The Overhead Wire Daily | June 20th, 2024 | Interconnected Risks

I share a lot of Susan Crawford’s items from her substack Moving Day because it really is sounding an alarm on the issues climate change will soon make us reckon with. Today she’s shares a study that looks at how insurance costs have gone up since 2020 in areas that are at high risk of climate change. Of course insurance companies don’t share this information readily so the report authors had to disassemble millions of monthly escrow payments to get at what people are paying for insurance and it’s as fascinating as it is scary.

Rising insurance rates from climate change trigger multiple issues as Susan puts so well; the weakening of asset values and in turn property tax dependent entities like governments as well as shifting risk to housing finance stability systems like Fannie Mae and Freddie Mac which can then infect the whole financial system of the US.

But there’s another issue that people on this email list might care about more than some of the others. Infrastructure finance. Again, it goes back again to the discussion we had with David Schleicher about his book In a Bad State (transcript | audio) which shows over time how the government has created a legal and financial foundation for cities to be able to finance transportation and other infrastructure through bonds. If insurance companies raise prices so high such that the only backstop is the public insurance option, we then see different levels of government at risk of default. Then if default happens there are three choices (The Trilemma) for the Federal Government to fix it as David put it so well on the show and in his book;

“[The Federal Government] wants to avoid kind of really sharp budget cuts or austerity because that state and local fiscal crisis generally happen during recessions and budget cuts during recessions are bad. Secondly, it wants to avoid moral hazard. That is say if it bails the government out then the government may grow to expect it and that will lead to greater budget problems in the future. And then third thing is it wants to avoid harm to the municipal bond market. Why would anyone care about that? Well, state and local governments, we rely on them to build almost all infrastructure in America.”

As David notes, you can only do two of the three. I know it might seem like I’m repeating this over and over again, but I do feel that climate change could have a bigger impact on issues like these down the line if we don’t address it sooner. It is likely to be painful, but less so now than later.

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