Flu Pandemics, Financial Pandemics, and the Macroeconomy

Two from the WSJ. First, Barro and Ursua discuss the macroeconomic threat posed by flu pandemics:

Pandemics and Depressions, by Robert J. Barro and Jose F. Ursua, Commentary, WSJ: Here we are, struggling to find a way out of the worst financial crisis since the 1930s, when along comes the possibility of a global influenza epidemic. Though the first concern about the new strain of A/H1N1 virus involves health, we also have to worry that a full-blown flu pandemic would intensify the world's economic problems.

Our ongoing study of economic disasters for 36 countries since 1870 suggests that this concern is well founded. In this sample, we have isolated 158 depressions -- defined as declines in a country's real per capita gross domestic product (GDP) by at least 10%. The most prominent features of these depressions are wars and financial crises. But the fourth-worst global macroeconomic event since 1870 seems to be the Great Influenza Epidemic of 1918-20. This "health shock" accounts for 13 of the depression events. In contrast, World War II is associated with 25, World War I with 23, and the Great Depression of the early 1930s with 21. ...

Next, Richardson and Roubini on the state of the banking system:

We Can't Subsidize the Banks Forever, by Mathew Richardson and Nouriel Roubini, Commentary, WSJ: The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions. ...