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

These financial titans derive their elite status not only from their privileged position in the network, but also from the importance of the network itself. The financial system is the bedrock of our society and touches everyone’s life, because we are a financial society and every activity we engage in requires finance, whether it is building a business, a house, or an educational background. This close interconnection between our culture and finance can be seen in some of the descriptive terms that finance borrows from our everyday language to express underlying concepts, such as “credit,” which is derived from the Latin word credere and means “to believe,” or the words “equity,” “bond,” “share,” and “trust.” Financial institutions like banks intermediate between savings and investments and allocate resources between different societal groups. This intermediation has created access to capital and opportunities for millions of people, especially those from lower- and middle-class income backgrounds. Moreover, these institutions provide payment systems, without which our highly interconnected world would likely come to a grinding halt.

The shadow banking system—financial intermediaries that do not have a banking license, such as investment banks, hedge funds, and money market funds—provides a variety of financial services. Financial regulators safeguard the system. Central banks are in charge of monetary policies. Think tanks develop new perspectives, offer expert advice, and advocate special interests. Academics and thought leaders provide innovative views and substantiate or invalidate practices in the financial system.

Leaders of financial firms impact the economy in any number of ways. They decide who gets business loans, influencing which industries will thrive and where jobs will be created. They provide mortgages and buy companies or take them public. They can move markets through the assets they control, the capital they direct, and the currencies they trade. The prices of basic necessities, such as energy and food, are impacted by bets they make on commodities, industries, and geographies—potentially fueling booms and busts. When countries are under pressure, their speculation can contribute to downward spirals. The political landscape is shaped through their financial contributions, direct interactions with politicians, and lobbying. During the financial crisis of 2007 and thereafter (hereinafter referred to as the “crisis” or “financial crisis”), they were a driving force behind the bailouts.

Relationships between the private and public sectors are solidified through the phenomenon of the “revolving door”—in which players oscillate between the two worlds. In good times, personal relationships among the superhubs of finance lead to ever more and greater transactions in a favorable regulatory environment. During financial crises, these relationships often tip the scale toward either the success or failure of an institution. In 2008, when the financial system teetered on the brink of collapse, strong personal bonds in both the public and private sectors became an important factor in the bailout of individual institutions and the stabilization of the system as a whole. For instance, Ben Bernanke, Tim Geithner, and Hank Paulson formed an effective trifecta that succeeded in preventing the financial system from collapsing in part because of their good personal relationships. In the midst of dramatic and chaotic circumstances they constructively cooperated, because they respected, trusted, and understood one another. A group of people who did not know and trust one another would likely not have been able to successfully work through such a crisis.

In terms of network science, the people who preside over these private and public institutions or have otherwise prominent positions are “super-hubs,” as they are the most well-connected nodes in the financial network. They are the few hundred executives who set the agenda, dominate the dialogue, and leverage their power on their organization’s behalf. Often, they are in charge of tens of thousands of employees in dozens of countries. They may not be as visible or well known as politicians, yet like a global supragovernment, their power comes close to and sometimes even exceeds that of democratically elected officials. Many financial titans have risen from obscurity to become the wealthiest and most powerful people on the planet. Examples of major superhubs include bank CEOs like Jamie Dimon of JPMorgan; George Soros, the billionaire hedge fund manager; Christine Lagarde, the managing director of the IMF; and economist Nouriel Roubini.

Boasting a myriad of influential interconnections all around the world, all of these “human superhubs” have one characteristic in common: They have successfully built and navigated personal networks based on shared trust, experiences, and backgrounds. While their individual relationships make them powerful, their combined power is exponentially higher and leaves its imprint on the world. Because these relationships are invaluable in regard to access to resources and crucial information, they constantly travel around the globe to cultivate them, despite the significant investment of time, energy, and money. These leaders can outsource all kinds of professional skills, but they cannot outsource the interpersonal skills needed build deep and resilient relationships.

Fault Lines: The Fragility of Our Financial System

From the vantage point of ordinary citizens, finance has become increasingly abstract, impenetrable, and disconnected from their worlds. One of the main reasons for this disconnect is that the powerful self-reinforcing dynamics of the financial system have led to financialization of our economy. Finance has assumed an increasingly disproportionate share of the GDP,6 and its rise has led to a gradual disconnect of the financial sector from the real economy. Rather than producing items of sustainable value for society, the financial services sector has created ever more artificial financial instruments supported by growing household credit—particularly residential mortgages—whose main purpose was to generate fees for the institutions that issued them. This dynamic greatly contributed to the financial crisis, which triggered a systemic breakdown that almost led to a collapse of the global economic system.

Finance has also been one of the key drivers of the growing wealth gap and inequality. While extreme global poverty has consistently fallen over the past decades to the lowest levels ever, the wealth gap has widened significantly. It is now at an all-time high and set to increase further: Today eighty people hold the same amount of wealth as the world’s 3.6 billion poorest, and the combined wealth of the richest 1 percent will soon overtake that of the other 99 percent.7 Many in this group of super-elites are financiers. This development has been exacerbated by the fact that the wealthy can capitalize on returns on ownership rather than solely on labor, a practice known as “rent-seeking.” In other words, they can let their money work for them, and over time these investments yield a higher rate of return than the economy’s rate of growth. In contrast, salaries derived from labor don’t rise as quickly as the returns on capital.8

The opportunity gap has also increased. Rather than perfect competition, our system creates superstars—or superhubs—and amplifies their rewards in a reinforcing feedback loop where the winners of the competition receive the means to win further competitions, so that all but a few competitors are eliminated.9 Tight interpersonal networks contribute to the unequal access to opportunities, and—as a consequence—people lose trust in the system. Yet, cooperation and trust are part of the social contract that binds us together.10 Unequal societies function less well as people’s willingness to cooperate declines. The wealthy want to protect their wealth and use their political connections to do so, while the rest fight for a larger share of the pie. The interests of the 99 percent conflict with those of the 1 percent. Moreover, the interests of those within the 1 percent begin to clash, because as elites grow bigger, they increasingly compete with each other. Ideological polarization leads to fragmentation and instability, as also evidenced in growing political disruption in many regions of the world.