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Comparing Financial & Other Disasters: A Conceptual Approach

John Singleton, Sheffield Hallam

• Economists are parochial• They miss the parallels between events in the

economic sphere and events in other spheres• See economic & financial disasters as unique• But in fact they are only a subset of disaster• They might gain new perspectives from

comparing economic and other disasters

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Disaster Cycle or Wheel of Misfortune

Halifax Explosion 1917 inspired Samuel Prince’s Catastrophe and Social Change.

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What kinds of disasters will I examine through the DC lens?

• Today– Hurricane Katrina– Slump of 1930s

• Also in the paper– WW1– Smoking

• Others planned– Financial crisis since 2007 including euro– Coal mining disasters– Global warming ?(the trickiest of all)

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Hurricane Katrina 2005and

Depression early 1930s.

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Stage 1: Context & precautions

VULNERABILITY IN BOTH CASES• Katrina– Mississippi prone to flooding– Lots of hurricanes in the Caribbean– Development of system of levees and canals

• Depression– US financial sector prone to instability– Insecure postwar recovery in Europe– Establishment of Fed to dampen crises– Reconstruction of Gold Standard in 1920s

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Stage 2. Warnings (N.B. usually hard to interpret)

• Katrina– National Hurricane Center predicts Hurricanes– Katrina designated Hurricane on 25 August– Hard to predict where it will land– Hits New Orleans on 29th

• Depression– Concerns about speculative excess in US late 20s– Concerns about sustainability of German recovery– Neither Harvard nor Yale forecasting teams

anticipated the events of the early 1930

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Stage 3. Impact

HUGE COSTS IN BOTH CASES• Katrina– 1800 dead– 80% of New Orleans flooded– Disruption of port and oil and gas industries– Cost $81 billion (William Nordhaus)

• Depression– Millions unemployed– Bank failures– Stimulus for extreme political movements

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Stage 4. Rescue and relief

INADEQUATE & CONFUSED RESPONSES• Katrina– Evacuation of New Orleans began 19 hours before landfall but

never completed (disorganisation)– Many stayed behind e.g. in Convention Centre– Government payouts to insured and non-insured residents over

following months• Depression– Macroeconomic response was misconceived: fiscal and

monetary tightening– Higher tariffs– Unemployed could often obtain benefits

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Stage 5. Blame

SEARCH FOR CULPRITS• Katrina– All levels of government accused of incompetence over

botched rescue effort– Some also blamed residents for choosing to live in New

Orleans knowing its flood history• Depression– Fundamental lack of understanding of slump– Search for individual and group scapegoats– Sunshine Charlie (National City), bankers in general, Jews,

Americans, the French– Growing radicalisation

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Stage 6. Recovery and reconstruction

UNCLEAR STRATEGIES, SLOW RECOVERIES• Katrina

– Debate over whether New Orleans deserved to be rebuilt (city was declining before 2005)

– Politically there was no alternative to pouring billions in– By 2012 population back to 81% of pre-flood level

• Depression– Recovery by accident– Leaving Gold Standard (UK) or devaluing (US)– Looser monetary policy– Many recovery policies (e.g. New Deal) were stronger on rhetoric than

substance

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Stage 7. Regulatory reform

VARYING REGULATORY RESPONSE• Katrina– Regulatory response was insubstantial– National Flood Insurance Programme (set up 1960s) was

tweaked– But flood insurance did not become mandatory– Should it? Is mandatory insurance desirable?

• Depression– Tighter financial regulation globally– End of central bank independence– Beginning of move to managed economy

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Reflections

• 1. Similarities and differences between the Katrina and Depression cycles identified

• 2. Both are of interest• 3. Uncertainty, politics, doctrine/beliefs,

moral hazard are major themes• Comparison is worthwhile for putting

financial disasters into perspective