Differential equation

An engineering view of the financial crisis

There is an extremely useful second order differential equation which allows mechanical engineers to predict the behaviour of forced vibration systems with great confidence. The equation is very versatile and enables electrical engineers to predict the behaviour of oscillating electrical circuits with equal certitude.

It is less obvious, but this ubiquitous equation must also apply to the behaviour of financial markets, an idea which is seemingly unknown to bankers, financiers and politicians.

To understand the equation requires some grasp of elementary calculus and this may be the reason that those whose knowledge is restricted to the mathematics of accounting, i.e. adding up and taking away (in which the adding up mostly applies to huge breathtaking bonuses for the bankers, and the taking away applies to the accounts of the customers) have not so far appreciated the beautiful mathematical description of their trade, which could be available to them.

The reason financial markets and share prices soar upwards when things look good and plummet disastrously when things look bad is because we have a forced vibration system with negligible damping.

If the world is to have long term financial stability it can only come as a result of introducing the necessary damping element, and this damping element can only be a considerably higher tax on the purchase of equities and other investments. The present system is the uncontrollable equivalent of trying to drive a car with no dampers at a hundred miles an hour.

As well as stabilising the financial system a substantial tax would discourage such financial nonsense as hedge funds, spread betting, and obscene banker's bonuses etc. It would encourage serious long term investment in wealth producing companies (such as engineering manufacturers) and eliminate those who buy and sell anything and everything by the hour simply to take advantage of the unstable nature of the market, and who thus provoke further instability.

Ian Crossley, Camberley, Surrey

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