Sunday, May 24, 2009

Major Northeast Earthquake

Earthquakes happen every day. On Thursday, an earthquake damaged buildings in China. On Friday, Mexico City felt a moderate earthquake that knocked out electricity in some areas. Yesterday, minor earthquakes hit central Alaska and the California desert. Today, a more powerful earthquake hit a more remote area, an archipelago northeast of New Zealand.

Major earthquakes are less frequent, but we know they’re coming, we just don’t exactly when. Where I live in Pennsylvania and across the northeast United States, we expect about one major quake every 500 years. That means, as far as I know, there is about a one in a million chance that it will hit in the next four hours. We tend to say “one in a million” as a way of saying “not gonna happen,” but it sounds more significant if I say that there is something approaching a 1 percent chance that I eventually die in a major northeast earthquake. It’s still unlikely, but perhaps worth thinking about.

One of the concerns about a major northeast earthquake is the tectonic structure of the northeast. It’s more solid, and that means that instead of affecting just three or four counties, like a California earthquake, it could hit fifteen states simultaneously. The potential for widespread damage makes a northeast earthquake financially more significant. It could wipe out 100 banks if borrowers are disabled, employment centers shut down, and real estate destroyed, so that bank loans cannot be repaid. The northeast is such an important region that it could bring down companies that operate nationally. Life insurance companies could be wiped out along with health insurance companies. And all at the same time that the electrical grid and pipelines might be shut down by damage in multiple places.

Insurance companies know about the financial risk of earthquakes, and I believe they exclude earthquake damage from most building, automobile, and travel accident insurance, but it isn’t easy to remove indirect earthquake costs from other kinds of insurance. For example, fire insurance could not easily exclude damage from the fires that follow earthquakes.

So the possibility of a major northeast earthquake represents a systemic risk to the U.S. financial system. The size of the financial damage would depend on the scale of the physical damage. Some of this risk could be reduced by rewriting the terms of some contracts. But fundamentally, we need to improve the quality of buildings and bridges across the northeast so that an earthquake will not result in so much damage and loss.

Earthquake resistance wasn’t a concept in Pennsylvania buildings until the 1960s, and even now, it isn’t always taken seriously. Meanwhile, most buildings are older than that. And bridges? The state is replacing the oldest bridges one by one, but not always getting to them before they fall down on their own. A few of these bridges are set to be rebuilt this year and next using the transportation funding included in the economic recovery bill. But there is a lot more that could be done to make Pennsylvania and the rest of the northeast more ready to withstand a major earthquake.