Sunday, August 19, 2012

A Gorilla in the Global Economy?

“Let them eat credit” was a line written by Prof. Raghuram Govind Rajan, and it remains as cleverly appropriate as any on our descent into The Great Recession.  Among the many factors ...

These are structural concerns, not party differences. 
Both parties have brought us here over decades. 
Despite heroic attempts, neither candidate or party
has yet addressed adequately our national concerns
in this arena.
In the U.S., our middle and lower classes scrambled to get by in a decade-long decline of wages and salaries.  The government, the FED, and Wall Street gave us their solution; we were offered cheap credit as a substitute for wage improvements. 

We took it.

Then it took us - and the country, and much of the world - to the cleaners.  The U.S., the E.U. and most national economies were wagged like a dog's tail by the risk-taking (and errors) of a corporate few.


Red companies are super-connected, yellow are very connected.
At the core, just 147 corporations, mainly banks

We're beginning to understand why and how the upheaval happened.  Among our discoveries, it seems there's a large gorilla at the heart of the global economy.


A surprising study recently by the University of Zurich discovered just 147 corporations* at the core of the entire world's economy (illustrated here).   According to Forbes, those few hold the reins to the entire global economy.

*Their analysis of the relationships between 43,000 transnational corporations has identified a tightly interconnected core group, mainly banks, with disproportionate power over the global economy.

There are too many corporations in this newly identified core to be a conspiracy for world rule, something that will disappoint the radical conspiracists.  They are also too few in number and too poorly regulated to be particularly predictable, but they are perhaps worth watching.  It's just a naturally-forming network where newcomers connect preferentially to highly connected members.  The structure is inherently unstable and has been subject to large-scale manipulation.

Sample of the international financial network, where the nodes represent
major financial institutions belonging to the core and the links give the
strongest existing relations among them; node colors indicate different
geographical areas: EU (red), US (blue), other countries (green); the 
width and the darkness of the links show their weight; only the most 
prominent links are shown; the network shows a high connectivity, 
with many mutual cross-shareholdings as well as longer cycles; this 
indicates that the financial sector is strongly interdependent, which 
make the network vulnerable to instability.
Many of these firms are financially larger than all but a few of the world's wealthiest countries.  Many are officially identified as 'too big to fail', a vulnerability increased by the interconnectedness of their ownership and control structures.

That the economic future of the world is in the hands of so few is troubling... 

There is nothing wrong with working hard, contributing meaningfully to the marketplace, and becoming wealthy.  What we have, though, is a broken system that funnels most of the world's productivity and most of the power into the hands of the ultra-wealthy and the gigantic corporations that they own.  Their business model, of course, is focused not on serving the citizens of the world but on their bottom line.

There are perhaps benefits to such an economic model, but the likely risks and downside continue to increase in magnitude.  The model is outside the regulatory pervue of any one nation and beyond our national and international attempts to rein it in as yet.

From a local (national, governmental) view, America's contribution to this juncture distributes across Republicans and Democrats.  This trends began in the last century with deregulatory initiatives which each administration has supported at the behest of industry.  Attempts at regulatory reform have had mixed results so far, and are considered inadequate

So, who are these few who can so shake the world with their actions?

The top 50 of the super-connected, transnational companies ...

1. Barclays      GB
2. Capital Group Companies Inc    US
3. FMR Corporation                        US
4. AXA                                     FR
5. State Street Corporation            US
6. JP Morgan Chase                      US                      ... some familiar names.
7. Legal & General Group GB                          45 of these are financial sector corporations.
8. Vanguard Group Inc                   US            Together, these 50 control 40% of the world marketplace.
9. UBS AG                       CH                            A third of these are on the 'too big to fail' list.*
10. Merrill Lynch & Co Inc*           US         Several have been caught illegally manipulating the market.
11. Wellington Management Co     US        Each has a history of 'bottom line' motivation.
12. Deutsche Bank AG    DE                        None can claim having served the interests of their host nation.
13. Franklin Resources Inc              US         Many are suspect for illegal market manipulation at
14. Credit Suisse Group       CH                       governmental behest (foreign and domestic firms).
15. Walton Enterprises LLC            US         There are documented cases where such activity
16. Bank of New York Mellon        US            was only inadvertently discovered and thwarted.
17. Natixis                               FR
18. Goldman Sachs Group Inc       US
19. T Rowe Price Group Inc             US
20. Legg Mason Inc                          US
21. Morgan Stanley                       US
22. Mitsubishi UFJ Financial  JP
23. Northern Trust Corporation       US
24. Société Générale               FR
25. Bank of America                      US
26. Lloyds TSB Group plc        GB
27. Invesco plc                          GB
28. Allianz SE 29. TIAA        DE
29. TIAA                                           US
30. Old Mutual Public Limited GB
31. Aviva plc                             GB
32. Schroders plc                      GB
33. Dodge & Cox                             US
34. Lehman Brothers*                   US
35. Sun Life Financial Inc     CA
36. Standard Life plc               DE
37. CNCE                                    FR
38. Nomura Holdings Inc     JP
39. The Depository Trust Company  US
40. Massachusetts Mutual Life        US
41. ING Groep NV         NL
42. Brandes Investment Partners LP
43. Unicredito Italiano SPA
44. Deposit Insurance Corporation of Japan
45. Vereniging Aegon
46. BNP Paribas
47. Affiliated Managers Group Inc
48. Resona Holdings Inc
49. Capital Group International Inc
50. China Petrochemical Group Company
* Lehman still existed in the 2007 dataset used

Government legislation and spending

Company bailouts, buyouts, or bankruptcies

General Motors

Merrill Lynch,  New York City
BankWest (subsidiary of HBOS)
Alliance Bank

So, what happens next?  We could leave such conversation to the wingers, R or L, and go on our plebeian way.  After all, these things are difficult and one person can't make a difference anyway.