The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Thursday, September 20, 2007

Northern Rock and Betting on Storms

I apologize to regular readers of this blog for not updating for a while. The reason why I haven't updated is that I recently moved to the UK. I've been busy settling in so I haven't had time to update the blog.

The last couple of blogs I wrote were regarding the 'credit crunch' that was unfolding in America (where I just left a few weeks ago). It seems like trouble has followed me across the Atlantic, because Northern Rock -- a British mortgage bank -- has basically suffered a run on it in the last few days. The 'queue' (or, as we Americans call it, a line) outside the local branch of Northern Rock (it was actually more like a scrum) of depositors trying to pull their money out of Northern Rock reminded me of photos of similar scenes during the Great Depression. The BBC has adequate coverage of the situation.

As I've written before, so-called 'expert' commentators are missing the point about the 'credit crunch': The heart of the matter is that there are a bunch of credit derivatives contracts out there that are still toxic right now. I fail to see how even a large drop in rates by the Fed or the Bank of England priming the monetary pumps will solve the problem of derivatives run amok.

Speaking of derivatives and storms, Michael Lewis wrote an article for the New York Times Magazine a few weeks ago that talks about quants trading in catastrophe bonds: In Nature’s Casino (Aug. 26, 2007). You may recall I had a blog post about catastrophe bonds a while back. Michael Lewis is a great writer and I thought his article was very interesting and stimulating. Frankly, though, I wish John Seo would have stuck with math (or 'maths' in British English) rather than getting involved with derivatives trading. The article has a great quote from Dr. Seo's father when he chewed out his son for leaving academic science for Wall Street by saying, "The devil has come to you as a prostitute and has asked you to lie down with her." Apparently the senior Seo has Wall Street experience!

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