Gallopin’ Gertie and the Financial Crisis
I’ve been waiting to draw this analogy and Alex’s post on the financial crisis has provided me the opportunity. It touches back on some points on the role of computers in the financial crisis that I’ve been making for some time.
I can’t help but wonder if some of what we’re seeing in the problems that the financial system is experiencing isn’t analogous to aeroelastic flutter. Aeroelastic flutter is a phenomenon that can occur when aerodynamic forces work together with an object’s natural mode of vibration to produce a rapid periodic motion.
One of the most famous examples of the potentially catastrophic effects of aeroelastic flutter is the collapse of Gallopin’ Gertie, the old Tacoma Narrows Bridge:
All of the factors were present: a strong fluid flow exemplified by the flow of money through the system, a positive feedback system provided by normal human motivations, misperceptions, and regulatory tools inadequate to the task at hand, resonance created by lots of computer models doing the same things in much the same way, and rapidity due to the (computer-assisted) pace of modern trading.
One more point in reaction to Alex’s post but not particularly related to the rest of this post. I don’t think it’s completely accurate to say that the root of the financial crisis isn’t government. I don’t believe there is any single root cause for the financial crisis other than human nature and we’re unlikely to be able prohibit that successfully.
I think that there are multiple interrelated causes of the crisis and the willingness to accept excessive risk on the part of the GSE’s is one of them. Others include, yes, human nature, the misunderstanding of risk by private institutions, the misunderstanding of risk on the part of individual borrowers and lenders, inadequate regulation, and, I believe, computer models and computerized trading.