What Hurricane Sandy Means for Ben Bernanke

The monetary consequences of natural disasters are not what you might think

ACBoardwalk.jpg
(Twitter/@Occuweather)

The economic consequences of hurricanes are certainly macabre, but no less real. As the super storm subsides and we move from recovery to rebuilding, the question becomes what this disaster means for not just FEMA but for the Fed too.

There's a standard script when it comes to the economics of natural disasters. Liberals argue the subsequent rebuilding is a tragic stimulus amid a depressed economy; conservatives retort this is nonsense since rebuilding what we had does not make us any richer. Now, it's true that replacing what existed before does not increase wealth, but it does increase medium-term growth, at least when idle resources abound. In other words, it's stimulus of the worst possible sort. But it's not as if we should start hiring people to go around destroying stuff. We'd be better off burying burying jars of money and then digging them back up, as Keynes wryly suggested -- or, you know, hiring people to build stuff.

But if natural disasters are the fiscal stimulus we don't want, they are the monetary stimulus we don't get. It's intuitive that the Fed should cut interest rates to help build back what was lost -- intuitive, but wrong. Large-scale destruction not only means lost lives and property, but also lost productive capacity. Less supply means lower output, but also higher prices -- it pulls the Fed in opposite directions. This 2007 St. Louis Fed paper argues inflation should pull the Fed more than output, to the tune of a 30 basis point hike after a big disaster. The logic is the Fed should prevent inflationary expectations from setting in until the government rebuilds the lost supply and inflation recedes. This is precisely what happened after Hurricane Katrina -- to the surprise of Wall Street -- as the Fed raised rates 25 basis points. The chart below shows what financial markets thought would happen in the days after landfall.


KatrinaFFR.png
This time, though, is different. Really. The Fed has promised to both keep buying mortgage bonds and keep rates near zero until even after the recovery picks up. The Fed is worried about there being too few jobs than too much inflation. In other words, the Fed won't raise rates now when it normally would. It's an implicit, if morbid, loosening of monetary policy.

It's stimulus we wish we never got.
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

Never Tell People How Old They Look

Age discrimination affects us all. Who cares about youth? James Hamblin turns to his colleague Jeffrey Goldberg for advice.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register.

blog comments powered by Disqus

Video

Never Tell People How Old They Look

Age discrimination affects us all. James Hamblin turns to a colleague for advice.

Video

Would You Live in a Treehouse?

A treehouse can be an ideal office space, vacation rental, and way of reconnecting with your youth.

Video

Pittsburgh: 'Better Than You Thought'

How Steel City became a bikeable, walkable paradise

Video

A Four-Dimensional Tour of Boston

In this groundbreaking video, time moves at multiple speeds within a single frame.

Video

Who Made Pop Music So Repetitive? You Did.

If pop music is too homogenous, that's because listeners want it that way.

More in Business

Just In