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Commentary on The Capital Markets- Category [Macro Factors]

I keep hearing this crap all over the so-called business media today.

Look folks, here's the reality on losses of this sort:

1. Homeowners and renters insurance does not cover flooding.  If you want (or need) it you need to buy FEMA-backed flood insurance.  If you're not in a rated hazard zone it's reasonably cheap, but most people don't buy it unless they are in a rated zone because the government has decided to force-subsidize people in rated zones by jacking premiums on those who are not.  This has dramatically dropped the "take rate" for those who buy it voluntarily, exactly as one would expect.  Note that flood insurance has gotten much more expensive since the last round of Florida hurricanes, plus Katrina.  If you are in a rated zone you can't get a mortgage without it, but for everyone else you can and take your chances.  I've seen estimates that only 20% or so of household properties have flood insurance in the Houston area and that plenty of places well outside of known flood plains have in fact flooded, but the bottom line is that Houston was built on low-lying, and often reclaimed coastal swamp.  In addition FEMA coverage has modest limits; you're capped off at $250,000 and $100,000 for contents.  And if that's not enough if you take more than a certain percentage of value damage you're required to rebuild to enhanced codes to reduce the risk of a second incident and after a second incident you can't buy it at all.  That is, if you're living in a McMansion you are going to eat a good part of it, especially if you have expensive possessions, irrespective of having the coverage.  Worse, if you get pounded and have to rebuild with elevation improvement or similar in order to continue coverage -- which you will have to do if your property is financed -- you are very likely to wind up eating a large part of the bill yourself.

2. Commercial properties can't get FEMA insurance that's anywhere near adequate (if they can get it at all) but can buy it privately, and some do.  But not many, especially small businesses, do because it's quite expensive.

3. Cars are covered if they have comprehensive coverage.  If not, then nope.  Again, if financed then it's covered because the finance company will insist on it.  However, note that you may still be upside down on the loan after the insurance company pays, especially on newer notes that were written for 6, 7, 8 or even 9 years.

If you have an insured loss then the economic impact to you is not very high, and you will spend the settlement to fix/replace/whatever the property, so that will be additive to GDP.

But if you have uninsured losses, and a hell of a lot of the losses will be uninsured, then your capital investment has been destroyed and so has the ability to use it as collateral to borrow for future expenditures that would add to GDP, and in addition that leverage is no longer available to you.  And by the way, if the Government "steps in" and hands out money (which they probably will) that's negative too to the economy as a whole because it's deficit spending which destroys the purchasing power of everyone's money, so instead of a positive impact from that it's a negative impact -- although it won't be reported that way.

What's worse is that many uninsured losses are greater than the actual loss of value because you have to pay to clean it up!

So no, folks, this is not "good news" from a GDP perspective -- at least not in real terms.

Not at all.

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