How The California Wildfires Could Lead To A Major Financial Crisis

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The August Complex fire has been burning through Mendocino National Forest in Northern California since August of 2020, and it still isn’t showing signs of slowing down. The complex, which began as 38 separate fires started by lightning strikes, has burned a total of 938,044 acres as of late-September, making it the single-largest wildfire in the state’s recorded history.

Though wildfires aren’t all that unusual, scientists say climate change is making America’s West Coast hotter and drier, which could result in more frequent and intense fires in the years to come. Although economists have typically viewed natural disasters like wildfires as localized shocks, this could soon change as global warming makes extreme weather events more common.

A 196-page report from the Commodity Futures Trading Commission (CFTC) — which includes representatives from asset managers, banks, and major oil companies — found that the rising costs of natural disasters could pose a systemic threat to the stability of financial markets by igniting a series of events that would undermine the US economy.

Here’s what experts are worried about:

Devalued homes

CalFire, California’s fire-fighting agency, says that about 25 percent of homes in the state are at high risk from wildfires. This would negatively impact house prices, which would in turn lead to more mortgage defaults which could damage banks and other financial assets.
Insurance woes

Following the 2018 California wildfires, which caused more than $25 billion in property damage, some insurers began pulling away from fire-prone areas. This caused many desperate homeowners to turn to more expensive policies from other insurers.

Dave Jones, a former California insurance regulator who contributed to the CFTC report, warned that expensive insurance also affects home prices. He added that the same could be said of floods and storms and their impact on real estate values.
Lower tax revenues

Lower property prices could cut cities’ real estate tax revenues which could leave them unable to pay their debts. Furthermore, disruptions to businesses and the tourism industry could hurt cities’ finances, which would impact the US financial system in the long term.


Investor concerns

Calamities such as wildfires could make investors more aware of potential climate risks, which could result in a disorganized repricing of assets. This has the potential to severely impact portfolios and balance sheets, which would then affect the country’s long-term financial stability.