It’s probably not too late to get tickets for next Monday’s Nature Debate on Science and the Financial Crisis, to be held at the lovely Kings Place (absence of apostrophe intentional), no more than a gnat’s crotchet from the London Orifice of your favourite journal of record beginning with N.

First, what the debate is not – it’s not about how the financial crisis has affected science and scientists going about their business, applying for grants, jobs and so on. Rather, it’s all about the part played in the current brouhaha by really terribly extremely very clever scientists who, in the 1980s, traded their pocket-protectors for Porsches. What part did such fine minds play in creating financial instruments of such subtlety, complexity, and sheer awesomeness that nobody understood them, even themselves?

Well, I’m not going to be there, so I shall get my retaliation in first, with what I hope to be my Emperor’s-New-Clothes version of events (please note correct use of apostrophe). I can do this as I am a palaeontologist, and therefore functionally innumerate. I can cope with numbers as high as two, or even three with a following wind, but confrontation with anything higher makes me all giddy and my knees wobble. So what follows should be taken as the opinion of a rank outsider. Well, an outsider, at any rate.

One upon a time, as far as I can judge, some bright spark in the good ol’ U. S. and A. thought it a shame that more people of said country couldn’t participate in the American Dream (whatever that is) as they were too skint and boracic to own their own homes. This bright spark, or perhaps it was one of his mates, then suggested to financial institutions that they should devise ways to extend credit provision to this underprivileged sector of society. The people who had to do this were a middle-aged couple in Oklahoma, or perhaps Iowa, called Freddie Mac and Fannie Mae, and as you can see from this picture, they were mighty unhappy about it. After all, such down-home folks would, with their Presbyterian Work Ethic, naturally wonder how you could even begin to contemplate lending even two zuzim to schnorrers who couldn’t pay them back. No matter how high the interest, you’d end up with bupkes, or worse than bupkes – you’d get tzores. Oy, that there should exist some schlemiel who could say things like ‘credit derivative swaps’ and still walk in a straight line, already.

This is where these clever scientist chappies come in. They found a way of bundling up these likely-to-be-defaulted-upon mortgages up with a lot of more promising financial products, I. O. U.s, derivatives, futures, promissary notes and plenary indulgences, and then trading them, as commodities. The financial equivalent of hiding a few rotten equations at the bottom of a barrel of algebra.

The problem was that once someone began to suspect that they’d been sold a pup, and started to dig around

A pup, digging around. Yesterday.
they found that the so-called ‘toxic assets’ (what my Dad called ‘bad debts’) were so thoroughly entropized among the less-toxic assets that the entire portfolio had become entirely fubarized. Nobody knew who had what assets, and so stopped lending to one another, for fear that such toxicity would spread like a contagion. As indeed it did. The financial markets ground to a halt, businesses could no longer raise the loans they needed to operate, people started losing their jobs, which meant that more (and perfectly good) mortgages were defaulted on, and so on, an so forth, in what we scientists call a ‘positive feedback loop’.

The moral of this story, as far as I can see it, has nothing to do with the complexity, subtlety or, indeed, the awesomeness of the financial instruments used to cover up bad debt. It was the bad debt in the first place, which anyone – anyone should have seen would be the consequence of lending money to people who were unlikely to repay it, and this applies no matter how much you dress it up in fancy financial language. Another thing my Dad used to say – you can’t polish a turd.

By hey, quit my yakkin’. Let’s boogie