THE risks are clear enough in hindsight.
An explosion Monday at the Fukushima plant, just one headline from a week that overwhelmed investors.
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The ultimate costs of coal plants like the one in Thompsons, Tex., are easier to tally than those of nuclear plants, especially because of problems like waste disposal.
The Tokyo Electric Power Company built its Fukushima Daiichi nuclear power plant, nearly 40 years ago, to withstand a powerful earthquake — but not one as big as the 9.0-magnitude quake that struck on March 11. Or the tsunami that followed. Now, the terrible “ifs” accumulate, as Japanese engineers work to bring the station’s reactors under control. The ultimate price, in human life, may not be known for years.
The details of this catastrophe were unforeseeable, leading some to conclude this was a black swan event — something so wildly unexpected, so enormous in its impact, that it seems to defy our understanding and expose the fragility of our knowledge of the world. How could anyone have predicted this?
And yet in 2007, Tokyo Electric Power, or Tepco, escaped a disaster at its huge Kashiwazaki-Kariwa nuclear power station, on the opposite side of Japan, when that plant was damaged by a 6.8-magnitude earthquake — three times as large as what the plant was designed to withstand. Tepco basically lucked out last time.
So perhaps a bigger question is whether the markets — in which we have come to place so much trust — can put a true price on outsize risks like this.
Many have compared the events unfolding in Japan with 9/11, Hurricane Katrina, the financial collapse of 2008 and 2009, the BP oil spill, and the uprisings in the Arab world — in that all have shown the limits of the collective wisdom of the marketplace. For a moment, all the swans seemed black. And those swans seemed blacker still when viewed through the lens of today’s hyperkinetic global markets.
“There are an amazing number of crosscurrents in the world economy right now, more than I’ve seen in 25 years,” said Shawn Reynolds, a co-portfolio manager at Van Eck Associates in New York.
Like everyone else, corporate executives, economists and financial analysts in Tokyo, New York, London and beyond struggled last week to wrap their heads around the scale of this disaster. But, as they so often do, the analysts quickly fell to work assessing the implications for companies, markets and economies. At times, it was almost surreal: On Tuesday, Laszlo Birinyi, a prominent stock market analyst based in Westport, Conn., e-mailed around a succinct report titled “Nuclear Meltdowns at a Glance.”
This is what happens on Wall Street. If you’re not immersed in the culture, it might be hard to understand the cool calculus that is applied to world events, however dire those events might be. After the quake hit on March 11, the CNBC anchor Larry Kudlow told viewers, “The human toll here looks to be much worse than the economic toll, and we can be grateful for that.” He later apologized.
As the week wore on, and prices were gyrating on everything from a share of I.B.M. to a ton of copper, everyone was making back-of-the-envelope calculations. There is still no clear consensus about how far the economic shocks will reverberate. Many analysts are guessing — and then second-guessing — how the disaster will play out in northeast Japan. The first, tentative analysis seemed painfully obvious: the Japanese economy, already weak, perhaps already in a recession before calamity struck, will become even weaker.
On Friday, the Group of 7 industrialized nations took the rare step of intervening on the world’s foreign exchange markets to stem a sudden rise in the value of the yen. The currency had soared all week against the dollar — the exact opposite of what you might expect. But Japanese companies and investors were bringing their money home, to pay for huge rebuilding costs.
After its most harrowing week since the 1987 market crash, the Tokyo Stock Exchange found its footing on Friday. But it was a week like few others on the exchange: the Nikkei 225 stock index, Japan’s equivalent of the Dow Jones industrial average, fell 6.2 percent on Monday, plunged 10.5 percent on Tuesday, rebounded 5.7 percent on Wednesday and sank 1.4 percent on Thursday. It closed up 2.7 percent on Friday, at 9,206.75.
The loss for the week totaled 1,048 points, or 10.2 percent.
IF you happen to visit a Wall Street trading floor, walk over to the nearest Bloomberg terminal, type “WRST” and hit the green key that says “go.”
WRST — that is short for “worst,” as in, “worst-case scenario.” The program enables Wall Street types to measure the level of risk in their investment portfolios under a variety of scary circumstances modeled on past crises, including the attacks of Sept. 11, 2001, the bankruptcy of WorldCom in 2002 and the devaluation of the Thailand’s currency, the baht, in 1997.
Such “what if” scripts are the stuff of modern Wall Street. Everyone runs them. Entire schools of financial analysis are devoted to examining historical market patterns in the belief that those patterns can predict the future.
Such analysis, of course, depends on — and perhaps even encourages — our belief that tomorrow will be much like today. And all that despite the fine-print caveat on your 401(k) statement that reads, “Past performance is no guarantee of future success.”
This article has been revised to reflect the following correction:
Correction: March 19, 2011
An earlier version of this article misstated the name of the American Economic Review as the American Economic View.
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