Wednesday, October 24, 2012

The Lehman Brother nuke

In 2006 RAND staged a wargame to think through the implications of a nuclear terror incident. They created a specific scenario - a tactical nuclear device being detonated by a terrorist organization in the Long Beach harbor - and then staged a role-play to determine how key stakeholders would react and work together. The experience must have been incredible, because even the write-up is riveting. When I revisited this text today, however, what struck me with particular force was RAND's assessment (this is in 2006, remember) of what the longer-term economic implications of such an event would be:
The attack is likely to have dramatic economic consequences well beyond the Los Angeles area: 
  • Many loans and mortgages in Southern California might default. 
  • Some of the nation’s largest insurance companies might go bankrupt. 
  • Investors in some of the largest ļ¬nancial markets might be unable to meet contract obligations for futures and derivatives. 
While exact outcomes are difficult to predict, these hypothetical consequences suggest alarming vulnerabilities. Restoring normalcy to economic relations would be daunting, as would meeting the sweeping demands to compensate all of the losses.
As some of you will no doubt observe, all of these consequences in fact did come to pass just two years after this report was issued - as a result of the Lehman Brothers default, the consequent collapse of AIG, and the cascade effects which are still creating malign reverberations throughout the global economy, above all in the Eurozone.

Usually when people say that something would be "like a nuclear bomb going off" they are exaggerating; but in the case of the Lehman default, it is accurate.

1 comment:

G said...

I'm sorry this isn't a comment in regards to this most recent post, but toward the general tenor and quality of this blog.

It's simply excellent.

As a new visitor, I'm excited to look forward to the body of posts going back several years. Simultaneously, it's disappointing to see the diminishing frequency with which you're able to post in more recent years. Hopefully that reflects an increasingly rewarding life rather than waning enthusiasm for this forum.

Thanks you for your efforts. Future posts, as permitted by obvious constraints on your time and energy, will be equally appreciated. Your lucidity and intellectual honesty are too rare.

Best wishes.