# Did Physicists and Mathematicians Cause the Financial Crisis?

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Interesting story on 60 Minutes tonight about the financial crisis. One thing they said that caught my ear was that some of the weird securities that involved the breaking up of mortgage-backed securities into tiny pieces and then remarketing them in creative ways were designed by "Nobel-track" physicists and mathematicians working on the side for the Wall Street firms. The complex algorithms designed by these people were supposed to reduce risk, and the managers took their word for it and leveraged to the hilt.

Much of the crisis is blamed on mortgage failures, but in fact (again according to this story) 94% of all US mortgages are currently being paid on time. So you can kinda see where this is going -- scientists getting left holding the ball. However the story does go on to say that most of the blame resides with "insurance"-like entities called "swaps".

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Well the physicists and mathematicians were hired to be "experts" in a particular matter, if you are a CEO do you ignore your own experts' advice? It is probably true that not enough questions were asked for clarification, but the fact of the matter is that many if not most made their money anyway and will never have to give any of it back. IMO many knew the whole thing was untenable from the start but didn't really care because it was too complicated for more than a very few to understand and they would be gone before things collapsed.

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Well the physicists and mathematicians were hired to be "experts" in a particular matter, if you are a CEO do you ignore your own experts' advice?

In most other industries that involve significant risk, a separate group (and sometimes multiple separate groups) independently double-check the work of the designers and developers. This independent assessment is a core concept in the aerospace, electrical power and transportation industries, just to name a few. Problems happen even with safeguards in place (e.g., NASA's Challenger and Columbia disasters). For one thing, the safety experts have to be treated as key partners rather than as interlopers.

The fault in the Challenger and Columbia disasters was deemed to lie primarily with NASA management - even though NASA had safety checks, independent assessments, a hoard of safety experts, ... The financial industry:

• Safety checks: The financial industry required the developers of the financial products to do their own safety checks. That should cover the safety check issue, right?
• Independent assessments: That would have required the financial institutions to hire another group of "Nobel-track" physicists whose sole job purpose would have been to get in the way of their existing group of "Nobel-track" physicists who were making money hand-over-fist.

In the end, I predict the financial crisis will be viewed as not only a failure of management, but as a criminal failure of management. I also predict that much of the money those executives paid themselves will be seized by authority of the RICO act.

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That was how I saw it as well, but I thought you guys had some comments (and amusing quips) above. I suppose I could see a case being made against (hypothetically) a physicist or mathematician who knowingly deceived his employer with a bogus algorithm (fraud?). But there's just no way this can be construed as a let-down by science in general.

That having been said, I wonder if some sort of new guidelines might be called-for. Something that would sit as a protective procedural barrier between uneducated managers and brilliant-but-untested methods. Perhaps some sort of peer review process for high-tech financing schemes. (Maybe such a thing already exists?)

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There are just too many variables to accurately model anything with a 100% confidence rate. When you start factoring in drops of consumer confidence due to unpopular wars and their effect on oil prices, for example, anything can happen. It's all connected.