[Infowarrior] - In ‘Star Wars,’ Was the Death Star Too Big to Fail?

[Richard Forno]

In ‘Star Wars,’ Was the Death Star Too Big to Fail?

Gray Matter

By ZACHARY FEINSTEIN JAN. 1, 2016

http://www.nytimes.com/2016/01/03/opinion/in-star-wars-was-the-death-star-too-big-to-fail.html

AT the end of “Star Wars: Episode VI — Return of the Jedi,” the heroic Rebel Alliance defeats the evil Galactic Empire, destroying the second Death Star, the empire’s central space station (and superweapon). Audiences typically respond to the destruction of the Death Star with triumphant cheers.

But over the years, a number of perhaps more reflective fans have paused to question the consequences of this event. In his movie “Clerks,” for example, the writer and director Kevin Smith has his protagonists debate the ethics of destroying the second Death Star, whose construction was still underway, given the collateral damage to the contractors (“plumbers, aluminum siders, roofers”) building it.

As a financial engineer, I have another concern: the economic repercussions for the “Star Wars” galaxy. In a recent working paper, I brought the analysis of financial systemic risk to bear on this question. I found that the resulting financial crisis would cause a serious galactic depression of astronomical proportions — so large, in fact, that it suggests the rebel victory might have been a pyrrhic one.

To perform my analysis, I had to make a number of assumptions about the economy in “Star Wars” and comparisons to the real world in order to develop a model of the galactic financial system. For instance, I compared the cost of constructing the first Death Star ($193 quintillion) with that of building the U.S.S. Gerald Ford (about $17.5 billion), the most recent aircraft carrier in the United States Navy, a similar approach to that used by the White House in responding to a humorous 2012 petition to build a Death Star. To calibrate the size of the imperial economy ($4.6 sextillion per year), I assumed that the cost of building the first Death Star was comparable to the costs of the Manhattan Project (0.21 percent of gross domestic product per year).

Following the destruction of the second Death Star (a much bigger version, at a cost of $419 quintillion) and the fall of the Galactic Empire, I presumed there would be an immediate default on imperial debt, a drop in asset valuations (comparable to equities after Sept. 11) and a potential for cascading defaults in the financial sector. Because the financial system in “Star Wars” lacked any meaningful regulation, the resulting financial crisis was larger than I ever imagined. Without a financial bailout of 20 percent of the entire galactic economy, the victory of the Rebel Alliance would cause a galactic depression that would compare to the Great Depression, or worse.

When the Rebel Alliance emerged victorious in “Return of the Jedi” and, presumably, chose to repudiate the imperial debts from both Death Stars, there would have been a drop of nearly 8.5 percent in gross galactic product (G.G.P.), according to my analysis, an almost sure path to economic depression. In only 40 percent of my simulations, the financial system absorbed this shock to the banking sector. However, the other 60 percent of cases set off a systemic crisis that crippled the galactic economy.

Did the Rebel Alliance foresee the economic consequences of destroying the second Death Star and take steps to mitigate an economic collapse? Without intelligent economic policy, a bailout of 15 percent to 20 percent of G.G.P. would have been necessary simply to limit the galactic economic fallout to something comparable to the gross domestic product decline at the heart of the Great Recession.

Fortunately, “Star Wars” is a work of fiction. Unfortunately, as we witnessed in 2008, financial systemic risk is a very real threat to the economic well-being of the United States and the world. As with a medical epidemic, understanding the causes, symptoms and progression of a contagious event is necessary to prevent economic illness. Financial contagion is the spreading of losses of individual institutions to other firms, and ultimately to the whole economy. That contagion can occur through local or global interactions: for example, locally through direct financial obligations, and globally to any bank through the impact on asset prices.

BECAUSE of the large cost to society, it is important that we accurately model what occurs in a systemic crisis. This is why my model of the “Star Wars” economy — a system of mathematical equations — is not entirely silly. Financial-contagion models provide a glimpse into how the financial sector can affect the health of the entire economy. Just as I made simplifying assumptions to price the Death Star, researchers construct mathematical models (in all fields) by looking at the world and translating what they observe into mathematical formulas.

Over time, through the efforts of researchers worldwide, these formulas are refined, making the model more realistic but also more complicated. These mathematical models, as simplifications of the real world, reveal which properties are general and which are specific to the crisis at hand. If done properly, they can help inform decision makers on how to prevent or mitigate future systemic crises.

I have found that the general lessons learned from studying financial risk do not always hold true during a systemic crisis. For the individual investor or bank, greater diversification is a prudent strategy to reduce risk. However, increasing diversification at all institutions might create new channels of contagion, which would exacerbate rather than mitigate a systemic crisis.

With my simple model, I have also found that when banks (and the Trade Federation in “Star Wars”) compete to maximize profits during a systemic crisis, they can unintentionally devalue financial assets to levels lower than necessary to reach a post-crisis equilibrium. As a consequence, this exacerbates the spread of the economic disease.

Because of the tremendous costs associated with systemic crises, it is paramount that we continue to study how to model financial contagion and measure systemic risk. As “Star Wars” proves, sometimes these crises can appear when and where we least expect them.

Zachary Feinstein is an assistant professor in the department of electrical and systems engineering at Washington University.


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It's better to burn out than fade away.