Tuesday, March 30, 2010

Bank of England: Financial Crisis Cost Between $60T and $230T; Production Losses Are Permanent

Bank of England's executive director for financial stability, Andrew Haldane, said today that the loss of production resulting from the global banking crisis may be between $60T and $200T trillion.

Haldane noted that the direct cost of the British Government to rescue banks might prove to be small, around 20B pounds, or just over 1% of gross domestic product (GDP) of the United Kingdom.

In this case, eventual demands that banks bear the costs of the crisis would also be small, he said, less than 1B pounds per year in the United Kingdom and under $ 5B annually in the United States.

Haldane warned, however, that the direct cost to the government "almost certainly underestimates the damage caused by the crisis in broader sectors of the economy."

"Evidence taken from previous crises suggest that production losses induced crises are permanent, or at least persistent, as regards the impact on the level of production, not counting its growth rate," he said.

Please take the time to think about what such loss of production would cause to stock valuations.

"If the losses to GDP are permanent, the cost of the crisis can significantly exceed the current numbers," he continued. Haldane calculated that the damage to the entire production could reach between U.S. $ 60T and U.S. $ 200T over the next few years.

In the specific case of the United Kingdom, he noted, the cost would be between 1.8T and 7.4T pounds. However, Haldane argued that the banks are not liable for any such loss, and not just because the amount was beyond their capacity of payment (!!).

"It would be plausible to argue that the damage to production significantly overestimated the damage inflicted by banks to other sectors of the economy," he said. "Others certainly can not be absolved of blame for the crisis. For every irresponsible lender there is probably an irresponsible debtor"

With news from Agencia Estado.

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