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Banking on air
OPINION LETTERS Levers of power From James Ferguson, chief strategist, Westhouse Securities It is not that banks are too big to fail, but that they are too interconnected to fail, according to the DebtRank analysis you cite (11 August, p 6). But, although banks may have been too big and too interconnected, the fundamental problem was that they were too leveraged: they did not hold enough capital. Banks are insolvent only if their losses exceed their capital. Surely, a scientific approach to the crisis first establishes what actually caused the crisis and then works on ways to establish earlywarning systems. I suggest that leverage and the extent of any wholesale funding gap are two excellent places to start. DebtRank utilises “previously confidential data covering 1000 days… of the debt borrowed from the US Fed”. This confuses cause with effect in a fundamental way. The lazy assumption made almost universally is that Lehman Brothers’ bankruptcy in September 2008 “caused” the financial crisis. In fact, the crisis
had been steadily escalating since the summer of 2007, when Northern Rock failed. What accelerated the crisis around the time of Lehman’s collapse was the demand by the US Federal Reserve and the Bank of England that banks improve their capital-toasset ratios, forcing them to shed short-term loan assets. Many of these loans were to investors, who, in turn, were forced to liquidate stock portfolios at the same time that credit-funded international trade imploded. London, UK The editor writes: n We discussed wider reasons for the crisis at the time (27 September 2008, p 8).
Some more equal From Bruce Denness Your graph of income inequality in the US since 1920 (28 July, p 37) shows the top 1 per cent receiving more than 15 per cent of total income during the Depression before about 1930, then the proportion slowly declining to half that rate mid-century and
Enigma Number 1714
Penny-farthing Adrian Somerfield The penny-farthing was a precursor to the modern bicycle. It had one very large wheel with pedals, over which was the saddle, and one much smaller trailing wheel to enable steering. We have some very early film of my great-grandfather riding one he had built. It had a large wheel 6 metres in circumference
with 48 spokes, and a small one of one-third that diameter having 20 spokes. It had no brakes. He was hurtling downhill –luckily at less than 50 km/h – and just before he fell off, the film appears to show both wheels not rotating. If the film is showing 16 frames per second how fast, in kilometres per hour, was he then travelling?
WIN £15 will be awarded to the sender of the first correct answer opened on Wednesday 10 October. The Editor’s decision is final. Please send entries to Enigma 1714, New Scientist, Lacon House, 84 Theobald’s Road, London WC1X 8NS, or to [email protected] (please include your postal address). Answer to 1708 Pentagon: paper dimensions are 37 by 66 The winner Robert Armstrong of Thousand Oaks, California, US
28 | NewScientist | 8 September 2012
rising back toward it from around 1980. This seems to support the old adage that the best time to make money is during a depression. I suggest a simpler explanation. The rich are insulated from fluctuations in the economy at all times, whereas the lower economic orders prosper during boom times but are impoverished during depressions, enjoying a greater share of the total income only during the booms. Whitwell, Isle of Wight, UK From Monica Young Deborah Rogers claims that “For tens of thousands of years, egalitarian hunter-gatherer societies were widespread” and “anyone who made a bid for higher status or attempted to take more than their share would be ridiculed or ostracised for their audacity” (28 July, p 38). There may have been less inequality in a hunter-gatherer society than in an agricultural one, but I doubt that huntergatherers were anywhere near as egalitarian as Rogers claims. Look at any human society in existence today, and you’ll see chiefs and leaders. Arlington, Massachusetts, US
Banking on air From Dhiren Rao Philip Penton implies that the mortgage debacle occurred because of people lying on their loan applications (7 July, p 31). He appears to overlook the fact that nobody was holding a gun to the
bankers’ heads to force them to make loans. Once upon a time, banks made mortgage loans and held the paper, so if the loan went sour, the bank lost money. With the advent of collateralised mortgage obligations, the bank no longer held the loan but bundled it and sold it to investors. If the loan went sour, the bank no longer lost money. Bankers were making so much money packaging and selling the loans that they encouraged brokers to generate an increasing number of loans without worrying about quality. Berkeley, California, US
Trouble at pit From Martin Savage Your look at the increasing automation in mining and quarrying (28 July, p 18) discusses how machines can improve safety standards for workers. It neglects to mention that the principal way in which automation improves worker safety is by making the workers redundant. I am not advocating a return to medieval mining: but it has to be recognised that if the future of mining is one person controlling many machines from a desk, that also means many unemployed people sitting at home, albeit in improved safety conditions. Jomtien, Thailand
Cycles come around From John Woodgate Peter Turchin’s “cliodynamics” method of predictive history (18 August, p 46) was predicted in considerable detail by Isaac Asimov in his classic novel Foundation – although Turchin may be early, since that was set 24,000 years in the future. An important principle stated early on is that the predictive power of cliodynamics – which Asimov called “psychohistory” – is fatally damaged if the detailed
had been steadily escalating since the summer of 2007, when Northern Rock failed. What accelerated the crisis around the time of Lehman’s collapse was the demand by the US Federal Reserve and the Bank of England that banks improve their capital-toasset ratios, forcing them to shed short-term loan assets. Many of these loans were to investors, who, in turn, were forced to liquidate stock portfolios at the same time that credit-funded international trade imploded. London, UK The editor writes: n We discussed wider reasons for the crisis at the time (27 September 2008, p 8).
Some more equal From Bruce Denness Your graph of income inequality in the US since 1920 (28 July, p 37) shows the top 1 per cent receiving more than 15 per cent of total income during the Depression before about 1930, then the proportion slowly declining to half that rate mid-century and
Enigma Number 1714
Penny-farthing Adrian Somerfield The penny-farthing was a precursor to the modern bicycle. It had one very large wheel with pedals, over which was the saddle, and one much smaller trailing wheel to enable steering. We have some very early film of my great-grandfather riding one he had built. It had a large wheel 6 metres in circumference
with 48 spokes, and a small one of one-third that diameter having 20 spokes. It had no brakes. He was hurtling downhill –luckily at less than 50 km/h – and just before he fell off, the film appears to show both wheels not rotating. If the film is showing 16 frames per second how fast, in kilometres per hour, was he then travelling?
WIN £15 will be awarded to the sender of the first correct answer opened on Wednesday 10 October. The Editor’s decision is final. Please send entries to Enigma 1714, New Scientist, Lacon House, 84 Theobald’s Road, London WC1X 8NS, or to [email protected] (please include your postal address). Answer to 1708 Pentagon: paper dimensions are 37 by 66 The winner Robert Armstrong of Thousand Oaks, California, US
28 | NewScientist | 8 September 2012
rising back toward it from around 1980. This seems to support the old adage that the best time to make money is during a depression. I suggest a simpler explanation. The rich are insulated from fluctuations in the economy at all times, whereas the lower economic orders prosper during boom times but are impoverished during depressions, enjoying a greater share of the total income only during the booms. Whitwell, Isle of Wight, UK From Monica Young Deborah Rogers claims that “For tens of thousands of years, egalitarian hunter-gatherer societies were widespread” and “anyone who made a bid for higher status or attempted to take more than their share would be ridiculed or ostracised for their audacity” (28 July, p 38). There may have been less inequality in a hunter-gatherer society than in an agricultural one, but I doubt that huntergatherers were anywhere near as egalitarian as Rogers claims. Look at any human society in existence today, and you’ll see chiefs and leaders. Arlington, Massachusetts, US
Banking on air From Dhiren Rao Philip Penton implies that the mortgage debacle occurred because of people lying on their loan applications (7 July, p 31). He appears to overlook the fact that nobody was holding a gun to the
bankers’ heads to force them to make loans. Once upon a time, banks made mortgage loans and held the paper, so if the loan went sour, the bank lost money. With the advent of collateralised mortgage obligations, the bank no longer held the loan but bundled it and sold it to investors. If the loan went sour, the bank no longer lost money. Bankers were making so much money packaging and selling the loans that they encouraged brokers to generate an increasing number of loans without worrying about quality. Berkeley, California, US
Trouble at pit From Martin Savage Your look at the increasing automation in mining and quarrying (28 July, p 18) discusses how machines can improve safety standards for workers. It neglects to mention that the principal way in which automation improves worker safety is by making the workers redundant. I am not advocating a return to medieval mining: but it has to be recognised that if the future of mining is one person controlling many machines from a desk, that also means many unemployed people sitting at home, albeit in improved safety conditions. Jomtien, Thailand
Cycles come around From John Woodgate Peter Turchin’s “cliodynamics” method of predictive history (18 August, p 46) was predicted in considerable detail by Isaac Asimov in his classic novel Foundation – although Turchin may be early, since that was set 24,000 years in the future. An important principle stated early on is that the predictive power of cliodynamics – which Asimov called “psychohistory” – is fatally damaged if the detailed