It Recession

IT's Role In The Recession

Information technology experts didn’t cause the current economic downturn, but they certainly made it worse.

The creation of incredibly complex risk models on Wall Street by pedigreed quantitative analysts, or quants, and the almost total reliance by trading houses on those models turned what could have been just another housing bubble into a global disaster. Forbes caught up with David Moschella, global research director for Computer Science Corp.’s Leading Edge Forum, to talk about what went wrong and what’s changing.

Forbes: What is IT’s role in the recession?

David Moschella: If you look at the housing bubble and all the crazy things the banks did, supporting and enabling that were the computerized models. They spun out equations that said from a risk-management perspective this was OK. In particular, they used the Gaussian copula formula to calculate the risk of the credit fault swaps.

This is what all the “quants” were doing, right?

Yes. These were the best and brightest taking supercomputers, putting in complex equations and coming out with answers that said this really highly leveraged model that depended on house prices rising forever wasn’t all that risky. Now people are realizing those models had some serious flaws.

Why did it take so long?

Some people realized those equations had serious flaws from the beginning. But when things are going well people ignore those risks and make money while they can. These computers had a role in convincing people everything was OK. And obviously the top management in firms can’t understand these equations. They’re very complex. There are lots of variables, lots of equations, and they assumed they were OK. In the end, it gave them a very false sense of confidence.

So what role did IT actually play in bringing down the global economy?

It’s certainly not the main culprit. There have been many speculative bubbles. But IT played a role in providing reassurances, and it magnified the...