1) Like many people, I immediately conjure up an image of a politician; usually one of the politicians who rule over countries considered powerful, like the President of the United States or the British Prime Minister.
2) Like very few people I have this image of Satchmo sitting on a rainbow and hear his voice singing ‘…I have the World on a string…’
Reading this, you may think that the second image is bonkers. Well, it is but by no means more so that the first one. Because anyone who thinks even for a moment that politicians, even the seemingly powerful ones, control much beyond the appearance of control has to think again. While we are on the subject of popular music do you remember a song entitled ‘Money Makes the World Go Round’? Now, crass and unrefined as it may sound, this one has got it more or less right.
Very recent research (in fact research that is still being considered for publication and please don’t ask me how I know about it) confirms that ‘money makes the world go round’ in more senses than one. Three Swiss researchers decided to test the intuitive assumption that large transnational corporations have considerable control over the global economy. They started with a list of 43,060 transnational corporations identified using official definitions. Then they defined different kinds of ownership and the control relationships that these imply. After that they used very powerful computers and very sophisticated software to do network analysis of these corporations. They found the following:
- A relatively small number of transnational corporations (737) control 80% of the total value of the world corporations.
- There is a clear core of corporations that is at the centre of the network. These 147 corporations hold 40% of the control of the economic value of the world corporations.
- The core corporations have full control over each other and thus can be seen as forming a super-entity. These are very strongly dependent on each other.
- Roughly 75% of the corporations in this super entity are financial intermediaries. In fact many well known global financial players are among the top 20. It suffices to mention that Barclays PLC leads the list, JPMorgan Chase is sixth and the Goldman Sachs Group Inc is eighteenth.
Why is this important? Because this has clear implications for our collective financial and economic future and wellbeing! This research shows that the world economy (and society) is controlled by a small number of very well connected through ownership corporations, the overwhelming majority of which are financial institutions. A fair proportion of these financial institutions were individually in trouble during the last three years or so.
This very tight level of connectedness, the research found, means that risk and volatility are not localised, these are not characteristics of individual financial institutions within particular countries. Risk and volatility are a systemic characteristic of the global economic system.
Put simply, this means that we probably should stop asking whether there will be a global economic meltdown and start asking when there will be one.
Is such a meltdown inevitable? I believe that it can be avoided. However, I also believe that the main recommendation of the Report published by the Independent Commission on Banking led by Sir John Vickers is unlikely to be effective. This report recommends that UK banks ring-fence their retail from investment banking. Clearly the assumption is that UK banks are local players and it neglects the fact that they are very tightly connected through ownerships with financial institutions elsewhere. Thinking that this will work is a bit like sitting in the middle of a snake nest, clearing one metre radius and feeling secure; well the snakes are bound to come back.
I believe that the way to offset the possibility of global meltdown is not by taking localised policy measures. But it can be achieved by agreeing on international regulation – regretfully the likelihood of this happening is very small. Better yet, there can be action that breaks the relationships through which the core super-entity of financial institutions controls the rest of the corporations and the tight relationships between the members of the core.
Systemic problems can be offset only by systemic answers and actions.