Sérgio Abranches

Economic damage costs related to extreme climate events to date in the US exceed $35 Billion, says the National Oceanographic and Atmospheric Administration – NOAA. These costs are likely to affect both the domestic and the global economies already facing a serious crisis.

Nine billion dollar disasters have occurred so far in 2011 in the U.S. Among them are the upper Midwest and the Mississippi flooding; drought, heat waves, and fires in the Southern Plains and Southwest; tornadoes in several regions; and a large winter storm impacting many central, eastern and northeastern states.

Climate extremes have led to harvest losses affecting particularly corn, soybean, and cotton crops. Food prices moved upward as supply plummeted.

The hurricane season has been very active, with nine named storms so far. Tropical storm Irene is the first to gain hurricane strenght of the 2011 Atlantic season. It has passed over Puerto Rico on Sunday. There were no reports of deaths or major injuries in Puerto Rico, but 800,000 people — half of the island’s electricity customers — were left without power by the storm, which felled trees, swelled rivers over their banks and flooded some roads, says Reuters.

Irene, with 80 mph sustained winds, is now on a path towards the Bahamas and Florida coastline. A ridge of high pressure to the north of the storm, around Bermuda, should stay in place over the next few days, forcing the storm along a west-northwest path. Irene is expected to strengthen over the next 48 hours, potentially into a Category 2 hurricane, according to NOAA

Irene is set to be the first hurricane to hit the United States since Ike savaged the Texas coast in 2008. Hurricane-force winds extended outward from the core to 50 miles and tropical storm-force winds extended out up to 205 miles.

Authorities along the U.S. Atlantic seaboard, from Miami to New York, were closely watching Irene’s possible path, with at least some computer forecast models showing it might even sweep up near New York City early next week.

President Barack Obama was briefed about Irene while on vacation at the Massachusetts island of Martha’s Vineyard, White House officials said (Reuters).

Reports from Reuters say that the storm could be the catalyst the insurance industry has been seeking in its quest for across-the-board premium increases, in what already promises to be the costliest year in history for natural disasters around the globe.

There are likely to be other economic consequences of these climate-related disasters. Some of them are already in place. Reduced crops, food inflation, higher ethanol prices, disruption of economic activity, and destruction of property and infrastructure all have a recessionary component, affecting employment, income, and both private and public expending. They hit an already slow-moving economy in the midst of a new turn of the financial crisis as shockwaves after an earthquake.

Like the extreme natural events that hit Japan earlier, disasters in the U.S. will very probably add to domestic and global economic woes. An aggravation of the U.S. economic trouble will certainly add to the troubles of the fragile global economy. The U.S. recent stop-and-go, and the financial breakdown in  the Eurozone are central elements of the present global crisis.

To make things worse, the Chinese government is highly concerned with food price inflation, mainly due to adverse climate events around the globe, and is set to reduce the pace of the domestic economy. A downturn of the Chinese economy at this moment would wipe out any hope that the global economy could recover from its present woes any soon.

Although the current crisis is a new turn of the financial crisis triggered by the subprime collapse, it has noticeable climate-related undercurrents. The crisis has not been fed only by bubbles, risk of default, and investors’ recurrent panic surges, but also by the economic consequences of extreme climate. After all, 2011 is the seventh year on a row with some major extreme climate events causing significant death tolls and economic damage.

Is the financial crisis over? Is the global economy any different from before the meltdown? Have the governments done their homework? Are we any safer?

Sergio Abranches

I’ve seen several economic analyses of the global financial crisis on the anniversary of the Lehman Brothers’ fall.

The large majority boils down to: a. the projections of the crisis were too pessimistic; b. the worst has already passed; c. the world economy is slowly recovering; d. the fiscal stimuli did the trick; e. governments failed to adopt better precautionary rules and to redesign the regulatory framework. Some have criticized the excessive amount of fiscal stimulus, especially in the US. Others say Germany, for instance, has not done enough on the fiscal side. There has been moderate praise for fiscal coordination among the larger economies, basically through the action of G20. The performance of the IMF and the World Bank have been positively rated as well. Is it all really that good?

Crisis scenarios were indeed far more pessimistic than reality proved to be. If one believes so, than the criticism about the excessive size of fiscal stimuli doesn’t hold, because they were dimensioned after the doom scenarios presented to policymakers by economic pundits, and the savvy of the endangered financial giants.

Some analysts argue that the size of the fiscal packages in countries like the US and Japan, will lead to a second phase of the crisis marked by high inflation. Because the crisis receded faster than expected, and was less than a tsunami, as most of the scenarios foresaw, fiscal stimuli were oversized in both countries. High inflation will lead to more conservative monetary and fiscal policies that in turn will bring recession back to the scene.

A few others are still more skeptical about the worst having already passed. They still believe a scenario in which a structural crisis of long-duration, with short-termed ups and downs within it, isn’t to be totally discarded. Meaning there will be more crisis events, after the current recovery, and before the worst is really over.

I confess my uneasiness with the brighter pictures that view the crisis as mostly gone. I am concerned with the risk of inflation too. My major concern is about what did not change and what did not happen when the crash brought panic.

The landscape of the financial system has changed a lot. Several icons of the financial empire before the crisis are no longer there. Wall Street became less crowded and more concentrated. Yet, nothing really happened in the deeper undercurrents that determine most of the behavior of financial markets. The change that has happened was at the surface, at the landscape. Underneath, the system remains fundamentally the same.

Moreover, the shockwave had more enduring negative consequences to Main Street, on the form of jobs and real economy businesses destroyed. Part of the wealth lost in Wall Street amounted to savings of the younger strata of the middle classes that were to finance investment on education, housing, or startups in the future. Another significant portion was to pay for retirement and income complementation at retirement age, for the older strata of the middle classes. These are factors of long-term economic disturbances still to come.

A source from the financial market told me almost everything is back to place in Wall Street, the City, and other financial centers of the empire. Complacence is back, risk aversion retreating, the search for short-term killings resumed. Several of those who lost financial jobs have been hired back. Meanwhile, the real economies are moving at a much slower pace. Even in countries like Brazil, where many people, and especially their governments, think things were never really that bad, and recovery was fast and complete, the wounds across the real economy, and particularly inside the homes of the unemployed, are still bleeding.

This week, in New York, I talked to a guy who has a small business in the service sector, and with whom I’d met there, at the height of the crisis. Back then he was desperate. He had just bought a new house near New York City, and was in trouble with his mortgage. The house’s market price was 40% less than he mortgaged. He feared not being able to pay, and he feared most being able to pay, because he’d been paying more than its present value. He was struggling with the risk of a foreclosure, and the weight of paying dear money to the bank, he would never realized when marketing the house. He told me he was trying to renegotiate the mortgage, but failed even to schedule an interview with his bank manager. “He’s having to deal with thousands of cases like mine,” he explained.

I asked the guy, last Wednesday, whether he had solved his mortgage problem.  “No, I’m still waiting for an answer to my application for a renegotiation,” he said. But he was no longer either desperate, or anxious. “I filled all the papers, the manager finally talked to me, now I’m waiting. Things are slowly getting better, though” he explained. “The banks are no longer in crisis, they’re making as much money as before. So, the pressure is over, no danger of a foreclosure. It is taking too long to get an answer from them, but, you know, they have a heavy workload, thousands of cases like mine to process.”

That’s what my source was telling me. They’re making lots of money, looking for more, and forgetting all about the crisis. Complacence is back.

What about regulation? I watched president’s Obama speech to Wall Street, on the anniversary of the Lehman Brothers’ collapse. He repeated all his promises regarding a bill defining a new regulatory framework for the financial sector, especially aiming at sectors and activities that today fall outside the regulatory grasp of any agency. Nothing has been done so far. The reaction among Congresspersons and business representatives was quite negative. Most said there is no need for more regulation. Some saw socialism and statism in Obama’s words.

Presidents Obama, Sarkozy, and Lula, as well as prime-minister Gordon Brown are promising to fight for a multilateral regulatory framework for global financial transactions as well as effective global coordination of domestic regulatory rules at the G20 meeting in Pittsburgh, next week.

President Obama said on his speech that domestic regulation won’t work if there is no global coordination and if all nations won’t adopt a similar framework for their own financial markets.

Australian Prime Minister, Kevin Rudd, and South Korean president, Lee Myung-bak, have made several recommendations to the G20 for macroeconomic policy coordination required to manage the transition from crisis to recovery.

The story is simple: the easy part, with future costs, i.e. fiscal stimuli, has worked, at least to avoid a long and deep economic global depression, and to revert the crisis on the short-run. The hard task, a new regulatory setup as well as regulatory and macroeconomic coordination at the G20 is still to be done.

I’ve asked an economist now at a university, but who has worked in Wall Street for more than three decades and left just before the crisis, whether he believed Obama’s regulatory bill would pass. He said he didn’t. “The crisis is over, you know, complacence is back…”

Political scientist Daniel Drezner, from the Fletcher School of Law and Diplomacy, at Tufts University, says on his blog at Foreign Policy that he’ll believe on macroeconomic policy coordination at the G20 when he sees it. Same here.

It seems that the G20 meeting will deal with two major deadlocked decisions that have the same logic: regulatory and macroeconomic reforms, and a new climate change protocol. In both cases, domestic efforts won’t work unless every relevant country enforces similar policies, even giving room to some diversity of pace and degree, and in the absence of effective global coordination.

I’m not placing high bets on Pittsburgh’s G20 role in breaking these deadlocks either on the required financial and economic retrofitting work to overcome the structural crisis, or on the climate change deal. But I’m ready to bet some chips that the summit will not be a useless one either. There will be some progress on the common understanding of both challenges, and this convergence will be all the more important on the near future, when both economic and climatic events will require decisions tougher than the ones we’re ready to make now.