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Earthquakes and Hurricanes: An essay on normalcy and the unexpected

August 29, 2011

Epicenter of the August 23 Earthquake; Source: MSNBC/Bing Map

Part 1: Double Whammy: Tuesday the earthquake and Saturday Hurricane Irene. Monday and the power is still off.  The 5.8 magnitude earthquake alone spurred me to think about big and unexpected events. Who would have predicted that these two events would happen a few days apart.  

The Quake: On Tuesday (August 23) at about 2:00 PM my house shook nearly knocking me over. I ran outside. My initial reaction was a combination of fear and extreme disorientation and disbelief. Friends experienced similar feelings. Phone lines were jammed.Washington government and office buildings were evacuated. People swarmed in the streets. The upper part of theWashingtonMonument received a good sized crack. Fortunately not many injuries. Things were a lot worse close to the epicenter near Mineral,Virginia. See photos. The North Anna Nuclear Power station lost electrical power and had to be shut down due to the quake’s vibrations. Geologists and seismologists were caught off guard. An earthquake with a 5.9 magnitude is extremely rare in the Mid-Atlantic. Nothing like this happened for the past 100 years.


Hurricane Irene on Sunday Aug 26, 2011 Source: NOAA: http://bit.ly/qBLcwZ

 Irene: A lot more damage. Hundreds of thousands up and down the east coast lost power. The worst flooding in decades in Vermont. More than 30 people killed. Michelle Bachmann told her Florida audience that the two events are a warning from God. Former Senator George McGovern replied on Diane Rehm; “I don’t believe in a God who would kill to send a message.”  

Flooding on the Outer Banks North Carolina; Photograph by Jim Lo Scalzo, EPA

***

Out of the ordinary: Like most people I don’t like big surprises, especially those that strike with a vengeance – ones that lie outside of the realm of normalcy. A giant oak stands for a hundred years suddenly falls and crushes the back of a house. A friend suddenly dies of a heart attack. Much better not to think about these possibilities not to mention our own mortality; we exist and then in an instant we don’t. Much better to stick to routine – brewing the morning coffee, scanning emails – I personally like cleaning the kitchen – brings reassurance that “the natural order of things” can be restored quickly. Or can they? Ask the Japanese. Ask those who suddenly lost jobs they held for years and the many who lost their homes.

***

Nassim Nicholas Taleb with black swan: Table Facebook: http://www.facebook.com/pages/Nassim-Nicholas-Taleb/13012333374?sk=wall

Part 2: Black Swans: Recently, many of the norms we believe in are being blown away. We here terms like “tipping point,” and “new normals” and “systemic instability.” In his 2007 best seller, The Black Swan, Naseem Nicholas Taleb, a major league investor warned of an impending financial collapse. Taleb was one of the few experts that understood that wealth built on a housing bubble and mortgage-backed securities was vulnerable. The term black swan? Black swan events are infrequent, difficult to predict, beyond the realm of expectation and cause havoc. The once in a hundred-year earthquake is an example (fortunately the damage was limited). The name black swan? Europeans until several hundred years ago assumed that all swans were white. This changed when the first Dutch explorers arrived inAustralia and saw black swans galore.

***

Cascades of failure: Taleb’s warnings proved all too true. In the fall of 2008 Wall Street suddenly teetered and only trillions in federal bailout funding prevented total collapse. By examining how this came about, we can learn a great deal

Bank foreclosures in Las Vegas; property values drop in 2007--foreclosures continue. http://jerrygarrett.wordpress.com/2011/08/02/leaving-las-vegas-the-frustrated-foreclosed-loot-scoot/

about the behavior of complex systems. The meltdown was initially triggered by a precipitous drop in the value of housing that occurred as a response to a rapid rise foreclosure rates (2006-2007). But it didn’t end there. Highly risky sub-prime mortgages were bundled with other supposedly less risky loans; the bundles were sold as “securities” which received triple-A grades from Standard and Poors and the other rating firms.[1] These “mortgaged-backed securities” began to tank in 2007. But it gets worse. Many big market players held “credit default swaps” – arrangements in which the investors pay monthly “insurance” premiums to firms like AIG. The terms: if the value of the covered product (e.g. a stock, a future, a market index) falls to a certain point, the insurance provider must pay the claims specified in the agreement. Unlike homeowner who buys fire insurance, the party who purchases a credit default swap (CDS) doesn’t have to own the asset covered in the deal. Many were simply bets.[2] These deals amounted to trillions of dollars that were neither regulated nor transparent. (You may recall the AIG commercial showing the little boy who comes into his parents in the middle of the night worrying about the family’s financial security. “Don’t worry, we’re with AIG” says the Dad a few months before the crash. (See video).

***

Remember too-big-to-fail? In mid-September 2008 AIG, the dominant CDS insurer, was forced to payout tens of billions of dollars to settle these claims – and the company’s stock lost 60 percent of its value overnight. On September 16th the federal government intervened by loaning AIG $85 billion to keep it afloat. AIG was simply “too-big-to-fail.” Administration officials believed that AIG’s fall would have created a collapse of the entire economic system. But did the regulators know that they were dealing with a financial house of cards? Or did they buy into the prevailing wisdom – bubbles last forever? And how much has changed? Thanks to trillions in government bailouts the Wall Street giants recovered nicely. However, while refusing to loan to small (job creating) businesses, the Goldman’s and Banks of America had no reluctance to buy other banks. After all, if they crashed again Uncle Sam would come to their rescue; after all they are now even “bigger-too-big-to- fails.” With many of Europe’s economies in trouble and Wall Street giants Bank of America and Goldman Sachs loosing ground, are we in danger of a second round of failure and bailout?   Hear the Diane Rehm Show of August 30 for a great discussion on the current state of banking.

****

Complex systems: Economies, ecosystems, the earth’s atmosphere are all examples complex systems — systems characterized by lots of interconnected parts. In such a system the whole is greater than the sum of the parts because interactions and processes dominate. Such systems are difficult to understand and cannot be done so in the classical way – dissecting the parts. Tipping points, black swans, vicious cycles and cascading failures are all indications that a complex system is highly unstable and subject to large fluctuations – relatively small disturbances tend to create mega-changes. The financial meltdown a case in point.

Hurricanes illustrate the effects of instability. They occur in the late summer and early fall because ocean surface temperatures are highest — a condition that loads the atmosphere with water vapor and favors strong overturning of the atmosphere. Both effects contribute to the growth and fury of hurricanes. “Climate change deniers” notwithstanding, global warming means warmer oceans and more frequent and intense hurricanes and greater extremes.

Resilience: Not all complex systems are vulnerable. As we’ve pointed out in previous posts, ecosystems (in their native state) tend to be resilient. They have mechanisms that allow such systems to absorb disturbances and adapt to changes (droughts, infestations, floods) without collapse. The great biodiversity of nature ensures that some flora and fauna will survive the next forest fire or spring freeze. Nature’s decentralized renewable energy system and continual investment in restoration also contribute to resilience. Unfortunately, our globally intertwined socio-economic systems tend to be vulnerable rather than resilient. There are many reasons for the fragility, including: speed of light transfer of capital, financial consolidation consuming diversity, a growing wealth gap between the wealthy (creates instability and political unrest) and the rest of us. Future posts will focus on the theme of building resilience into economies – from the bottom up.    

Enduring, resilient ecosystem / preserve it: Temperate rainforest Chilliwack River, British Columbia, Canada; http://www.marietta.edu/~biol/biomes/temprain.htm

 


[1]  The Justice Department is investigating whether the Standard & Poor’s credit ratings agency improperly rated dozens of mortgage securities in the years leading up to the financial crisis, The New York Times reported Wednesday. Retaliatory? What we do know is that the investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month to AA+. AA+ doesn’t sound that bad, but it did send shock waves around the planet. Government officials are raising serious questions regarding S&P’s secretive process, the credibility and the competence of its analysts. Yet the most serious problem seems to be that the rating companies including Fitch’s and Moody’s get paid by the very firms they rate. Wow! The game is simple, if you’re a Goldman or Bank of America and you don’t like the Fitch rating they give to a security, simply threaten go to Moody’s. So the rating firms have a built in incentive to give high marks even when the evidence points to junk. Now perhaps if Standard hadn’t done such a Poor job, investors might have thought twice before buying the collapse of mortgage securities that triggered the meltdown in 2008 – one of the causes of the financial meltdown.
__
[2] Imagine that you bought fire credit default insurance for all of the homes owned by your neighbors.  You might have an incentive to light a few matches.

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8 Comments leave one →
  1. Joanne Kashansky permalink
    September 3, 2011 8:36 pm

    Hi Hank

    I responded to your comments and don’t see it posted, Did you receive a response from me? Just curious.

    Thanks

    Joanne

  2. Joanne Esposito permalink
    September 3, 2011 7:02 pm

    Hank,

    My email was not a repsonse to you. It was to Joyce but I thank you for your comments and your views. I too have paid into Social Security and Medicare for a good part of my adult life and I, at age 68 still work full time because I am self supporting and have bills to pay. I don’t consider them entitlements because everyone has paid into them, When I commented about “lazy people”, I absolutely was not referring to anyone who had a job and lost it, my heart goes out to those people. There are far too many because companies either are afraid to hire or can’t afford to hire. I was referring to those people who don’t want to work and there are plenty out there. I guess we can say we have different political views but I am a free market capitalist. In this country, if you have the brains, the foresight, the luck or whatever it takes to become a millionaire well, God Bless you. If you can afford the best health care go for it. Not everyone should own a home, if they can’t afford the mortgage and so on and so on. Didn’t Mr. Obama bail out Wall Street? Isn’t Tim Geithner a Wall Streeter? Why doesn’t GE pay a penney in taxes?? Isn’t Jeff Immelt Obama’s Jobs Czar? The outdated idea that the Republicans are for the wealthy and the Democrats for the working guy is ridiculous. The democrats are just as wealthy and neither care about us. They only care about getting reelected because they are all multimillionaires and that’s funny because they work for us, don’t they?? Isn’t Nancy Pelosi a gazillionaire with a private jet?? Doesn;t it bother you that Obama does not support Israel?? We have different poliical views, but I like you anyway!!

    Joanne

    • Henry S. Cole, Ph.D. permalink*
      September 4, 2011 10:39 am

      Joanne, thank you for your thoughtful and good comment. I think we are closer than you think — especially with regard to the failure of the two parties to do enough for the majority of Americans. Although the Democrats have historically done more for the average citizen (invented Social Security and Medicare) they have as a party (with many exceptions) become beholden to corporations. It is extremely expensive to run a political campaign. In a 5 conservatives on the Supreme Court through campaign finance laws out the window (Citizens United) — a move that allows corporations to contribute to political campaigns without limit (ruling that corporations have all of the rights of people to free speech). In many cases disclosure of such donations is not even required.

      I also agree with you on Obama as a President whose allegiance seems to be with corporations rather than the people. If you go back through the posts on this blog, you will see that I have been extremely critical of Obama and his Administration. Specifically I criticized his appointment of Immelt and have spoofed Geithner for being out of touch with Main Street America.

      As far as Israel goes; I think Obama’s approach is the right even-handed approach needed. However, he could be a lot more proactive in bringing the sides together. Obama is correct in recognizing the needs of both Israelis and Palestinians. Best, Hank Cole

  3. August 30, 2011 2:29 am

    This really highlights the link between what too many people think are estranged concepts. Nature really does have the upper hand! Hope you are all okay over there…

    • Henry S. Cole, Ph.D. permalink*
      August 30, 2011 12:16 pm

      Hi Manu,
      We are fine but without electric power for the third day. The only thing I miss is a hot shower. Unfortunately, the gym I go to has no power either. But some are a lot worse off.
      Best, Hank

  4. Joyce Hreha Stringer permalink
    August 29, 2011 10:37 pm

    The Republicans and their DEREGULATION
    of our banking and mortgage system…brought on the real estate debacle…and making fun of Al Gore’s Inconvient Truth book and deregulating clean air, water, etc…YOU see where Im going with this….all this MESS…if this is capitalism and democracy at its best…wow are we a stupid greedy immoral country or WHAT.

    • Joanne Esposito permalink
      September 3, 2011 1:23 pm

      I guess you are a die-hard liberal who thinks that Obama is doing a great job and all the lazy sob’s who sit home on their butts waiting for their check every month are entitled to them. Yes, of course we know there are many legitimate people who really need assistance and should get it but there are just as many who are just plain lazy.

      Please don’t tell me that you support Al Gore also. OMG what has happened to us.

      Obama is a fraud and is leading our democracy down the rode to socialism with all of
      its entitlements.

      I don’t know about you but I’m not greedy, I’m not immoral and I’m not stupid and I’m an American. I still go to work everyday so that I can afford to pay my bills because that’s the way I was raised. Responsability is the word and no one seems to take any these days.

      The month of August had 0 jobs added. He has got to go!!! Everyone blames Bush for everything but Obama promised to make everything better and he lied. He hasn’t made one thing better.

      I don’t understand the liberal point of view. It really is a mental disorder.

      Joanne Esposito Kashansky

      • Henry S. Cole, Ph.D. permalink*
        September 3, 2011 5:44 pm

        Joanne, thanks for your comment. You can call me a liberal, I call myself a Progressive. Someone who stands for progress and who understands that the role of government is vital, so long as its directed in the right ways. It should
        not for example be interfering with the basic freedoms of American people — for example sexual preference and freedom of speech and assembly. I strongly believe that government policies right now should be aimed at
        creating jobs. It has not. Rather, It has encouraged “free trade” and globalization that have crippled America’s manufacturing and the jobs that go with it. Some of these firms don’t pay any taxes.

        There are now 25 million Americans either unemployed, underemployed, or who have given up looking for the jobs that just aren’t there. These are not by in large lazy people. Many have worked hard for decades only to see their jobs eliminated. As far as the Obama, I’ve been quite critical
        of his Presidency. The socialism we have is not the usual working class brand, but socialism for the wealthy and corporate interests. Who got bailed out? Small businesses and laid-off workers or Wall Street? Why is the wealth
        gap between the riches and the rest of us growing? Because folks are lazy? I doubt it. The system is like a pin ball machine that is tilted towards the wealthy. The Tea-Party backed Republicans are now ripping this country to shreds — or trying to do so.
        Imagine someone like Eric Cantor saying that there should be no disaster relief for hurricane and earthquake victims unless it comes out of some other program. Which program? Schools, like the good one we attended, teacher salaries? Public safety programs — like police and fire? What we need
        to do is have a fair tax system — one in which those who can best afford it pay their fair share. Why should budget deficits come solely from the struggling middle class? Don’t rich folks use the same highways, airports, and national security as the rest of us.

        My main criticism of the President is that he has failed to advocate a real national investment program that would return this country to its former greatness, i.e. the best public University system in the world, the used-to-be best railroads, best roads, best
        scientific research institutions, best space program, best public school system, etc. No longer so. The other modern countries of the world are investing in their futures. We instead seem to be embracing a path that government has no role to play. How can we remain competitive without a game plan. Remember, Ralph had a game plan, and it got the Rams a bunch of championships. He invested in his players. He had a strategic vision, and this nation as a whole needs one badly. Though believe in the power of entrepreneurship (am one myself), no individual or company can reap America’s potential by themselves, anarchy produces little more than chaos. We need sensible policies and investments that put people back to work, not a race to the bottom.

        ll of this is absurd in for a wealthy, democratic nation. The problem is not laziness. But a system that rewards greed rather than merit or contribution to the whole. Where is the patriotism that made this nation great. Is in the big
        corporations who are outsourcing jobs and investment? Is in the big banks who refuse to invest in local economies? Is in politicians who want to “close the doors of the Environmental Protection Agency” so that our kids will breathe air with pollutants known to cause asthma?

        As far as entitlements. I don’t know about you, but I paid into Medicare and Social Security for the past 45 years. Praise the Lord for these programs. I have my share of medical expenses, and at the age of 68 can’t work the way
        I used to. These systems are not broken and they should not be privatized. In fact nearly every modern, industrialized country offers Medicare to all, i.e. universal health care. Who should get the best care, only the wealthy?

        Joanne, do you really want to have a third world country? Because that’s what the Republicans seem to advocate. Third world countries have little or no public education, safety, no worker safety, no environmental regulation, no food safety, no sanitation,
        and a great deal of joblessness and poverty; they do however, have a small elite minority with a great deal of wealth and political power so concentrated that democracy goes out the window.

        Hank Cole.
        P.S. Whatever you do, don’t go to some person who has just lost their job and call them lazy.

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