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.

FILED UNDER: General,
Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. Michael says:

    I await Bithead’s exclamation about how the elasticity of the government-mandated steel quality for the bridge is solely to blame for it’s failure, and how that proves that government-mandated steel quality is bad for bridges in general.

  2. Bithead says:

    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.

    There were of course many forces at work. But there’s one thing we can say; Had it not been for the governmental involvement, in trying to wrest something for nothing, the rest of it would ahve been survivable.

    I await Bithead’s exclamation about how the elasticity of the government-mandated steel quality for the bridge is solely to blame for it’s failure, and how that proves that government-mandated steel quality is bad for bridges in general.

    Certainly the design of the bridge was the issue… The original design wanted 25foot girders under the roadbed…Moisseiff was too busy worrying about how the thing was going to look… and proposed girders of just under eight feet, if I recall correctly…and the government wonks who were paying for the project agreed with him.

    In short, the choice to use the lesser design, which failed, was that of the government.

    As with the financial matter… absent government involvement, the other forces, in this case winds, would have been survivable.

  3. sam says:

    That’s quite a leap off that bridge, Bit, onto the financial meltdown. Don’t you think that in order for your analogical argument to have any force, you’d have to show that a private entity building the bridge would have made a different decision? The decision to use the shallower supports (contra the original government-supported design) was made on the basis of cost. It’s counterintuitive to suppose that a private entity would not have found the cheaper cost argument as compelling as the government entity.

    “As with the financial matter”… as with it how? As it stands, this is just bald assertion.

  4. Steve Plunk says:

    I agree with Dave’s hypothesis concerning the effect of modeling and computers. The more complex a system becomes the more sensitive and fragile it becomes. Add panicked traders to the mix and you can have market volatility which creates more panic and more market volatility and so on.

    The wild swings in the stock markets and commodity markets are not based upon fundamentals. We have seen twice in the past couple of months where rumors have sank stocks. Not just any stocks but United Airlines and Apple. Rumors continue to move oil prices up and down like a yo yo.

    The SEC should see this a failure not of the basic principals of supply and demand but failure of the modern trading arena to support rational decisions and not punishing the irrational. Computers could well be part of that with their lightning fast trades. Those fast trades could resonate and create further computer trades.

    Is there any academic work available on this subject?

  5. Bithead says:

    Don’t you think that in order for your analogical argument to have any force, you’d have to show that a private entity building the bridge would have made a different decision? The decision to use the shallower supports (contra the original government-supported design) was made on the basis of cost.

    A reasonable question.
    Do a little reading on the subject, and you’ll find, I think, that the heavier support choice had already been made, years before.. nearly a decade, in fact. For financial considerations the bridge stayed on the drawing board for years.

    The guy they brought in at the last minute was the same one who designed the Golden Gate, and whose political connections at the federal level were more powerful. (read that; old boy network)

    The original design took the winds there into account, in terms of load stress calculations. The design they used, did not.

    It’s counterintuitive to suppose that a private entity would not have found the cheaper cost argument as compelling as the government entity.

    A building is designed by a priavte concern to be built using stone and steel . A second designer comes to the people whose buidling this is supposed to be, and tells them he can make it cheaper from cardboard boxes. Of course the thing falls over in the first wind and catches fire, or falls apart in the first rainstorm. Either way, it fails miserably.

    Is the choice of the second design the fault of the second designer, or the ones responsible for buying it?

    “As with the financial matter”… as with it how? As it stands, this is just bald assertion.

    Not really.
    Consider the reaction of the Democrats in Congress when the problems of F&F were brought up a couple years ago. Their take was there was no problem at F&F, and so, no problems for the economy at large. Meanwhile, of course warnings kept going out about how F&F was going to, pardon the pun, F up the whole economy if they kept going where they were going… John McCain, by the way being among those trying to issue such warnings.

    This stuff is all pretty well established, the attempts to shift the blame away from the government not withstahding.

  6. Bithead says:

    The SEC should see this a failure not of the basic principals of supply and demand but failure of the modern trading arena to support rational decisions and not punishing the irrational. Computers could well be part of that with their lightning fast trades. Those fast trades could resonate and create further computer trades.

    True, and it seems to me that some safeguards against such events being driven by computer trading have already been put into place.

  7. sam says:

    failure of the modern trading arena to support rational decisions and not punishing the irrational

    But Steve, isn’t it a truism that the market is moved by fear and greed? And aren’t we seeing a punishment of the irrational? (Unfortunately, the innocent victims here far outnumber the guilty.)

    Today, with the world caught in an economic tempest that Mr. Greenspan recently
    described as “the type of wrenching financial crisis that comes along only once
    in a century,” his faith in derivatives remains unshaken.

    The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were
    not as reliable as “the pharmacist who fills the prescription ordered by our physician.” [Source]

    They got greedy? When were they ever not greedy? The widespread use of computerized trading programs and the use of instruments based on opaque mathematical models served only to potentiate the irrationality.

  8. Michael says:

    Do a little reading on the subject, and you’ll find, I think, that the heavier support choice had already been made, years before.. nearly a decade, in fact. For financial considerations the bridge stayed on the drawing board for years.

    The original design took the winds there into account, in terms of load stress calculations. The design they used, did not.

    The shortened girders didn’t cause the torsion of the bridge, they just failed to keep it in check. The use of plate girders instead of trusses is what caused the airflow that caused the torsion, and girders were in the original design. The suspension cables were adequate to keep the bridge from swaying, even with the shortened girders. Both designs took the winds into account, just not properly. Neither the original nor the modified design took into consideration the aerodynamic effects caused by the plate girders, and even with the original larger girders it would have had the same problems (though the added weight would have countered some of the torsion).

  9. Michael says:

    Computers could well be part of that with their lightning fast trades. Those fast trades could resonate and create further computer trades.

    If the computer models they used assumed that all the other players were human, then this could definitely cause a feedback problem.

  10. sam says:

    The original design took the winds there into account, in terms of load stress calculations. The design they used, did not.

    Not true:

    Moisseiff and Fred Lienhard, a Port of New York Authority engineer, published a paper that was probably the most important theoretical advance in the bridge engineering field of the decade. Their “theory of elastic distribution” extended the “deflection theory”, originally devised by the Austrian engineer Josef Melan, to horizontal bending under static wind load. They showed that the stiffness of the main cables (via the suspenders) would absorb up to one-half of the static wind pressure pushing a suspended structure laterally. This energy would then be transmitted to the anchorages and towers.

    Using this theory, Moisseiff was able to justify stiffening the bridge with only eight-foot deep plate girders, instead of the 25-foot deep trusses proposed by the Department of Highways. This change was a substantial contributor to the difference in the projected costs of the designs.[Source]

    But look, bridges aside, the idea that somehow the government is fundamentally responsible and, absent government whatever, the crisis would not have happened is yet to be shown. Not every bank got burned, e.g. Bank of America never got into the sub-prime morass. “You got me drunk!” “Well, you didn’t have to take that first drink, you know.”

  11. Steve Plunk says:

    Sam,

    I wouldn’t characterize proper market motivation as fear and greed but caution and profit. Both caution and profit are reasonable goals and have served us well. When the fear and greed step in irrational thinking prevails.

    There seems to be a lot of hang ups on the word greed. Wanting to make a reasonable profit, grow a nest egg, or even get rich is not greed in my book. That desire for profit has fueled the great advancement of society and provided the comfort and health we enjoy today. There is no pure definition of greed but I see it as a short sighted desire for excessive profits. Now that’s a subjective measure and can change from person to person.

    Computers create opportunities for greed to rear it’s head. I recall years ago traders taking advantage of timing differences and making trades fast enough to make a few cents on each one. At the end of the day those pennies added up. Like Bit said some mechanisms have been installed to stop the abuses. I wonder if some aren’t creating new ways to game the system before regulators can step in?

    I also am concerned about how quickly rogue traders can run up huge losses like the fellow in Indonesia a few years back. Imagine if we had a few hundred traders trying to cover their losses all at once.

  12. mnotaro says:

    The guys in congress that we want to fix this problem are the same people who started this problem. Do we really think that these rich CEO’s of banks really care that I owe more on my house than it’s worth? Do the lefty illuminati politicians in DC care? I don’t think so! Remember McCain is the one who saw this problem coming ages ago and tried to warn our politicians–to deaf ears it fell.

  13. Bithead says:

    The shortened girders didn’t cause the torsion of the bridge, they just failed to keep it in check. The use of plate girders instead of trusses is what caused the airflow that caused the torsion, and girders were in the original design.

    More than granted. BUt what research I did on the subject back in the 70’s suggested that the original design would have survived the wind strain.

    But look, bridges aside, the idea that somehow the government is fundamentally responsible and, absent government whatever, the crisis would not have happened is yet to be shown. Not every bank got burned, e.g. Bank of America never got into the sub-prime morass.

    Not all who smoke get lung cancer.
    Ergo the tobacco companies are not at fault.
    Right?