Sandra Navidi - SuperHubs - How the Financial Elite and Their Networks Rule our World

During the time of the impending AIG failure, an executive of a private bank told me in confidence that the C-suite had given orders to halt all trading with Goldman Sachs and that their decision had led executives at other institutions to do the same. Similarly, in the case of Lehman, financial executives made the decision to hoard liquidity, which led to a crisis that spread through markets and brought the entire global financial system to a screeching halt. Executives have control over their own actions, but they have no control over the contagion effect, and there are few if any circuit breakers.

As discussed in Chapter 10, checks and balances by supervisory authorities like the Federal Reserve or the SEC often fail due to “relational capture,” which typically leads to “cognitive capture” and “regulatory capture.” Most people are rarely only transactional but also have an inherent desire to create a collaborative and positive work environment by fostering good relations. After a certain amount of interaction, they typically begin to relate to one another and bond. At that point “cognitive capture” sets in, according to which they begin to view matters from each other’s perspectives. This in turn leads to “regulatory capture,” meaning that regulators become biased toward, or even dominated by, those they are supposed to regulate. The revolving door phenomenon further inclines people to be accommodative rather than confrontational.

Averting Collapse: Thinking Differently

Why is the system ever more fragile? Why have so few improvements been made after the dramatic global financial meltdown of 2008? Perhaps—as Einstein said—we don’t need to think more, but think differently.

Traditionally, we have been trained to think analytically and deal with parts of problems separately. However, today’s multidimensional, complex world is not linear, but is the result of dynamic, simultaneously interacting phenomena. Brexit, unpredictable monetary policies, mass migration and terrorism are but a few examples. We can attain a deeper understanding of these problems by employing a different approach called “systems thinking” and focusing more on the relationship of individual parts than on the parts themselves, which alone say nothing about the system’s behavior.39 According to organizational theorist Stephen Haines, “major change fails 75 percent of the time because of a piecemeal and analytical approach to a systems problem that tries to cure one problem at a time.”40 And in the opinion of world systems analyst Immanuel Wallerstein, part of the problem is that “we have studied . . . phenomena in separate boxes to which we have given special names—politics, economics, the social structure, culture—without seeing that these boxes are constructs more of our imagination than of reality.”41 The postcrisis banking regulation exemplifies the analytical, one-dimensional approach to problem solving. When looking at individual cases, progress seems to have been made; however, viewed in a wider context, stricter regulation has had the unintended consequence of relegating the riskier financial activities to the lightly regulated shadow banking system, where they have the potential to cause even greater harm. So instead of minimizing risks, bank regulation has created new ones.

In any case, urgent action is required because the forces of nature will inevitably eventually kick in to recalibrate the system. Whether such circuit breakers will trigger gradual, managed, and orderly change or sudden, uncontrollable chaos is uncertain. But the longer we wait, the more difficult it will be to effect constructive change. Experts agree that even remote minor events can trigger failure of complex systems. This has been termed the “butterfly effect” and characterized as “the notion that a butterfly stirring the air today in Peking can transform storm systems next month in New York,” meaning that even slight disturbances may have dramatic consequences.42 As Wallerstein explains, disorderly transitions are usually painful because they entail battles over pieces of the pie.43 As paradigms shift, “structures and processes oscillate wildly,” as manifested by volatile markets, fragile economies, and geopolitical conflicts. Some people advocate for letting the system collapse to allow a better one to emerge, but such a process would likely be arduous for all segments of society, and the rebuilding could take a very long time, as the Great Depression has shown.

Karl Marx argued that capitalism carries the seeds of its own destruction, and it indeed appears that impermeable elite networks have distorted the dynamics of the capitalist system and prevented adaptation. To paraphrase Winston Churchill, capitalism might be the worst economic system, except for all others. Socialism and communism have historically led to dramatic power vacuums and even smaller and tighter networks corrupting the system. Particularly in times of crisis and transition, elite groups form and absorb large parts of a country’s wealth. Russia is a classic example. During the transition from communist U.S.S.R. to a market-based Russia, a handful of oligarchs-in-the-making with government connections and access to financing acquired state assets on the cheap and made billions. Estimates of President Putin’s personal fortune range up to $200 billion.44

The Growth Premise: A Paradox?

Our society and economy are predicated on growth as the engine for jobs, prosperity, and social stability. However, since the crisis, the recovery has been stubbornly slow and weak, as the world lacks demand, struggles with a huge debt overhang, and the political establishment procrastinates crucial structural reforms. Globalization has run out of steam, and central banks are trying to overcompensate for governmental inertia. The lack of growth exacerbates inequality even more and threatens social stability. But growth also comes with often overlooked costs and unintended consequences, such as the depletion of natural resources, exploitation of others, misallocation of human capital, and distortion of political systems.

In his book Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity, Douglas Rushkoff argues that we are caught in a growth trap, where we have lost track of the purpose of the economy and made growth an end in itself, driving a jobless recovery and low-wage economy.45 But what if we are unable to produce substantially stronger growth? What if growth is limited? The think tank Club of Rome argued in its 1972 research report The Limits to Growth that growth cannot continue indefinitely because resources like water, food, and energy are limited. More-recent research has only corroborated this theory, concluding that the drive for limitless economic growth could disrupt many local, regional and global systems and would end either through an uncontrolled collapse or human adaptation.46

Northwestern University economist Robert Gordon predicts significantly slower growth for the foreseeable future, because the most significant innovations that triggered disproportionate growth over the last 150 years—such as the internal combustion engine, running water, and electricity—were in his opinion unique and unrepeatable.47

Culture: The Value of Our Values

To a certain extent the drive for growth is expedient, as the economy is like a plane that must fly at a certain speed to stay airborne. Generally, it is human nature to be dissatisfied with the status quo and strive for more. While this desire is an essential driver of progress and growth, the mere self-interested drive to accumulate excessive wealth has a tendency to be socially destructive. In Alan Greenspan’s opinion, humans haven’t become any greedier than in generations past, but have more avenues to express greed.48 The pope stated that “once capital becomes an idol and guides people’s decisions, once greed for money presides over the entire socioeconomic system, it ruins society.”49 Indeed, if greed isn’t mitigated by a strong set of personal values, it tends to impair judgment and lead to illegitimate behavior.