Last week we wrote two related posts: A New Influenza Stress Test and Influenza Pandemic Stress Test, Part II. Both posts discuss the need for banks to perform stress tests/scenario analyses that incorporate the possible negative economic effects of a flu pandemic in additional to consideration of possible additional structural weaknesses (and shrinkage) in the economy.
In the second post, we mentioned a government study from a few years ago that estimated a five percent contraction in GDP if the USA faced a severe pandemic. (In our best Jack Nicholson/A Few Good Men courtroom-scene impersonation, we ask: is there any other kind of pandemic, Danny?)
In today’s edition of The Wall Street Journal, Robert J. Barro and Jose F. Ursula provide additional evidence of the possible negative effects of a pandemic in Pandemics and Depressions. In it they provide estimates of the historical costs of such outbreaks. Well worth reading.
We’ll have more to say about the stress tests in our next post. The past week’s events provide evidence to confirm one of our hypotheses from a post one month ago when we asked Where Will the Bank Stress Testing Exercise Lead?
