Nobel Winners Expect Crisis to Further Weaken Growth

If you haven't heard of Scholes then look him up. He is particularly known for his work in developing the Black-Scholes PDE for valuation of derivative equities. You know, it’s the he model that was applied to Long Term Capital Management's bond arbitrage scheme. While LTCM did not manage to stay solvent, the ideas leveraged from the Black-Scholes PDE were critical to the excellent performance which spanned several years. Then, the Russian government defaulted on their bonds and undermined previous assumptions that large countries' governments do not default. This fueled a mass exodus from foreign currency investment which led to the demise of an overly leverage company known as LTCM. It is a great story with full of brilliant investor and mathematicians who got too greedy at just the wrong time. But, I digress.

My point being, Scholes has a crisp understanding of the way the financial sector in America, and around the world, got far too "innovative." The turmoil sprung from sub-prime mortgages packaged as investment products-in the form of derivatives-is right up his alley mathematically. So, this week there was a conference for self important and likely wealthy people. They all gathered to listen to significantly distinguished scholars disperse their insights and predictions about the economy. Some blame Greenspan for letting the growth fire rage out of control, but that is another discussion altogether. The recession is here. If it hasn't arrived it will be coming to a town near your soon. In fact you may already feel it at the pump and in the driveway; if you still own one. You and I can see it. Our president and some in the media deny it, but we are all feeling the impact of a recession. Anyway, it doesn't take a Nobel laureate to figure out the worldwide economy is going to suffer, but he is correct.




``There will be a global recession,'' Scholes said in an interview today at a conference in Lindau, Germany, featuring 14 Nobel laureates in economics. Stiglitz forecast the world economy would continue to perform below its potential for some time, resulting in a ``social loss'' through weaker employment.

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