're saying we got a benefit by backing GM & Chrysler.  Nope.  You're saying we got a benefit by owning AIG & Citigroup.  Nope.

All we did was make the taxpayer the last-and-final sucker, buying worthless crap at top dollar, so the counter-party could exit unscathed (actually, with a bonus and a profit).

You are correct that the financial world would have collapsed in 2008, but the sovereign USA would not have collapsed.  That is different now:  Both the world financial system will collapse, *and* the sovereign USA will also collapse (right after the EU collapses, probably by 2012).

jm's picture

Good comments.  Sure don't think we are out of the woods.  Sure think that taxpayers, future taxpayers and currency longs are going to get a divine hammer on viagra.  QE allowed a bit of time (?) to think out how to deal with the next bomb to drop, and maybe shape the future.

Looks like few are thinking about these issues at all.  Sure not the guys on office who are spending even more money.


It does look like

 I have nothing to give, but no matter what, I will be rich with your interest payments or rich by claiming your assets, without me actually contributing anything.

But this isn't as asymetric as it looks: the trade off you're missing is that nobody had to put a damn dollar down as collateral in the past 10 years. 

This implies banks took on credit risk like crazy, and now its all coming due for everyone.

mikla's picture

But this isn't as asymmetric as it looks: the trade off you're missing is that nobody had to put a damn dollar down as collateral in the past 10 years.

You are correct that society has had the benefit of "cheap credit" for decades (we didn't pay the true costs of the credit, all borrowers were effectively "subsidized").  Individuals, businesses, and nations "benefited" from this "invisible subsidy".

However, we are merely describing the "behavior of the system":  These aren't really benefits, but merely the "delayed reckoning".  Sugar was needed to give us the sugar high.  We've had that now, and that's over.  Now comes the crash.

You can say the "sugar" aspect of the system is a "benefit", but I'm actually not very enthralled with the decades of mal-investment, social engineering, and subsidization of bad behavior that IMHO makes society and families "sicker".

This implies banks took on credit risk like crazy, and now its all coming due for everyone.

On paper we can pretend it's "risk".  However, a better metaphor is that bankers run a casino, typically winning, and winning over time.  Remember, they put nothing down (contributed no capital) to reap their benefits.  When the house finally "loses big", remember that the house merely shifts those costs to the taxpayer (socialized losses).

So, (1) wall street contributed nothing, and (2) wall street extracted huge sums of cash in salaries and bonuses, and (3) wall street doesn't care if their casino is unmaintained and ready to fall down, because they will be claiming real property from the rest of society (e.g., they have the lien notes).

I say this as a *huge* capitalist -- as you say, businesses need access to capital, and it's worth a *LOT* to society to have liquid capital markets.  However, that's not what wall street does, that's not what the COMEX does, that's not what the S&P does.

jm's picture


Banks probably have an incentive to avoid good risk management:  bonuses and the Greenspan put.

The casino analogy is apt.  My read of it is that the casino caought on fire while everyone was playing, and the Fed had to axe open the door with QE.  Maybe they'll put the fire out.  Maybe not.

I'm smart enough to know I don't know.

jm's picture

BTW-- if banks did extend credit, and went BK if their risk assumptions were wrong, I would disagree, and say they added economic value.

If taxpayers and other have to backstop their purpose, taking credit risks, then they don't serve an economic purpose.  But we have to trudge through with the shit we have until we have something better.

dark pools of soros's picture

jm - you are mainlining the big bank kool-aid..  there are LOTS of banks and credit unions that would of picked up the slack if the few giants were allowed to fall to their death..


you act like they hold the keys to life itself...there would of been massive disruption of POWER more than banking and that, in the end, is what was really saved...

jm's picture

I know the kool-aid of which you speak (weird English there).  I have no qualms with firing the execs and wiping out shareholders.  Let's manage this inevitability thoughtfully, that's all.    

There is more to a banking system than small businesses.  There are insurance companies, pensions, international trade financing, blah, blah, blah that needs a reasonably large scale to do.  I don't care if a Swiss or French or whatever bank does it.  Problem is in my view they are probably all decapitalized/insolvent-ish. These are important, valuable roles that are necessary for people and businesses.  

I don't think I'm biased towards the sharks,  because if my firm blows up there ain't no bailout coming.  Also, there's not much love lost between different species of the ecosystem.  I don't hate anybody either. 

ThreeTrees's picture


We cannot let Those in Power go without it.

Cognitive Dissonance's picture


You're putting words into my mouth. I was simply taling about the size of the number. I am not a simplistic mouth breather whose solution to our "problem" involves random hangings and mass riots, though the idea is tempting. When I said "getting away with this" I'm talking about the corruption, deception, manipulation, war mongering, false flag attacks, black ops and dozens of other things done in the name of national security and apple pie. I don't dispute we need an financial system and that we need some way to extend credit. But not as it is currently structured and not by who controls it.

The TBTF banks for saved because there are over $600 Trillion of outstanding and certifiably insane derivative bets that would topple the world into chaos if they were allowed to crash in an uncontrolled manner. I get that. So why was this allowed to get to this point and why isn't this insanity being unwound?

I constantly talk about how the average Joe has benefited by this insanity with cheap consumer products and a life style that they could not afford. But this is also the noose that will hang everyone. So who is more guilty here, the deliberately kept in the dark average Joe (who most certainly participates with his denial) who is handed credit because s/he is breathing or those who extended that credit or those who should be regulating both? It's obviously all three. But who has the control? Who has always had the control? I get it that everyone participated in this mess. You should read my comments, of which there are thousands. I'm not narrow minded nor stupid.

I am so sick and tired of bastards telling me they must feed the masses more bread and circuses or the masses with turn upon them. The masses have been brainwashed, conditioned and indoctrinated to believe that the consumer culture is the be all, end all ideal way to live. The wealthy few created a monster. I will never buy the idea that the few at the top only gave the masses what they demanded. The wealthy few manipulated and extorted the masses for the wealthy few's gain.

jm's picture

Your post wasn't about black ops and whatever, so it didn't occur to me that such was how you would take this. I commented on what you said here, as I don't particularly follow what you post elsewhere.

It occurs to me to insist that people be realistic about the situation.  The reality is that it took years to make this problem.  It will take years to get out of it. 

Blaming and figuring out who did what to whom only resolves to people using selective info to their perceived advantage, or only adding noise.

This is so much bigger than subprimes, ARMs and NINJAs and the old buzzwords.  The issue lies at the insolvent core of the world financial system.  This means it lies at the core of the world economy. 

Are the wealthy exploitive, sure.  But so is everyone.  Dumbasses have it coming from someone and the wealthy have greater means to that end.  Not that I approve or like it.

Continue to be sick and tired.  Sadly, bread and circuses have been the name of the game since Rome.  When domestication ends overnight, the results are often brutal. 

So I believe that in this case, you can't pull the plug on the life-support without really bad things happening to many people--nothing related to a Mad Max movie.  In a brighter time, I think it is right to end all backstops.  We should stop rewarding failure immediately.  They are mutually exclusive.   

We just may be in complete agreement.  

Cognitive Dissonance's picture

You pulled a few words out of this sentence......

"In fact, this is one of the reasons the Fed, CONgress and other assorted scoundrels, minions and banksters are getting away with this."

....and then read many things into what I said, including an interpretation that I wanted to take the system down or let it fail.

Mr Lennon Hendrix's picture

"Trillion, as formally reserved for astronomy."  Heard that a few weeks ago and have been using it ever since.

AR15AU's picture

Congratulations, dumbasses...  Now you know why its futile to try and bail corporations out...  This is the natural cycle of creative destruction.

carbonmutant's picture

" It just doesn't register."

PTSD indeed with the MSM showing symptoms of Stockholm Syndrome.

EllisWyattOTC's picture

Question did the $200 Trillion really exist in the first place or was this greatest monetary illusion ever pulled?

Ragnarok's picture

I was thinking the same thing, perhaps they created 175T to suck in 25T of real wealth and skim it off the top.

cougar_w's picture

Largely correct. Even the multiplier is about right.

They "lost" $200T the way you and I "lose" $1M when we DON'T win the lottery this week.

In fact, we lost a dollar (the cost of the ticket) and even that bought a few minutes of fun. The difference is you and I don't go banging on the government door for our "lost winnings" whereas the banks do exactly that, and threaten to destroy the world if they are not "compensated" for their "losses"

Pretty cool racket, huh?

Ragnarok's picture

I need to get on the other side of that trade.


1. Get uber-rich and marry into old money

2. Throw away any notion of nature's law and the civil society.

3. Have utter contempt for my fellow man



MsCreant's picture

Surely they are all just swaps and will cancel each other out on the balance sheets and everyone can go on with their happy lives?

No harm, no foul.

Black hole sun, wont you come, and wash away the reign...

mikla's picture

Surely they are all just swaps and will cancel each other out on the balance sheets and everyone can go on with their happy lives?

The "experts" keep asserting that, but no:  These swaps do NOT cancel each other out, because:

  1. A (very) small percentage of a (very) large number is itself a large number.  The entire GDP of nations (and the planet) is now "rounding error".  So, even if the "intent" was that these are all covered, the numbers are so large that effectively it's impossible to cover with that level of precision.
  2. Counter party risk is non-zero.  Even if all swaps are covered, they are NOT covered, because so many of the counter-parties are the walking dead.  There is NO WAY all these claims can be paid, and that will start the dominoes-a-fallin'.

I like the Richard Feynman quote -- this is absolutely a creation of man, and the scale "economical", with numbers beyond the mere "astronomical".

I used to think "Geologic Time" was big (and it is).  It's bigger than what most people can handle.  However, ice ages are in the mere thousands of years, life and species in the mere millions of years, and planets and solar systems are in the mere billions of years.  It takes a tremendously cruel joke to be speaking in terms of Trillions.

Ragnarok's picture

It took 10 million years of constant terenchal rain to fill our oceans.