Walt Laws-MacDonald | Money Matters
Published: Friday, November 2, 2012
Updated: Friday, November 2, 2012 08:11
As the sun finally cut through a still cloudy sky on Tuesday morning, Tufts let out a collective groan. Part relief — “YES, Tisch is open!” — and part dismay — “
but that weird acorn head is still here.” It was the sigh of a student body that had avoided the worst part of the storm — even if it did mean returning to classes.
I had kept in frequent contact with my parents at home in New York throughout the night, and my dad gave me the classic example of a jaded Manhattanite: “You know, [Mayor] Bloomberg told people to stay inside; six foot pieces of plywood are flying off scaffolding, but people don’t really care. There are some people out walking their dogs.”
But just a few miles downtown, it was — and is — a very different story. Lower Manhattan, where the New York Stock (NYSE) and Mercantile (NYMEX) Exchanges have their physical floors and the NASDAQ is headquartered, was hit with thirteen foot high storm surges and flooded tunnels, streets, and businesses.
Both the NYSE and the NASDAQ halted even their electronic systems until Wednesday morning; according to the NYSE, this is the first longest storm-related closure since the Blizzard of 1888, and I’m sure we all remember how rough that bad boy was.
Though these closures alone kept trillions of dollars from changing hands at the beginning of this week, the real economic hit will come from the tremendous amount of property damage the storm inflicted.
Flooding and water damage will likely be the main culprit, while fires in Queens and Far Rockaway, New York destroyed over 80 homes. Wind gusts close to 100 miles per hour took down trees and power lines across several states, and more than 3.75 million Americans are still without power — less than half the number afflicted power-less early in the week. The shore of New Jersey (yes
, that one) was simply decimated, with some evacuees being told they shouldn’t even think about coming back for another two weeks.
Current estimates put the damage at over $50 billion with insurers covering less than half that figure. One Wells Fargo analyst predicts Sandy will take 0.1 to 0.2 percentage points from the country’s fourth quarter GDP growth.
So how does the country pay for the path of destruction Sandy left behind? Though FEMA and local governments will foot most of the bill, the financial system does have hedges against such disasters.
The most basic hedge would be your average homeowner’s insurance. Important life lesson for all you Jumbos who don’t own a home (or car) just yet: get insurance. By paying a monthly rate, an insurance company (say, State Farm) will take on the risk that a tree crashes through your roof
If a tree ever does find its way into your living room — and your policy covers it — State Farm will cover the repairs. Until then, they will simply pocket the money. On the more exotic side are instruments like weather derivatives. On the CME (which owns the NYMEX) you can buy “hurricane options.” These assets, often used by farmers, estimate the number of hurricanes that will occur over a given time period, and pay out the difference from the actual number. Similarly, ski resorts can buy snow options to hedge against warm winters. Basically, if nature goes bad, you can recoup some of your losses.
Though the worst part of the storm is over, Sandy’s death toll grew to 88 yesterday (and, sadly, it continues to rise), and it forever changed parts of the eastern coastline. Thanks to the leadership and resilience of our nation’s governments, help is getting where it needs to go. Stay safe out there, Jumbos!
Walt Laws-MacDonald is a sophomore majoring in quantitative economics. He can be reached at Walt.Laws_MacDonald@tufts.edu.