Featured Research

from universities, journals, and other organizations

The Crash Of 2008: A Mathematician's View

Date:
December 15, 2008
Source:
Wiley-Blackwell
Summary:
Markets need regulation to stay stable. We have had thirty years of financial deregulation. Now we are seeing chickens coming home to roost. This is the key argument of a mathematician at Imperial College London, in an article just published in Significance, the magazine of the Royal Statistical Society.

Attempts to insure mortgages by securitization resulted in vast quantities of toxic debt and the 2008 financial collapse, one author argues.
Credit: iStockphoto/Ahmad Hamoudah

Markets need regulation to stay stable. We have had thirty years of financial deregulation. Now we are seeing chickens coming home to roost. This is the key argument of Professor Nick Bingham, a mathematician at Imperial College London, in an article published today in Significance, the magazine of the Royal Statistical Society.

There is no such thing as laying off risk if no one is able to insure it. Big new risks were taken in extending mortgages to far more people than could handle them, in the search for new markets and new profits. Attempts to insure these by securitisation – aptly described in this case as putting good and bad risks into a blender and selling off the results to whoever would buy them – gave us toxic debt, in vast quantities.

"Once the scale of the problem was unmistakably clear from corporate failure of big names in the financial world, banks stopped lending to each other," says Bingham. "They couldn't quantify their own exposure to toxic debt – much of it off balance sheet – so couldn't trust other banks to be able to quantify theirs. This led to a collapse of confidence, and the credit crunch, which turned a problem in the specialised world of exotic financial derivatives into a crisis in the real world. Once the problem became systemic, government had to step in to bail the system out with vast quantities of public money."

Professor Bingham suggests that to learn more and predict financial future, we should look to our past, likening the current crisis to the 'Tulip Mania' in the Netherlands in 1636 where huge prices were paid for futures in tulips, which then turned out to be as worthless as sub-prime mortgages today.

Even Alan Greenspan, the long-serving former chairman of the US Federal Reserve, admits that mistakes were made in the past. To avoid repeating these mistakes, we need to learn from them. This needs a new mind-set, new policies, and much more proactive regulation.

Bankers complain that the risk models they used predicted problems as dramatic as today's only every few centuries. "This is like talking about the details of how to steer a boat on a river," says Bingham, "what matters there is whether or not the river is going to go over a waterfall, like the Niagara Falls."


Story Source:

The above story is based on materials provided by Wiley-Blackwell. Note: Materials may be edited for content and length.


Journal Reference:

  1. Bingham N. The crash of 2008: a mathematician's view. Significance, Dec 2008; 5:4, 173-175 DOI: 10.1111/j.1740-9713.2008.00324.x

Cite This Page:

Wiley-Blackwell. "The Crash Of 2008: A Mathematician's View." ScienceDaily. ScienceDaily, 15 December 2008. <www.sciencedaily.com/releases/2008/12/081208203915.htm>.
Wiley-Blackwell. (2008, December 15). The Crash Of 2008: A Mathematician's View. ScienceDaily. Retrieved August 20, 2014 from www.sciencedaily.com/releases/2008/12/081208203915.htm
Wiley-Blackwell. "The Crash Of 2008: A Mathematician's View." ScienceDaily. www.sciencedaily.com/releases/2008/12/081208203915.htm (accessed August 20, 2014).

Share This




More Computers & Math News

Wednesday, August 20, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Ballmer Leaves Microsoft's Board, Has Advice For Nadella

Ballmer Leaves Microsoft's Board, Has Advice For Nadella

Newsy (Aug. 19, 2014) In a letter to Microsoft CEO Satya Nadella, Ballmer said he's leaving the board of directors and offered tips on how the company can be successful. Video provided by Newsy
Powered by NewsLook.com
What Google Can Gain From Special Accounts For Children

What Google Can Gain From Special Accounts For Children

Newsy (Aug. 19, 2014) Google will reportedly offer official accounts for children younger than 13 years old. Video provided by Newsy
Powered by NewsLook.com
Breakingviews: Ebola's Economic Impact Could Eclipse SARS

Breakingviews: Ebola's Economic Impact Could Eclipse SARS

Reuters - Business Video Online (Aug. 18, 2014) The virus ravaging Africa has yet to spread elsewhere. Yet Asia’s SARS crisis in 2003 showed how changes to behaviour can hurt the economy more than the actual disease, says Breakingviews' Una Galani. Video provided by Reuters
Powered by NewsLook.com
Twitter Users Up In Arms After 'Favorites' Show Up In Feeds

Twitter Users Up In Arms After 'Favorites' Show Up In Feeds

Newsy (Aug. 17, 2014) Twitter is testing a feature on some users that shows favorited tweets from people they follow in their own timeline, the same way a retweet appears. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins