20090404

Cringely Compares Financial Mess to a Nuclear Meltdown

I read Robert Cringely's post about the Three Mile Island nuclear meltdown, and thought it was quite insightful, particularly

  • when compared it to the financial meltdown of the last 6 months
  • when he clearly stated that there are consequences for having the wrong people in charge

Quite often, when I speak about the economic crisis of late, I make an analogy that the risk analysts for certain investment firms are very much like the safety engineers in a civil engineering. However, there is one major discrepency - when a skyscraper collapses that a civil engineering firm has built, the engineering firm is held legally and financially responsible. At least in Canada, that concept is stressed upon engineering students right from the beginning. Furthermore, the regulatory body for professional engineering in Canada will not allow someone to act as a professional engineer without certifying that they are fully aware of their own liability. In many cases, the collapse of a building has similar reprocussions to the collapse of an economy. Lives are ruined. Some people lose everything. It's unfortunate that public administration, and certain investment banking firms are not also required to have liability.

The public administration that changed the laws for acceptable risk analysis methods did so based on a paper by a certain Waterloo mathematician. It was a formula for risk analysis that simplified calculation in a few very special cases. In spite of publications warning about improper usage of that formula, the public administration never fixed what they had broken.

The economic meltdown actually started a decade ago after the US government had approved certain changes in acceptable risk analysis for bank loans. The consequences of those changes went unnoticed, because the people overseeing the loans simply did not know to observe them. Similarly, public administration was either not qualified enough to understand the mathematics of the risk analysis methods they approved, or they were simply ignorant of the warnings and did nothing about them.

Why is it, that an engineer can be held legally responsible for disaster, but a financial analyst cannot be? Why is it, that there are often highly unqualified people in positions of great power?

Those are questions that we should really never need to ask.

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