Engineering System D ivision (ESD) at MIT hosted a talk this Tuesday about the financial crises with Charles Ferguson, director of Insider Job . Ferguson identified the securitization chain as a major cause of the 2008 meltdown. A while back, the issuer of a loan held it to maturity and bore the risk. More recently, risk bearing moved downstream from the issuer to the investment bank and on to investors and insurers. Faculty members in ESD deal more with fighter jets and supply chains than finance. However, system thinking and system engineering methods are great tools for investigating financial systems. The securitization chain acts like a physical supply chain and the meltdown happens to be a bullwhip effect just like in any supply chain. Using System Dynamics is also a powerful tool. Risk assessments of mortgage backed securities were faulty because the risk models had narrowly-defined boundaries. Cash incentives for short term gains, deregulation, shorting on one’s ...