A fire at the Fargo, North Dakota hotel that destroyed more than $1 billion worth of real estate in the 1990s has come to be seen as the largest single financial meltdown in US history.
But now, with the global financial crisis raging in the United States, a new analysis by researchers at the University of Chicago shows the fire’s aftermath is not just a tale of destruction but also a cautionary tale for those planning to build new offices or apartment buildings.
“Fargo burned, and its legacy is one of its own destruction,” says Daniel A. Miller, the John M. Olin Distinguished Professor of Economics and Public Policy in the College of Arts and Sciences and the Robert B. Bennett Distinguished Senior Fellow at the Hoover Institution.
“It’s not a story of a great loss, but one of a terrible loss.”
Miller and his co-authors analyzed data from the Bureau of Economic Analysis (BEA) for the year 1999 and found the number of fires that destroyed the financial sector increased by 4,400 percent in the first three years after the fire.
For example, between January 1999 and March 2000, more than 5,300 fires burned, while in the same period, the number fell by 488 percent.
The increase in fires is not a direct result of the financial crisis, Miller says, but is instead an effect of the new financial infrastructure built in the wake of the crisis.
“The financial sector is the economic engine that’s fueling the economy today,” he says.
To get a clearer picture of what went wrong in the Fargo’s days, Miller’s team analyzed a data set of data from more than 200 fire-related fires.
The data came from the Federal Reserve Bank of New York, the Bureau on Accreditation for Federal Financial Institutions (BAFI), and the US Census Bureau.
As the paper notes, the first two years after a fire, the fires are a bit more dramatic.
During that period, about 4,000 fires were recorded, but by the time the fires started to slow in the mid-2000s, the total number of active fires had fallen to about 3,400.
The authors also analyzed the impact of the fires on the economic and job creation of the area.
After accounting for the impact that the fires had on the financial economy, the authors found that the fire actually increased the number and severity of fires.
“This was true for all sectors except real estate, where the overall increase in fire activity is smaller,” the paper reads.
“There is a slight, but significant, increase in the number or severity of residential fires, but this increase is not statistically significant.”
The paper notes that, “while the impact on the overall fire rate was greater than that observed during the fire crisis, there were no statistically significant differences in the overall number or the severity of fire incidents.”
The authors also note that, while there was a net decrease in the size of the economy in the aftermath of the fire, it was not as severe as it was in the crisis era.
“These results show that the effects of the economic crisis did not become permanent and were not offset by the fire,” the authors write.
In fact, Miller and his team found that there were several significant impacts of the Fargo fire on the economy that could be attributed to the financial crash.
For instance, they found that, by 2020, the economic impact of these fires was positive, with economic activity increasing by about $1.5 billion.
The paper also notes that a number of factors contributed to the economic recovery in the region, such as the opening of a new financial center and the addition of millions of people.
“Fargo’s demise is a caution to those building new office buildings or apartment developments,” Miller says.
“For example, it is the case that the economic cost of fire and its associated loss is larger than the economic benefit.
There is a possibility that this loss will make it harder for investors to borrow at the appropriate times, which could further slow the recovery.”
But the paper’s authors also caution that, even after accounting for these impacts, the overall economic impact is still much smaller than the damage from a natural disaster.
“Given the complexity of the process, we cannot predict the future impact of a fire,” they write.
“However, given the current state of economic recovery, we would recommend that investors consider whether their investments in new office or apartment projects are more likely to benefit from the economic stimulus associated with a fire than from the loss of jobs and the associated losses.”
Read the full study here.