A European super-duper atom-smasher blowing up the world? That's so last month. Now, physicists and mathematicians are taking the rap for blowing up the financial world, not unleashing microscopic black holes. Their crime? Creating rare "black-swan" credit panics to incinerate our retirement accounts.
Check out CBS' Oct. 5 edition of 60 Minutes, in which "mortgage science projects devised by these Nobel-tracked physicists" get the blame for the worldwide financial crisis, roughly $60 trillion worth of dubious debts now choking credits markets from Hong Kong to New York. Or take New York University risk engineering professor Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable— the " hottest thinker in the world," according to The London Times— who says "use of probabilistic methods for the estimation of risks did just blow up the banking system."
So what do mathematicians and physicists have to say for themselves?
"The idea of blaming any of this stuff on physicists strikes me as entirely daft. It's true that some people trained in physics went into the trade of financial calculations. At that point they were no longer physicists, just smart people," says science historian Spencer Weart of the American Institute of Physics. "Any sensible person would place the main blame upon any fool who took such calculations as a guide to real-world actions."
"My first reaction is this is totally silly," Paulos says. Financiers have managed to create banking crises before, from the Great Depression to the dotcom bust of 2000, without help from mathematicians, he notes. Shoddy lenders, stinky loans and bogus promises to back up those two things are behind the current credit bust, he says, not guys in lab coats.
Fancy math only came into the financial picture after bankers slapped AAA ratings on crummy loans and fed them into their sales pitches, says Paulos. "What does a bad craftsman do? He blames his tools."
Perhaps the blame should go to economists, not physicists or mathematicians. Much of the ire is aimed at the "Black-Scholes" formula, for which Harvard's Robert Merton and Myron Scholes won the 1997 Nobel Prize in economics. The Royal Swedish Academy of Sciences said they "laid the foundation for the rapid growth of markets for derivatives in the last 10 years." Derivatives are contracts that bet on the future prices of assets, such as stocks, bonds or commodities. They're the tools behind the financial mess now exploding before our eyes.
If you really want to worry, take a gander at the Nobel diploma awarded to 2003's economics prize winner Robert Engle, whose "models have become indispensable tools not only for researchers, but also for analysts on financial markets, who use them in asset pricing and in evaluating portfolio risk," according to academy. His Nobel diploma is one of academe's most truly weird art pieces, depicting a phrenology-tattooed Kilroy peering over a tattered banner. No wonder people call economics the dismal science.