Gustav and economic recovery

Sitting comfortably at home this weekend, we couldn't help but notice hurricane Gustav head directly towards New Orleans.  As I write, Gustav is expected to make landfall as a Cat 4 'cane- not a wimpy breeze indeed.  New Orleans hasn't quite rebuilt adequately, although this storm will certainly test reconstruction efforts.  In the comments to Holy GDP, we started to discuss how unforseen events can impact the economy and markets in unanticipated ways.

In fact, a commenter noted that other countries are now discussing the idea of stimulus checks similar to the ones shelled out this spring here in the U.S.  We noted that worldwide stimulus may indeed be a welcome positive suprise for the economic outlook.  Gustav is without a doubt another unforseen event. 

Such a strong storm might not only cause widespread destruction along the gulf coast, but may also disrupt an enormous piece of the U.S. energy infrastructure as did Katrina.  Obvioulsy, a re-escalation of energy costs could be part of an economic knock-out punch. 

Perhaps more interesting is Gustav's impact on the credit crisis.  How so?  Consider that financial institutions across the board are writing off assets.  Such losses demand capital reserves to shore up their credit worthiness.  Now, if property and casualty insurers need more capital than previously expected because of a devastating hurricane(s), we could see another segment of the financial industry in need of tens of billions in capital.  An even greater demand for capital reserves is not what a weak financial system needs right now, although how much more still remains to be seen.  Let's hope Gustav has a small impact and we don't have to speculate about the ramifications.