Critical Phenomenon

I turned on the TV last night when I got home and learned to my amazement that the US House of Representatives had voted against the package of financial measures assembled by the Treasury Secretary, the nice Mr Paulson, to deal with the Credit Crunch. As news broke the US Stock Market fell and by its close was 7% down. Pundit after pundit appeared on the small screen offering opinions about why Congress had said no and what would happen next. The really scary thing is that it is clear that there is no Plan B.

Overnight, asian stock markets fell and this is sure to follow in Europe and especially in the UK where so many of the leading companies involved in the FTSE index are banks and other financial institutions. The FTSE index fell 5% yesterday, but it closed before the result of the US vote was known. This morning there is certain to be another drop, tearing a large hole in pension funds and putting even more severe pressure on the banks.

Much more of this and the entire economic system will be in pieces on the floor. And who will suffer? Pensioners, or those approaching retirement will see the immediate brunt but the knock-on effect for the working people in general could be catastrophic. Unless something is done quickly – and it could be too late already – we could be heading back to a Great Depression like that of the 1930s. The present situation is eerily reminiscent of the Wall Street Crash of 1929, and could even turn out worse owing to the complexity of the financial instruments now involved in trading and the speed at which panic can propagate through the digital economy.

I suppose one can’t really blame the politicians entirely. Some congressmen voted against it for understandable reasons, primary among them being that it was using taxpayers money to bail out the institutions responsible for making the mess.The Republicans, on the other hand, seem to have voted against it on the grounds that it was too much like “socialism”. Maybe it was, but it was also pragmatism. I’ll never have any time for any politician who is scared of doing something right because it has the wrong kind of name. In any case governments these days have little chance to really influence global capitalism, and that even goes for the USA. It was never clear the Treasury plan would work anyway. Any surge resulting from its approval could well have been no more than a stay of execution.

Looking at economics as a physicist is probably not a very useful thing to do. There are no conservation laws for money, for example. Otherwise it couldn’t have turned out that everyone is in debt to everyone else. But I do think that one identify in these events the character of a phase transition. For many years the financial markets have lived in a false equilibrium, and now they have reached a critical point and are about to collapse into a different state. After the 1929 crash, which overall amounted to a loss of 89% of the peak market value, it took until 1954 to recover (in cash terms). The parameters of the world order are about to change, but what is going to follow is anyone’s guess.

Regardless of the vote in the House of Representatives, some form of transition was inevitable. It was only ever a question of when. All the years of economic growth we’ve had based on housing bubbles and lax credit is about to turn into a major crash which could well lead to huge changes in the political arena too, just like it did in the 1930s. It may be many years before order can be restored.

But it’s our own fault. The industrialized nations have been living beyond our means for way too long.

We deserve it.

5 Responses to “Critical Phenomenon”

  1. Well, I don’t know if we deserve it, but a lot of people deserve a good bitch slap for this.

    I wonder, too, how much of this enormous downturn on the market today was a result of short-selling stocks. More gambling. They’re still playing the game, and lots of people are likely winning on this short selling as well — benefiting from the downturn. But probably not things like larger funds that can’t play the gambler so much.

    Personally, I’d like to see the Wall Street Casino closed down. I’d like to be able to invest in companies I think will be good companies, and do well. I don’t like all this other dark voodoo manipulation.

    That’s what got us here. Those people don’t need to be bailed out. They say we likely stand to gain if the govt buys the bad mortgages. Well, let them hold onto them and gain.

    This is a perfect time for reformation. Turn investments back into investments, and keep casinos for gamblers.

    If we end up bailing them out (they’re still talking about making it happen) then we better own a huge chunk of those companies.

    And since we purchased the largest insurance company in the states (AIG), why’s it so hard to have health insurance for everyone?

    This stuff just drives me nuts. Isn’t it true that theoretical physicists go to Wall Street and do math when they can’t find a job in academia?

  2. On your last point, it’s not just those who can’t find a job in academia that go into the financial sector. Many of the high fliers do too. The pecuniary rewards are much larger in the City of London than a British University could offer, and much of the work is interesting and challenging.

    Stock markets began with very good intentions, primarily to raise capital for investment in new adventures and to reward investors for backing enterprise. These days much of the activity is basically parasitical: takeovers, derivatives, hedge funds and the rest. None of these serves any purpose other than making money out of money. These parasites have infested and drained the body economic to the point where it is near death. It may be already too late to save it.

  3. Well, that wouldn’t bother me too much, I think. At least possibly after the initial chaos. Money is just data in memory locations manipulated with equations now, anyway.

    Honestly, and I don’t think this is being unpatriotic (patriotism seems a little embarrassing, anyway), I’d love to see the US just come down from being a “superpower”. I would love to just be another member of the world community. I don’t know why we have to be so overblown in nearly every respect.

    Maybe this is how it happens. I have a nice, big garden. Dairy farms are nearby. Oh wait, the computer. Damn.

  4. As a physicist, a want to make a comment on the general idea that your article puts forward and not the specific economic event.

    Financial crisis is an internal property of the economic system named as capitalism. These kind of crisis are in fact periodical, as can be proved by political economy. So it is something like an internal force that drives the economic system to these crises.
    I don’t know many things about political economy, but as far as i understand, it is difficult to define an equilibrium state for capitalism as an economic system. The most scientific attempt to describe the general dynamical laws of capitalism has been made by Marx in his works Capital, Grundrisse and Theories for the Surplus Value. Maybe if you studied these, you could describe economy in a physical way. (by the way i think that the proper order parameter for this kind of phase transition should be the accumulation of capital – according to marxist theory).

  5. My understanding is that the efficient market hypothesis and the law of one price can be interpreted as conservation laws for money provided that all the market information is known or updated every day. What we see in the market today is not essentially a loss of money, but it was primarily the burst of a credit bubble which is now affecting all the options which are bundled with credit derivatives. The economy of the united states is based on something like 20 Trillion dollars of credit (even much more than its GDP) and now it has just turned out that some of this credit were granted under false assumptions which had caused the market to be overvalued. But, I’m a Physics student, I am not an expert in economy!

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