Crisis 'cost us $10,000 each'

The world's largest economies have spent $10,000 for every person in a bid to fix the financial meltdown of the past year.

New calculations by the BBC, based on IMF data given to G20 finance ministers, shows these countries have spent a total of $10 trillion (£6tn).

The UK and US spent the most, with the UK spending far more, 94% of its GDP compared to 25% in the US. That equates to £30,000 per person in the UK and $10,000 in the US.

Of course, most of this bail-out money was in the form of guarantees to the banking system, and as that system pulls out of the crisis, governments stand to recover most but not all of that money.

However, there are several other ways to measure the severity of the crisis which has led to the world falling into recession for the first time in 60 years.

They all show the extent of the damage and illustrate the point that the damage has been most severe for the rich countries - especially the US and the UK with their large financial sectors - who were at the heart of the crisis.

Private write offs

The private financial sector is estimated to have write-offs amounting to $4tn, of which two-thirds are losses suffered by the big international banks such as Citigroup or RBS.

And although about half of these losses ($1.8tn) are write-offs of securities backed by sub-prime mortgages, the damage caused by the crisis has spread much wider to other banking assets, with big write-offs of commercial mortgages and company loans as well.

These big write-offs, which have wiped out about 10 years of banking sector profits, have also made it hard for the banks to rebuild capital in order to give themselves the security to resume lending.

Many experts think it will take years, if not decades, before lending returns to pre-crisis levels, and reduced lending was one of the key causes of the economic slowdown, along with a massive collapse of confidence in financial markets.

World economy shrinks

The world economy is projected to shrink by 2.3% this year, or nearly $1tn, a loss of output shared by all citizens, but particularly affecting the rising numbers of the unemployed.

If you take into account the fact that the world economy normally grows by more than 2% per year, then the loss of output caused by the recession is almost $2tn - although some of that may be made up in future years.

However, in order to try to boost growth, governments have borrowed billions of dollars in stimulus funds.

Over the next five years, UK government debt is expected to rise from £600bn to £1.4tn, while the US national debt could double to $10tn.

This extra government debt will have to be paid by future taxpayers, whose ability to spend money on government services like health and education will be constrained. The interest on the UK government's debt in 2014 could be bigger than its entire education budget.

Wealth effect

Finally, individuals are also feeling less wealthy as a result of the drop in the value of their assets. Not only are their homes worth less, but their financial assets, such as stocks and shares, have also declined in value in the last 12 months.

The BBC, in conjunction with the Halifax, estimates that in the UK national wealth held by individuals has dropped by £815bn in the past year (comparing end 2007 with end 2008), with a 15% drop in the value of people's homes and a 9% drop in the value of their other financial assets. These figures do subtract the value of debts, such as mortgages, from the overall valuation.

Of course, wealth is distributed very unevenly, and those who are not homeowners and do not have a pension will not be feeling the effects as much - unless they are finding it hard to get a job.

But there is no doubt that it is curbing people's overall spending plans, and thus exacerbating the recession (the so-called "wealth effect").

It may be some time before we return to an era where people were borrowing against the notional value of the increase in the value of their home to buy holidays and big-screen televisions.

And, as these figures make clear, we will all be paying the price of the collapse of Lehman Brothers for some time to come.

The BBC