Wired 12.08
By Benoit Mandelbrot, father of fractal geometry
By any measure, the late 1990s was a time of extraordinary growth and prosperity in much of the world - and yet, the global financial system still managed to lurch through six crises: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997 and 1998; Russia in 1998; and Brazil from 1998 to 1999. The Indonesian crisis was especially severe: The country's quarterly real GDP plummeted 18.9 percent, and its currency fell into a hole 526 percent deep. Each of these upheavals spread to most parts of the globe, destabilizing currencies, knocking gaping holes in bank balance sheets and, in many cases, causing a wave of bankruptcies. The fact that each country recovered and the global economy roared on again is testament not to good financial management but to good luck.

Fortunately, bankers and regulators now realize the system is flawed. The world's central banks have been pushing for more sophisticated risk models - but what they need is one that takes into account long-term dependency, or the tendency of bad news to come in waves. A bank that weathers one crisis may not survive a second or a third. I thus urge the regulators, now drafting the New Basel Capital Accord, to regulate global bank reserves, to encourage the study and adoption of more-realistic risk models. If they do not, the number of crises will just keep growing.

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