Wall Street and the Earthquake


Doug Merrill argues that last week’s earthquake in Japan shouldn’t spark any serious global economic problems. Why?

Because Tokyo Earthquake is probably the most widely used wildcard in any sort of future/scenario planning. Sure, it was a low-probability event at any given time, but over longer terms it had a non-trivial likelihood of coming to pass. From financial markets to supply-chain managers, they all should have a file at hand marked Tokyo Earthquake, and the work — for people far away — now involves dealing with how reality diverges from what was planned. Maybe some international actors will be exposed as having neglected to answer this most obvious of what-ifs, but most will have worked through the possibilities.

Roughly speaking, I’ll buy this. On the other hand, my confidence in the ability of global financial actors to properly identify and plan for big but low-probability catastrophes has been pretty shaken over the past couple of years. I mean, how surprised would you be if it turned out that a bunch of big financial players, weakened by the 2008 collapse, knew perfectly well that “Tokyo Earthquake” would put them out of business but just decided to cross their fingers and hope it didn’t happen for a while?

In my case, not very. Still, as Doug says, this is the kind of catastrophe that insurance companies really do know how to account for, so he’s most likely right.

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