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Defending society against natural hazards is a high-stakes game of chance against nature, involving tough decisions. How should a developing nation allocate its budget between building schools for towns without ones or making existing schools earthquake-resistant? Does it make more sense to build levees to protect against floods, or to prevent development in the areas at risk? Would more lives be saved by making hospitals earthquake-resistant, or using the funds for patient care? What should scientists tell the public when – as occurred in L'Aquila, Italy and Mammoth Lakes, California – there is a real but small risk of an upcoming earthquake or volcanic eruption?  Recent hurricanes, earthquakes, and tsunamis show that society often handles such choices poorly. Sometimes nature surprises us, when an earthquake, hurricane, or flood is bigger or has greater effects than expected from detailed hazard assessments. In other cases, nature outsmarts us, doing great damage despite expensive mitigation measures or causing us to divert limited resources to mitigate hazards that are overestimated. Much of the problem comes from the fact that formulating effective natural hazard policy involves combining science, economics, and risk analysis to analyze a problem and explore the costs and benefits of different options, in situations where the future is very uncertain. Because mitigation policies are typically chosen without such analysis, the results are often disappointing. This book uses general principles and case studies to explore how we can do better by taking an integrated view of natural hazards issues, rather than treating the relevant geoscience, engineering, economics, and policy formulation separately. Thought-provoking questions at the end of each chapter invite readers to confront the complex issues involved. Readership: Instructors, researchers, practitioners, and students interested in geoscience, engineering, economics, or policy issues relevant to natural hazards. Suitable for upper-level undergraduate or graduate courses. Additional resources can be found at: http://www.wiley.com/go/Stein/Playingagainstnature [http://www.wiley.com/go/Stein/Playingagainstnature]

Even advanced technological societies are vulnerable to natural disasters, such as the 2011 Tohoku earthquake and tsunami, and financial disasters, such as the 2008 collapse of the US housing and financial markets. Both resulted from unrecognized or underappreciated weaknesses in hazard assessment and mitigation policies. These policies relied on models that proved inadequate for reasons including inaccurate conceptualization of the problem, use of a too-short historic record, and neglect of interconnections. Japanese hazard models did not consider the possibility of multiple fault segments failing together, causing a much larger earthquake than anticipated, and neglected historical data for much larger tsunamis than planned for. Mitigation planning underestimated the vulnerability of nuclear power plants, due to a belief in nuclear safety. The US economic models did not consider the hazard that would result if many homeowners could not pay their mortgages, and assumed, based on a short history, that housing prices would keep rising faster than interest rates. They did not anticipate the vulnerability of the financial system to a drop in housing prices, due to belief that markets functioned best without government regulation. Preventing both types of disasters from recurring involves balancing the costs and benefits of mitigation policies. A crucial aspect of this balancing is that the benefits must be estimated using models with significant uncertainties to infer the probabilities of the future events, as we illustrate using a simple model for tsunami mitigation. Improving hazard models is important because overestimating or underestimating the hazard leads to too much or too little mitigation. Thus, although one type of disaster has natural causes and the other has economic causes, comparison provides insights for improving hazard assessment and mitigation policies. Instead of viewing such disasters as unpredictable and unavoidable “black swan” events, they are better viewed as “gray swans” that—although novel and outside recent experience—can be better foreseen and mitigated.

The foreign debts of the European countries are at the core of the current crises. Generally, the crises are attributed to government budget deficits in excess of the values stated in the Stability and Growth Pact, as part of the Maastricht treaty. Proposals for reform generally involve increasing the powers of the European Union to monitor fiscal policies of the national governments and increasing bank regulation. This article seeks to explain intercountry differences in the debt crises in Europe. Adapted from the source document.

The external debts of the European countries are at the core of the current crises. Generally, the crises are attributed to government budget deficits in excess of the values stated in the Stability and Growth Pact (SGP), and the Maastricht Treaty. Proposals for reform involve increasing the powers of the European Union to monitor fiscal policies of the national governments and increasing bank regulation. I explain the inter-country differences in the debt crisis in Europe. The SGP and the EU focused upon rules concerning government debt ratios and deficit ratios. They ignored the causes of external debt ratios in the entire economy that led to a crisis in the financial markets. My basic questions in the European context are: how were 'excessive/non sustainable' external debt ratios produced in the various countries? Were the crises due to government budget deficits/government dissaving or to the private investment less private saving? What is the mechanism whereby the actions of the public and private sectors lead to an unsustainable debt burden, defined as an unsustainable ratio of debt service/GDP? The answers determine to a large extent how one should evaluate proposals for economic reform, to avert future crises. [PUB ABSTRACT]

The financial crisis was precipitated by the mortgage crisis. A whole structure of financial derivatives was based upon the ultimate debtors, the mortgagors. Insofar as the mortgagors were unable to service their debts, the values of the derivatives fell. The financial intermediaries whose assets and liabilities were based upon the value of derivatives were very highly leveraged. Changes in the values of their net worth were large multiples of changes in asset values. A cascade was precipitated by the mortgage defaults. In this manner, the mortgage debt crisis turned into a financial crisis. The crucial variable is the optimal debt of the real estate sector, which depends upon the capital gain and the interest rate. I apply the Stochastic Optimal Control (SOC) analysis to derive the optimal debt. Two models of the stochastic process on the capital gain and interest rate are presented. Each implies a different value of the optimal debt/net worth. I derive an upper bound of the optimal debt ratio, based upon the alternative models. An empirical measure of the excess debt: actual less the upper bound of the optimal ratio, is shown to be an early warning signal (EWS) of the debt crisis.

The Dodd-Frank (D-F) bill establishes the Financial Services Oversight Council. The bill authorizes the Federal Reserve Board to act as agent for the Council to monitor the financial services marketplace to identify potential threats to the stability of the US financial system and to identify global trends and developments that could pose systemic risks to the stability of the US economy and to other economies. Is the Fed capable of fulfilling these requirements? Shojai and Feiger (2010), in their article Economists' Hubris - The Case for Risk Management - write that the tools that are currently at the disposal of the world's major global financial institutions are not adequate to help them prevent such crises in the future and that the current structure of these institutions makes it literally impossible to avoid the kind of failures that we have witnessed. I evaluate what Greenspan has learned and develop the Stochastic Optimal Control approach that should be used to implement the D-F bill. [PUB ABSTRACT]

The Youth Development Leadership Master of Education (M.Ed.) Program, a professional studies graduate program in the College of Education and Human Development (CEHD) at the University of Minnesota, has been in existence for twelve years. In this article, faculty describe the program philosophy, pedagogy, leadership, and curriculum; share insights into the student experience of youth development, and; reflect on the important lessons learned that have shaped the program over time as well as the challenges that continue today.[PUBLICATION ABSTRACT]

Creditors, banks and bank regulators should evaluate whether a borrower is likely to default. I apply several techniques in the extensive mathematical literature of stochastic optimal control/dynamic programming to derive an optimal debt in an environment where there are risks on both the asset and liabilities sides. The vulnerability of the borrowing firm to shocks from either the return to capital, the interest rate or capital gain, increases in proportion to the difference between the Actual and Optimal debt ratio, called the excess debt. As the debt ratio exceeds the optimum, default becomes ever more likely. This paper is 'A Tale of Two Crises' because the same analysis is applied to the agricultural debt crisis of the 1980s and to the subprime mortgage crisis of 2007. A measure of excess debt is derived, and we show that it is an early warning signal of a crisis in both cases