Posted on 08/29/2009 6:53:46 AM PDT by BGHater
Companies from US, UK and Australia have the most concentrated financial power.
A recent analysis of the 2007 financial markets of 48 countries has revealed that the world's finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power, and point out the worldwide financial system's vulnerability as it stood on the brink of the current economic crisis.
A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the "backbone" of each country's financial market. These backbones represented the owners of 80 percent of a country's market capital, yet consisted of remarkably few shareholders.
"You start off with these huge national networks that are really big, quite dense," Glattfelder said. “From that you're able to ... unveil the important structure in this original big network. You then realize most of the network isn't at all important."
The most pared-down backbones exist in Anglo-Saxon countries, including the U.S., Australia, and the U.K. Paradoxically; these same countries are considered by economists to have the most widely-held stocks in the world, with ownership of companies tending to be spread out among many investors. But while each American company may link to many owners, Glattfelder and Battiston's analysis found that the owners varied little from stock to stock, meaning that comparatively few hands are holding the reins of the entire market.
“If you would look at this locally, it's always distributed,” Glattfelder said. “If you then look at who is at the end of these links, you find that it's the same guys, [which] is not something you'd expect from the local view.”
Matthew Jackson, an economist from Stanford University in Calif. who studies social and economic networks, said that Glattfelder and Battiston's approach could be used to answer more pointed questions about corporate control and how companies interact.
"It's clear, looking at financial contagion and recent crises, that understanding interrelations between companies and holdings is very important in the future,” he said. "Certainly people have some understanding of how large some of these financial institutions in the world are, there's some feeling of how intertwined they are, but there's a big difference between having an impression and actually having ... more explicit numbers to put behind it."
Based on their analysis, Glattfelder and Battiston identified the ten investment entities who are “big fish” in the most countries. The biggest fish was the Capital Group Companies, with major stakes in 36 of the 48 countries studied. In identifying these major players, the physicists accounted for secondary ownership -- owning stock in companies who then owned stock in another company -- in an attempt to quantify the potential control a given agent might have in a market.
The results raise questions of where and when a company could choose to exert this influence, but Glattfelder and Battiston are reluctant to speculate.
"In this kind of science, complex systems, you're not aiming at making predictions [like] ... where the tennis ball will be at given place in given time," Battiston said. “What you're trying to estimate is … the potential influence that [an investor] has."
Glattfelder added that the internationalism of these powerful companies makes it difficult to gauge their economic influence. "[With] new company structures which are so big and spanning the globe, it's hard to see what they're up to and what they're doing,” he said. Large, sparse networks dominated by a few major companies could also be more vulnerable, he said. "In network speak, if those nodes fail, that has a big effect on the network."
But of course if the mutual funds represent hundreds of thousands of indivudual fund owners, and if the corporations themselves have hundereds of thousands of owners of their shares...
Our system is so large, everyone is scratching his head trying to figure out what is going on.
Suppose, for example, that we discovered CitiCorp controls vast stretches of the economy. OK, they have 300,000 employees at that place. So who exactly is in charge? It doesn’t seem like the officially designated top management has a clue about half of what goes on there. The stockholders? They know nothing.
In a word: DUH.
Companies from US, UK and Australia have the most concentrated financial power.The key to keeping a tailored suit looking nice is to not sleep in it.
Part of the blame for the recent bubble goes to physicists. Banks would hire physicists who knew nothing about the market, these guys would create complicated "risk" models no one else understood but that predicted a "1 in 1,000,000,000,000,000" chance of the crash we saw or whatever, and traders would rely on the models and take ever-increasing risk since they were created by "scientists."
I have way more respect for physics as a real science than I have for finance, but that doesn't mean physicists know anything about finance.
The “value” of an equity, in an efficient market
is defined precisely as
half the money thinking it will go up
half the money thinking it will go down
the people pushing the money around are not stupid
but the decision paradigm they use may be “not obvious”
It's the investment companies that vote those shares.
No kidding - but they represent thousands of owners - that is the premise of a mutual fund. This analysis focuses on a concentration of ownership which is a superficial view.
The stock market reminds me of the Army in World War II. They put every available man in the Army, and then were surprised to discover that half the Army was below average in intelligence.
Well, somebody must be buying when the smart guys are selling!
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