as a whole. ‘There was a lot of faith in the vast, complex financial
system being self-correcting,’ he said. ‘The attitude was “we don’t
need to know how the system works, instead we can concentrate on
individual institutions”.’[36] Unfortunately, the events of 2008 would
reveal the weakness in this approach. Surely there was a better way?
During the late 1990s, May had been Chief Scientist to the UK
Government. As part of this role, he’d got to know Mervyn King, who
would later become Governor of the Bank of England. When the 2008
crisis hit, May suggested they look at the issue of contagion in more
detail. If a bank suffered a shock, how might it propagate through the
financial system? May and his colleagues were well placed to tackle
the problem. In the preceding decades, they had studied a range of
infections – from measles to – and developed new methods to
guide disease control programmes. These ideas would eventually
revolutionise central banks’ approach to financial contagion.
However, to understand how these methods work, we first need to
look at a more fundamental question: how do we work out whether an
infection – or a crisis – will spread or not?
A and Anderson McKendrick announced their
work on epidemic theory in the 1920s, the field took a sharp
mathematical turn. Although people continued working on outbreak
analysis, the work became more abstract and technical. Researchers
like Alfred Lotka published lengthy, complicated papers, moving the
field away from real-life epidemics. They found ways to study
hypothetical outbreaks involving random events, intricate
transmission processes and multiple populations. The emergence of
computers helped drive these technical developments; models that
were previously difficult to analyse by hand could now be simulated.
[37]
Then progress stuttered. The obstacle was a 1957 textbook written
by mathematician Norman Bailey. Continuing the theme of the
preceding years, it was almost entirely theoretical, with hardly any
real-life data. The textbook was an impressive survey of epidemic
theory, which would help lure several young researchers into the field.
But there was a problem: Bailey had left out a crucial idea, which