Category Archives: Financial Aspects

Proposed Change in Federal Funding of Disasters

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Article titled Debt Deal Reopens Debate on Climate Catastrophes appeared in the NY Times, August 10, 2011.

A provision tucked into the debt ceiling legislation is rekindling debate about the nation’s ability to pay for soaring catastrophe losses as coastal development and carbon dioxide emissions continue to rise.

The nation has struggled for years to find an effective way to help communities rebuild homes, businesses and infrastructure after natural disasters. Now, in a collision between downward federal spending and an upward presence of catastrophes, Congress is moving to pre-fund disasters.

The last-minute legislation approved by Congress last week to raise the debt ceiling creates a disaster fund that will carry billions of dollars for recovery in hard-hit areas. The fund is a money-saving effort proposed by the president’s bipartisan fiscal commission last December in its report “The Moment of Truth.”

The fund could reduce stress on the deficit by preventing the need for emergency supplemental appropriations made in the wake of a crisis. Those unplanned expenses are not included in the budget, so it amounts to new debt

Japan Government to Buy Stake in TEPCO

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South-Yokohama Powerplant (Yokohama,Japan)

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According to Reuters, via the HuffPost on April 1, the Japanese government will buy a partial state in TEPCO, in an effort to gain more control over response and recovery activities. See : Japan Government To Reportedly Buy Partial Stake In Tokyo Electric Power, Owner Of Nuclear Plant

Japan’s government plans to take control of Tokyo Electric Power Co., the operator of a stricken nuclear power plant, by injecting public funds, the Mainichi newspaper said on Friday. But the government is unlikely to take more than a 50 percent stake in the company, an unnamed government official was quoted by the daily as saying. “If the stake goes over 50 percent, it will be nationalized. But that’s not what we are considering,” the official was quoted by the paper as saying.

The company, also known as TEPCO, has come under fire for its handling of the emergency at its Fukushima Daichi nuclear complex, triggered by a March 11 earthquake and tsunami that left more than 27,500 people dead or missing. Mainichi quoted an unnamed government official as saying: “It will be a type of injection that will allow the government to have a certain level of (management) involvement.”

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Japan Disasters – estimated cost of damages reaches $306B

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The estimated cost of damages in Japan is huge, equal to more than 4 times that of H. Katrina. See explanation at: Japan Forecasts Earthquake Damage May Swell to $309 Billion, Business Week, March 23.

Japan’s government estimated the damage from this month’s record earthquake and tsunami at as much as 25 trillion yen ($309 billion), an amount almost four times the hit imposed by Hurricane Katrina on the U.S.

The destruction will push down gross domestic product by as much as 2.75 trillion yen for the year starting April 1….The figure, about 0.5 percent of the 530 trillion yen economy, reflects a decline in production from supply disruptions and damage to corporate facilities without taking into account the effects of possible power outages.

The figures are the first gauge of the scale of rebuilding Prime Minister Naoto Kan’s government will face after the quake killed more than 9,000 people. Japan may set up a reconstruction agency to oversee the rebuilding effort and the central bank has injected record cash to stabilize financial markets.

Damages will probably amount to between 16 trillion yen and 25 trillion yen, today’s report said. It covers destruction to infrastructure in seven prefectures affected by the disaster, including damages to nuclear power facilities north of Tokyo. Wider implications on the economy, including how radiation will affect food and water supply, are not included in the estimate.

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Buyouts after a disaster — may be the most cost-effective recovery option

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From a book review in BusinessWeek.com, March 17, a Harvard economist looks at urban life in the future: Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Healthier and Happier, by Edward Glaeser.Penguin Press; 352 pp; $29.95.  Athough the book is primarily about urban planning, one quote from the review is worth considering:

The author’s prescription for Detroit, as well as Buffalo and Leipzig, is to “shrink to greatness” by searching for fresh advantages. What if they fail? Well, that would be too bad, but Glaeser believes cities are about people, not places or buildings. Does it make economic sense to resurrect Detroit when the cost of building a house is greater than the reward from selling it? It could have been cheaper, he notes, to hand every household in New Orleans $200,000 after Hurricane Katrina rather than pump vast quantities of public money into rebuilding a city of waning economic significance. As disturbing as this may sound for New Orleanians, there exists a far more disturbing thought: Glaeser may be right. As the latest U.S. Census figures prove, the city’s capital is disappearing in droves.

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Japan Disaster Victims — returning and rebuilding decisions are fraught with conflicts

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Decisions to return and rebuild, or not, in Japan are similar to those experienced in the U.S after major disasters. The article ‘Too Late’ for Some Tsunami Victims to Rebuild in Japan presents some of the conflicts inherent in that decision; NY Times, March 19.  A week after the tsunami obliterated most of this northern Japanese city’s seafront and not a little of its inland, some of the shopkeepers and their employees were outdoors shoveling mud and hauling wreckage from their businesses, the first signs of restoration.  Will they stay and rebuild or not?  Among the factors to consider:

“These are declining areas. With an exogenous shock like this, I think it’s possible that a lot of these communities will just fold up and disappear.” Some have been hollowing out, albeit slowly, for a long time. Japan’s population as a whole is shrinking and graying, but the Japanese prefectures hardest hit by the tsunami — Miyagi, Fukushima and Iwate — often outpace the national trends, and their workers’ average incomes are shrinking as well.

“There’s really no economic engine in these communities,” said Mr. Aldrich, whose 2010 book “Site Fights: Divisive Facilities and Civil Society in Japan and the West” details the government’s strategy for locating reactors in struggling areas. “These facilities bring $20 million or more to depopulating, dying towns. Many people saw these power plants as economic lifelines at a time when their towns are dying.” And they were, until an earthquake and tsunami changed the economic equation last week.

Now at least one of the Fukushima complexes appears destined never to reopen. Part of the prefecture could remain off limits for years because of radiation. The future of similar plants could be thrown into doubt, along with the jobs and supporting businesses that sprung up around the nuclear industry.

… the tsunami wiped out thousands of businesses and tens of thousands of homes, many of them owned by retirees who lack the spirit or money to rebuild. And Mr. Aldrich — also the author of a long-term study of the societal impact of major disasters like Hurricane Katrina in New Orleans — says the dislocation caused by the tsunami threatens to permanently rend the social fabric that keeps many coastal villages afloat in hard times.

“We faced exactly the same question after Katrina,” said John Campbell, an expert on aging at the University of Michigan and visiting scholar at the University of Tokyo. “There was a big discussion about whether we should rebuild the Ninth Ward, since it was below sea level, and so on. In terms of economic rationality, it didn’t make any sense, really. But on the other hand, it’s where these people lived, and there were emotional reasons to do it. “These villages may not have the same sentimental attachment. Nonetheless, there’s an emotional argument that’s going to be made, and I think it will be a potent one.”

Thanks to Bill Cumming for pointing out this article.

See also another NYT article, same date, titled Reeling from Crises.

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Sendai, Japan Disaster – updates on economic and financial aspects

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Japan Earthquakes 3-13-2011 11-29-13 AM

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Right now the dominant news coverage deals with the nuclear and radiation issues that are hindering the response.  Regarding the recovery phase, most of the news reported comes from financial experts. I have not seen any significant interviews or articles that provide insights or analysis from major historic earthquakes and successful recovery from them.  Many dimensions of recovery are not being considered, other than financial. And few media types seem to understand of the complexity or actual duration of the recovery process.  See the “Worth Reading” page on this blog, which is my attempt to highlight some useful documents for consideration.

Discussion of the likely sources of recovery funds, from the NYTimes today. Japan’s Government Likely to Bear Much of the Loss

Apart from an expected $35 billion in insurance claims from last week’s earthquake, the financial losses in Japan will probably fall most heavily on the Japanese government once it tallies the damage from the tsunami and the nuclear disaster.

The extent of insurance coverage is not as great as in the Tokyo area; nor is it as high a ratio as is true in New Zealand.  But the coverage is far greater than that in the U.S.

March 14: The Diva did a brief TV interview on CNBC this morning, where they were interested in the effects on the business and financial communities, as might be expected. (The video clip is now available.) Presently, I am thinking about the upcoming federal National Level Exercise regarding a New Madrid earthquake, planned for May.  To date most of our thinking in the U.S. about recovery has not been broad gauge enough; we should be thinking in terms of events of the size and destructive possibilities of the Tangshan, China (1978), Christchurch, N.Z. (2011), and the current Sendai, Japan events. I plan to provide more details about the first-mentioned in subsequent posts.

March 13:  Disaster recovery has many essential ingredients, two of which are business and financial recovery.  Here is my take on some key business and economic issues/concerns that I have gleaned from secondary sources on the catastrophic events in Japan:

  1. The earthquake, tsunamis, and other cascading events (damage to nuclear power plants) combined resulted in a catastrophic disaster, which probably will be the costliest one Japan has ever experienced. This sequence of major events is unprecedented and quite scary.  Altogether, the compound of events poses the greatest challenge Japan has faced since WWII
  2. The recovery period will begin soon, although completing the damage assessment and cost estimates will take more time than usual.  The recovery process is likely to divert resources away from manufacturing. It no doubt will entail making some major decisions about the future of the country. Plus, it will take decades to accomplish.
  3. Insurance and reinsurance. Earthquake and fire insurance coverage is common for residential and commercial structures, although fewer policies are in place in Sendai than is true in the Tokyo region, which is (was) considered the highest risk. The major reinsurers (Lloyds of London, Munich Re, Swiss Re) expect to make payouts in Japan.  These same companies also provide insurance in New Zealand.
  4. For American business owners and consumers, interruptions in supply chains might occur; e.g., computer parts, chips, cars etc. Sendai is not an industrial hub, like Kobe. But ground transportation and communications have been disrupted in many areas of the main island.
  5. Possible relocation of residents and structures in Sendai and around the failed nuclear power plants.  Similar to the decisions made about downtown Christchurch, N.Z. Already consideration is being given to not rebuilding in place many of the past structures and systems in the most vulnerable seismic areas. Decisions about the power plants remain to be made.

Reuters news service has done an interesting special report, on March 13, titled Japan Quake Unlikely to Shock Economy. The analysis is thoughtful, citing quite a few economists who have studied the economics of disaster recovery. Yet, despite the optimistic sounding title, the article lays out some serious negative considerations re the Japanese economy with respect to the essential requirements for an effective and efficient recovery.

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Sendai Earthquake – economic and financial aspects

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Earthquake and Tsunami near Sendai, Japan

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One good source for breaking news is the English Version of the online news from the Japan Broadcasting Network.

For basic facts of the quake and seismic history of the area, go to this USGS website. And an amazing amount of descriptive info has been posted in Wikipedia. Another useful site is the MCEER Center at SUNY/Buffalo, which maintains a chronological list of major articles and reports.

Earlier I mentioned Crisis Commons, a crowdsourcing and mapping info site.  Consider the fact that this source and also Wikipedia are done entirely by volunteers.  Great work everyone who helped!!

Apparently the Honshu location was a surprise to Japanese seismic experts; similarly, the Christchurch, N.Z. location was a surprise to experts in that country. As I recall, the Kiwis thought Wellington had the greatest risk.  Clearly, earthquake science is an ongoing learning experience.

Financial Aspects — among the anxious watchers of the outcome of the earthquakes and tsunamis emanating from Japan are the major insurance and reinsurance companies. Some are already involved in payout for the N.Z. quake.  See this financial account from a German newspaper. I am not sure how they make the calculation, but already they have estimated the cost of damage in Japan at $100B. Additional information about the reinsurance concerns is an an article in Business Week today.

Economic Impacts — See Quake Disrupts Key Supply Chains, Wall St. Journal, March 12,

Preparedness — three takes on Japan’s capabilities in this area:

Here’s the truly scary thing about the 8.9-magnitude earthquake off the coast of Honshu Island and its resulting tsunami: Japan is a country that is lauded for doing preparedness right. Japan is a rich, high-tech nation with much rough experience of seismic rumblings: those factors have led it to plan, and plan well, for disaster, with billions spent over the years on developing and deploying technologies to limit the damage from temblors and tsunamis. Those steps almost certainly kept the death count lower than it might otherwise be — especially in comparison with the multitudes lost in recent earthquakes in China and Haiti. Last Friday, however, showed the limits of what even the best preparation can do

Japan is a best case because it has three vital things: wealth, technological skill and sufficiently frequent seismic activity to boost political will to invest against the worst case. The Pacific Northwest has two out of three, which isn’t evidently good enough.

 

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More details re BP Oil Spill outcomes: financial and personal

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Today there have been several important articles about the effects of the spill on individuals and businesses.  In the Washington Post, there are two stories about the financial payments made to ease the effects of the massive oil spill.  Six months after the spill, BP’s money is changing the gulf as much as its oil

Today, it is BP’s money, not its oil, that is most visibly altering the Gulf Coast. The company has been trying – on federal orders – to protect not just the water but the way of life there. But BP’s waterfall of cash has changed people’s lives profoundly.

The second one is an interview with attorney Kenneth Feinberg, who is in charge of payments to business owners. Overseer of BP’s gulf oil spill fund gets his hands dirty

Today the Wall St. Journal commented on the many problems and discrepancies in the payouts. Bumpy Start to BP Fund Puzzles Gulf. From what I read, Feinberg truly has a thankless job, given the large number of undocumented claims.  I for one would not want to be in his shoes.

On the same topic, but with a different take — one that covers the personal stories and hardships– see the account in the Huffington Post, Oct. 20: Six Months later, An Oil Spill Spread Across the Gulf. The writer quotes my friend, Laura Olson, who has devoted years to studying the effects of both Hurricane Katrina and the Oil Spill on the local residents.