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Financial Tsunamis, Real Tsunamis, Global Tsunamis

Telling parallel between water waves and financial markets

by Dan Bloom

TOKYO(RushPRnews)10/29/08-- A tsunami is "a small harbor wave" in the original Japanese meaning of the word, but the term has now becone an international code word for "tidal wave" of huge proportions. There are ocean tsunamis, called "an ocean scream" in Chinese, as well as economic tsunamis and political tsunamis. Andrew C Revkin, creator and webmaster of the Dot Earth science blog on the New York Times website, recently received a long note from a tsunami expert in California, Costas Synolakis.

Professor Synolakis, who serves as director of the Tsunami Research Center at the University of Southern California, is one of the world's leading specialists on the interactions of earthquakes and oceans, according to Revkin, and while his views on the financial tsunami we are experiencing worldwide now are part of his job title, they make an interesting read nevertheless.

Revkin told his blog readers the other day that the USC professor "has been thinking about the differences and similarities between the so-called financial tsunami and the real thing", and left readers with a personal but public message from Dr Synolakis.

"Alan Greenspan recently said that he was in a state of "shocked disbelief" and "had put too much faith in the self correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending," the professor began, adding: "He concluded that "We are in the midst of a once-in-a century credit tsunami."

He added: "While Mr. Greenspan meant it figuratively, there are many similarities of the current financial crisis to once-in-a-century tsunamis. In 2004, the world experienced one of two deadliest natural disasters of the past century. The death toll was highest wherever there was little or no understanding of tsunami precursors, the harbinger shoreline recession that accompanies most tsunamis at their nearest target shoreline. Victims then were caught unaware admiring the newly exposed seafloor and collecting bounties of stranded marine life, and perished as the main wave crushed in. In regions of the Indian Ocean where there had been uncontrolled and unregulated coastal development, there was carnage.

In regions were people (such as the Sentinelese in the Andaman Islands) relied on ancestral knowledge there were hardly any deaths. It is too early to tell if proper coastal zone management has been implemented in the region. Yet, experience in Central America and elsewhere suggests that people quickly rebuild in the same area that was devastated, only not the same people who suffered the first time around. Market forces can not be relied upon to regulate human behavior in hazard mitigation any more than they can be trusted to regulate financial greed, or improve our carbon footprints."

The USC professor opined: "The analogies with hazard mitigation stop here. As opposed to what has been apparent in painful testimonies by the financial czars of behemoth financial corporations, not to mention our revered economic icons, the objective in natural hazard mitigation has been to determine future impact from extreme but realistic natural catastrophes. To identify what is realistic for planning, we look for clues into our past history. Some look for evidence in sediments in the Pacific Northwest, in Alaska fjords, other at the seafloor off California. Armed with this information, we construct scenario events, and study their impact, if they were to happen tomorrow. We thus decide how to manage the coastal zone and how to impose limits on development. And yes, we also educate coastal residents of the simple steps they need to take to protect themselves should the worst happen.

One wonders exactly what our financial wise men, whose companies — even in good times — advertised their expertise in risk management solutions, had been planning for? And as opposed to the mission-impossible of geologists and engineers pondering the history of the earth to understand future extreme events, what triggered the Great Depression is well documented."

Synolakis noted: "Yet, there is telling parallel between water waves and financial markets. If the world was always linear or predictable from simple principles, waves in the ocean would keep growing for ever, even when close to shore. This is shoaling: the wavefront slows down as it gets into shallow water, while the rear of the wave keeps moving fast, and the wave amplifies and steepens. Mercifully, the wave doesn't grow beyond a certain physical limit, breaking takes over in a spectacular display of what physicists call nonlinear processes. Had these processes not tampered with the growth of the 2004 tsunami, the death toll would had been in the millions. Had the analogous nonlinear process in financial markets not created the market correction to our exuberant, but mathematically unrealistic expectations, the eventual impact would had been disastrous at a scale not even Mr. Greenspan, with the benefit of the hindsight he exhibited in his congressional testimony, could contemplate."

Synolakis concluded: "All this brings to mind how we are preparing for the consequences of global warming. We all know that we can't go on forever. The question is no longer when but how severe will it be. The U.S. government should take note of Mr. Greenspan's testimony, and realize that often common sense trumps experience and financial sainthood."

Photo: disasters.justsickshit.com

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