Buildings Kill People, Not Earthquakes


Sao Paulo: On Wednesday night, high-rise buildings on Avenida Paulista, the main avenue of the financial district in this city, were shaken by tremors lasting a few minutes. In Argentina, on both sides of the Andes, dozens of towns and villages were jolted out of sleep. Soon, news began to trickle in. A massive earthquake measuring 8.3 on the Richter scale had struck about 44 km west of Illapel, a town about 200 km north of Santiago, the capital of Chile. Within a few minutes, nerve-wrecking videos were being shared on social media: buildings and bridges swaying from side to side, expensive wine bottles crashing on the floors of supermarkets packed with people, and men and women running out of their homes with their kids in their arms. Then, amid reports of the sea rising by about 10 to 15 feet, tsunami warnings were issued along the Pacific seaboard.

On Thursday morning, the region – and the whole world – was braced for reams of bad news from Chile. There was some bad news: hundreds of thousands of people without electricity, no drinking water in some cities and thousands of people, fearing after-shocks, sleeping in tents and more than one million people have been evacuated from coastal towns. But the good news – if it can be called good news – was that the number of casualties, considering the intensity of the quake, was very low: 8 dead, 1 missing.

Every time a quake strikes a part of the subcontinent, it’s generally described as “nature’s fury” or “tragedy” and its victims labelled as “ill-fated” people. It’s not that the Chileans survive major tremors because they are luckier but because of the way they treat these natural disasters: with careful planning. Earthquakes can’t be predicted and there is no “earthquake-proof” architecture. And yet, if there’s a secret to Chile’s survival techniques, it’s in the country’s building codes, which have been strictly implemented since an earthquake measuring 9.5 hit the country in 1960.


Financial crises are pathologies of an entire system, not of a few key firms. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.


The bottom line: equity financed investment and narrowly backed deposits

These factors suggest that instead of trying to divine which firms are systemically important, banks should be required to get a larger share of the funds they invest by selling stock. Bank investment funded by equity avoids the danger of a run: If the value of a bank’s assets falls, so too does the value of its liabilities. There is no advantage in getting to the bank before others do.

deposits—the checking and saving accounts that are bank liabilities—should be invested only in short-maturity secure assets, like Treasury bills.

Good news: These views seem to be taking hold. The people who run the regulatory agencies are pretty smart, they do listen, and they understand better than we do just how unworkable the plan is for them to make sure no big highly levered bank ever loses money again:

The Federal Reserve seems to be wising up, and may require higher equity capital for the SIFIs and place less emphasis on regulation.

When the next financial crisis hits (when, not if!), will we be Chile or Nepal?


One thought on “Buildings Kill People, Not Earthquakes

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s