The Economic Aftermath of Sandy

The markets will be limping badly when they open for trading on Wednesday, numbed by the destructive power of Hurricane Sandy. The cleanup is going to take many weeks if not months, and cities up and down the East Coast will be in a daze until basic services have been restored. Pumping out the saltwater that gushed into tunnels and subways will be relatively easy compared to fixing and replacing electrical switches and components. Because New York’s subway system is very old, many of the parts that will be needed are no longer available. Of course, the trains will run again, and soon, but how smoothly is a question that looms large for those who live in, and commute to, New York City.

Although it will be a while before we can know the extent of the economic damage, the markets themselves cannot but give an instant assessment when stocks start to trade Wednesday morning. The shares of property and casualty insurers are all but certain to dive, but there will be a bullish offset in stocks tied to the rebuilding effort. The cities themselves will be under enormous financial strain to rebuild transit systems, roads and beaches, and the logistical challenge to FEMA in particular will be considerable. President Obama has promised that there will be as little red tape as possible, and there is no doubting that he intends to make good on that promise.

A Keynesian’s Dream

On Wall Street, pent-up demand could cause the markets to be quite volatile in the days ahead, especially because the four-day trading hiatus has occurred in the middle of the Q3 earnings season. My hunch is that the remainder of the week will see a continuation of the bearish trend in stocks, perhaps with an added kicker from the storm. From a Keynesian perspective, restoring and rebuilding the Eastern Seaboard is as pure and powerful a stimulus as you could ask for. Tens of billions of dollars are going to be spent in the effort. But where will those dollars come from? There’s no getting around the fact that they will have to be borrowed. Ironically, the dollars when considered as an investment may have a much better chance of paying off than the Government’s bailout of General Motors. If so, the rebuilding of the Eastern Seaboard cannot begin soon enough.