Professor Weidenmier Examines Economic Hit from Natural Disasters

Katrina may be the nation’s most expensive storm, but she’s not the most economically devastating natural disaster. A paper written last fall by CMC associate professor of economics Marc Weidenmier, and coauthored by Scripps economist Kerry Odell, is generating national attention for its discussion of how the San Francisco earthquake caused one of the nastiest recessions in American history and the Panic of 1907an event especially noteworthy to economists, as it led to the founding of the Federal Reserve.

The paper, Real Shock, Monetary Aftershock: The San Francisco Earthquake and the Panic of 1907, has caught the recent attention of the Los Angeles Times, the Chicago Tribune, the San Francisco Chronicle, and several other newspapers includingmore broadlya publication in the Czech Republic. The Federal Reserve Bank of Chicago also featured this article in their online education forum earlier this year.

In a column last month for the UK’s Daily Telegraph, recent Athenaeum guest and writer Niall Ferguson, professor of history at Harvard University and a visiting professor in modern European History at Oxford University, picked up on Weidenmier’s research that “it wasn’t so much the earthquake as the subsequent fires that destroyed the city” by the Bay.

When insurers more than half of them British companies started paying out for quake damages, the outflow of gold to America led the Bank of England to raise interest rates nearly double, from 3.5 to 6 percent, Ferguson noted in his reference to Aftershock. “And as American rates rose in response, there was a banking crisis and a recession that knocked down industrial production by a third.”

As further financial injury, Weidenmier adds, London banks also refused to extend loans to the U.S. for a year, causing a liquidity crisis.

“What happened,” Weidenmier says, “is that the quake made us susceptible to a financial crisis that ultimately led to the formation of the Federal Reserve, which wasto say the leasta pretty big deal.”

Interesting to note is that when looking at damage figures as a percentage of the GDP, Weidenmier says the two disasters the San Francisco quake and Hurricane Katrinaare roughly of equivalent magnitudes, about 1.5 percent of U.S. GDP.

Weidenmier says financial implications for Katrina cleanup will be more optimistic, as long as the Federal Reserve doesn’t tighten interest ratesa decision, he predicts, that will be key to avoiding a recession.

“We need to keep interest rates stable, and provide liquidity to the States, just like we did when we were confronted with the tragedy of 9-11,” he says.

Weidenmier originally paired with coauthor Odell as an investigation into the origins of the Federal Reserve. “We became interested in the disaster as an offshoot, but tracking the Reserve was our original intention.

“Interestingly enough, there are virtually no papers written about this kind of subject matter,” Weidenmier says. “But I imagine we will see more in the near future.”