July 2012
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Financial Networks

According to The Great Revealing post at Divine Cosmos it seems that Vitali, Glattfelder and Battiston at the Swiss Federal Institute of Technology at Zurich have released a paper [The network of global corporate control] which executes a version of the financial network graph idea that I envisioned in my post concerning Financial Cascade Failure.

They find that most of the wealth is concentrated in a highly connected core of a handful of international conglomerates. The situation is typical of a power law distribution. Usually the heterogeneous distribution of links in a power-law graph endow it with a robustness to failure. However, in the case of our financial network, the presence of that tightly connected component creates the possibility of systemic risk. Should one or two of these large institutions fail (probably due to a shared risk), the entanglement of obligations will bring a cascade of bankruptcy which will spread throughout the core component. Each of these financial powerhouses is deserving of the despicable phrase: “too big to fail”.

If this happens, I fear that our reliance on just-in-time shipping, ordering, billing, receiving, and manufacturing means that we won’t have enough in warehouse caches to tide us over until the system reorganizes. Those distribution networks which operate most efficiently have the thinnest margins and will be the first and hardest hit. I would not want to find myself trapped in a major city (such as the LA basin).

1 comment to Financial Networks

  • Recently, Sandy Weill, former citi-boss came out and said that banks should reduce leverage. Specifically, he said that he was wrong to push for the merging of commercial and investment banking, that he regrets successfully spearheading for the repeal of Glass-Steagal during the Clinton era.

    No kidding! If only he knew then that the increase in leverage would both destabilize and centralize the system. We now have too many eggs in too few baskets.

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