{"id":32601,"date":"2025-06-26T04:40:56","date_gmt":"2025-06-26T04:40:56","guid":{"rendered":"https:\/\/financialrush.com\/?p=32601"},"modified":"2025-06-26T04:40:56","modified_gmt":"2025-06-26T04:40:56","slug":"how-the-next-financial-crisis-starts","status":"publish","type":"post","link":"https:\/\/financialrush.com\/?p=32601","title":{"rendered":"How the next financial crisis starts"},"content":{"rendered":"

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If you are over the age of 40, there is a good chance you remember where you were on September 15 2008, the day Lehman Brothers went bust.\u00a0It was one of the first of many shocking moments during the last global financial crisis, a searing time of bank runs, crashes and bankruptcies when big economies tumbled into some of their deepest recessions since the Great Depression. Stunned Lehman staff, who left the 158-year-old investment bank\u2019s offices carrying their belongings in cardboard boxes, came to symbolise the millions who lost their jobs, homes and life savings in a disaster that destroyed trillions of dollars of wealth<\/a>.<\/p>\n

There were multiple culprits for the mayhem but, as with so many past financial debacles, the property market was implicated. In 2006, the air went out of a US housing bubble fuelled by supposedly safe mortgage-backed securities that had been sold around the world and included risky \u201csubprime\u201d home loans. As the number of mortgage defaults and foreclosures climbed, the value of these securities plunged, saddling investors with crippling losses and prompting panic in financial markets.<\/p>\n

In the months after the crisis hit, government bailouts and sweeping reforms began to put the battered financial system back together. Today, big banks are better capitalised. Markets are better regulated and investors more protected as a result of those reforms. And yet each month now brings warnings with echoes of that strife. Fears are growing that property markets could again be roiled, this time not by risky lending practices but by rising numbers of climate-related disasters putting pressure on insurers and other critical financial institutions. \u201cProperty values will eventually fall \u2014 just like in 2008 \u2014 sending household wealth tumbling,\u201d said Next to Fall, a December report on climate change and insurance<\/a> from the then Democrat-chaired US Senate Budget Committee. \u201cThe United States could be looking at a systemic shock to the economy similar to the financial crisis of 2008 \u2014 if not greater.\u201d\u00a0<\/p>\n

In January, the Financial Stability Board, which was set up to keep an eye on the global financial system after the 2008 crisis, said insurance was becoming more costly and scarce in disaster-prone areas and \u201cclimate shocks\u201d could set off wider market turmoil. In early February, US Federal Reserve chair Jay Powell warned that the Fed was also seeing banks and insurers pull out of risky areas. \u201cIf you fast forward 10 or 15 years, there are going to be regions of the country where you can\u2019t get a mortgage. There won\u2019t be ATMs [and] banks won\u2019t have branches,\u201d he told Congress<\/a>. \u201cI don\u2019t know that it\u2019s a financial stability issue, but it certainly will have significant economic consequences.\u201d<\/p>\n

Less than two weeks later, Warren Buffett told shareholders<\/a> in his Berkshire Hathaway conglomerate, which includes a string of insurers, that property cover prices had gone up thanks to a major increase in violent storm damage. \u201cClimate change may have been announcing its arrival,\u201d he said. \u201cSomeday, any day, a\u00a0truly staggering insurance loss will occur \u2014 and there is no guarantee that there will be only one per annum.\u201d\u00a0<\/p>\n

Then, as Europe experienced its hottest March on record, G\u00fcnther Thallinger, a management board member at Germany\u2019s insurance giant Allianz, warned global temperatures were fast approaching levels where insurers would no longer be able to operate, creating \u201ca systemic risk that threatens the very foundation of the financial sector\u201d.<\/p>\n

\u201cIf insurance is no longer available, other financial services become unavailable too,\u201d he wrote in a LinkedIn post that made headlines<\/a>. \u201cThe economic value of entire regions \u2014 coastal, arid, wildfire-prone \u2014 will begin to vanish from financial ledgers,\u201d he added. \u201cMarkets will reprice, rapidly and brutally.\u201d<\/p>\n\n

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\u00a9 Alex Trochut<\/span><\/figcaption><\/figure>\n<\/div>\n

There is no single scenario <\/strong>for exactly how property insurance costs might lead to climate-fuelled financial upheaval. But here is one that has emerged from discussions I\u2019ve had this year with more than 20 investors, financial analysts, regulatory experts, insurance executives, scientists and\u00a0researchers.<\/p>\n

It begins with the number of insurers pulling back from US states swelling from a stream to a flood, and not just in disaster-prone states such as California. Across the country, homeowners face soaring premiums or an inability to renew their cover as insurers confront a remorseless spate of wildfires, storms and hurricanes.\u00a0<\/p>\n

Cash-strapped governments try to plug the gaps with more last-resort insurance schemes. But these plans typically cost more and cover less, raising a chilling new reality for thousands of homeowners. The value of their family home, which had risen year after comforting year, instead begins to sink.\u00a0<\/p>\n

The contagion spreads because you need insurance to get a mortgage, so as property coverage fades, so does the presence of banks. In state after state, it becomes impossible to find a bank branch. Some lenders quit the mortgage business completely. A\u00a0few begin reporting big losses. And the US is not alone. Climate-driven upheaval intensifies abroad, rattling insurers, banks and property markets from southern Australia to northern Italy. In city after city, people find themselves living in homes worth less than what they had paid for them. Each monthly mortgage payment feels like throwing good money after bad.<\/p>\n

In a disturbing hint of past financial turmoil, mortgage defaults begin to rise, along with foreclosures and credit card delinquencies<\/a>. But this time, it\u2019s different. Unlike other financial disasters, the underlying cause of this one is not financial, it is physical, and it is not clear how it will ever end.<\/p>\n\n

It needs to be said that views<\/strong> are far from settled about whether a warming planet will ever cause this or any other form of financial disorder.\u00a0<\/p>\n

Christopher Waller, a US Federal Reserve governor appointed during Donald Trump\u2019s first term, has long been among the doubters. \u201cClimate change is real, but I do not believe it poses a serious risk to the safety and soundness of large banks or the financial stability of the United States,\u201d he told a 2023 conference in Madrid on economic and financial challenges.<\/p>\n

Property values plunged after population declines in US cities such as Detroit without posing a threat to financial stability, Waller argued. Why would declines in coastal cities hit by rising sea levels be any different? Also, Fed stress tests<\/a> that typically assumed a fall in US real estate prices of more than 25 per cent had found the largest banks could absorb nearly $100bn in losses on loans collateralised by real estate, plus another $500bn of losses on other\u00a0positions.\u00a0<\/p>\n

Even experts who disagree and think there is a deepening climate-driven insurance problem don\u2019t say this will automatically lead to the abrupt meltdowns of the 2008 crisis. Here\u2019s how former California insurance commissioner Dave Jones, a Democrat, put it to me. \u201cOver time you\u2019ll see even more insurance company insolvencies, more insurance price increases and less insurance availability, more mortgage defaults, and falls in asset values and credit freezes; as opposed to a single catastrophic event or events where a bunch of financial institutions nationally go down at once.\u201d Although, he added, \u201cThere is some risk of that as well.\u201d\u00a0<\/p>\n

There is, however, wider agreement on one daunting point. Climate-driven financial havoc, even if it happens in slow motion, could be more menacing than past financial chaos. That\u2019s because it would not be caused by financial failures that are typically followed by a recovery, but by global carbon emissions that the world has spent more than 30 years struggling to cut.<\/p>\n

\u201cThis type of climate risk is not cyclical. It\u2019s heading in one direction,\u201d says economist Ben Keys, a professor of real estate and finance at the University of Pennsylvania\u2019s Wharton School. \u201cSo you don\u2019t necessarily need as big a shock, if it\u2019s a permanent shock, to have a serious, long-term effect on house prices and other asset values.\u201d<\/p>\n

This idea of a persistent climate imprint on real estate, one of the oldest and most important asset classes, marks a shift in the way some experts have been thinking about the relatively new concept of climate-fuelled financial instability. The story of why this shift has happened, and what it means, may seem remote when missiles are falling in the Middle East and Ukraine, and streets in the world\u2019s biggest economy are filling with protests against authoritarianism. But in the long run, this is the story that may matter most, if only because it is so hard to see how it finishes.<\/p>\n\n

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\u00a9 Alex Trochut<\/span><\/figcaption><\/figure>\n<\/div>\n

For many years, analysts have thought<\/strong> there are broadly two ways that global warming might affect financial stability: the physical risks of extreme weather, and the so-called \u201ctransition risks\u201d from government policies or technologies that disrupt fossil fuel-based investments by hastening a move to greener economies.\u00a0<\/p>\n

The two threats are linked: if physical risks intensify, they could in theory spur tougher climate policies that deepen transition risks. But physical dangers often seemed the more distant of the two when the idea of climate-fuelled financial problems first arose.<\/p>\n

Mark Campanale was an early thinker about a climate crash and transition risks. He was a 40-something sustainable investment analyst in London in 2007 when he began warning about the threat of \u201cunburnable carbon\u201d, the fossil fuels that could not be used if global temperatures were to be kept at safe levels.\u00a0<\/p>\n

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The contagion spreads because you need insurance to get a mortgage, so as property coverage fades, so does the presence of banks<\/p>\n