Tuesday, October 14, 2008

On financial crisis and collaboration

A New Scientist article (The blunders that led to the catastrophe) made yet another attempt to ascribe cause to the global financial crisis.

This analysis focused on risk modellers within the financial industry, and the extent to which they:
- did not attempt to capture sufficient historical data in their models;
- did not model the interaction of disparate risk factors;
- did not successfully model problematic or new products, which have short histories.
Of course, the current situation is the confluence of quite a number of causes besides this.

A point late in the article caught my eye:
"Capturing the degree to which bank fortunes are interconnected, and how this feeds market prices and liquidity, has become much more important as banks and other financial institutions have come to rely on loans from each other and from large investors rather than on customer deposits."

The transaction relationships between banks drive liquidity, and also supercharged the crisis. The closer they work together, the greater the rewards, but also the greater the risks at times like this.

At the government level, there may also be moves afoot. Bretton Woods in 1947 was a meeting in the aftermath of crisis (the war) of a group of like-minded nations, the Alliesthat formulated many fundaments of the international financial system we have today. (Inter alia, it set the US dollar as the internal trade currency, and thereby allowed the US to export its inflation whenever it printed money.) There have been recent calls for a modern-day equivalent of this conference, to realign - if not 'reform' - the global financial system.

Governments around the world propping up financial institutions, absorbing them, part-nationalising them... what could this could this new era of international collaboration bring? Not quite Marx's transformation of capitalism into socialism (apart from all else, aggregate capital has not yet run out of lebensraum). Not quite a mechanism for addressing global warming (money talks, environment sucks). But ideologies have taken quite a battering in recent times. If one locates modern-day class struggle in the nexus between capital and government, then labour is set to flex its muscle anew.

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