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.

World: The structure of capital, part 1: demutualisation

I'm reminded of my thesis work in economics. The topic was demutualisation, but it threatened to blow out, because there was a very interesting strand to chase down.

The most successful organisational structure, from the point of view of capital, is the joint-stock company. It's unparalled in its success in accumulation, that is, raising more capital. In this sense, profit distribution can be seen as the bait, a necessary cost of accumulation. Some might call this view a little topsy-turvy - isn't the prime aim of capital agglomerations to generate profit? Hmm, it's all a matter of perspective.

Mutual organisations were largely formed in the 19th century, for particular purposes - largely social and benevolent. Over the latter half of the 20th century (in particular) there was a great rush of demutualisation for a number of reasons. The main two that I saw were: managerial bias in favour of joint stock companies (in this "managerial" category I also include corporate advisors); and a far greater ability to raise capital - particularly through share issues.


That was largely my thesis. The deviant strand was an interest in the changing structure of capital formation over time: the forces involved, the mechanisms, and in particular the implications. There's a lifetime of research in this, and I still have some ambitions.


One important aspect that cannot escape me is the control of these capitals. This control is shared between managers and shareholders. Large shareholdings are sometimes favoured, in that their degree of influence provides clarity. Rupert Murdoch, for example. This clarity can also be achieved by consistent managerial vision. But in the competitive world, this consistency is seldom achieved, as managers change tack, absorb fads, try something different to get that competitive edge.

At this time and this place, I'm just ruminating. Next up will be a countervailing, almost contradictory perspective, on the rise of superannuation funds.

World: Ownership: you think they’re providing a service; that’s not what they think

A survey conducted by the Australia Institute made an unexpected discovery: going by what the carers themselves thought, childcare in corporate-owned centres was significantly lower quality than in other forms of childcare.

The study, wanted to “probe the views of child-care workers generally on the quality of care.
“But as the responses came in the differences were striking and could not be ignored”, said Institute director Clive Hamilton.

If you think this is all pretty obvious, hear me out and you may be surprised.

The Institute surveyed 578 workers in three general types of childcare: community-owned and run, privately owned (independent) centres, and ones that were owned by corporations, who typically ran a number of centres and were listed on the stock exchange. The general breakdown of attendance in Australia of children who go to childcare is: 30% to non-profit centres; 45% to independent private centres, and 25% to corporate chains.

Responses include:
Is there enough time to develop relationships with individual children? Responses were positive for:
54% in non-profit centres
49% in private centres
25% in corporate centres

Would you avoid sending your own children to such a centre (because of quality concerns)?
4% in non-profit centres
6% in private centres
21% in corporate centres

Does your centre hire more than the regulatory minimum staff?
40% (approx) in non-profit and private centres
14% in corporate centres

The last is telling because studies in the past have consistently shown a direct correlation between quality of care and number of carers.

The margins are similar for most questions, with corporate centres coming off significantly worse, and private centres slightly worse than community-owned centres.

It’s to be expected that when a service is run wholly for the good of the community, the community is the focus and the service is better. However, this also suggests that where profit is involved, the results are only slightly worse, because the owners are closer to the action – typically they will run the centre. Where ownership is entirely divorced from management, the service is significantly worse.

So in general, the motivation for supplying a service makes a difference. But when the managers are (legally) obliged to serve someone else’s profit requirements rather than their own, the service is significantly worse. I guess managers are more willing to sacrifice a little of the profit for the sake of professionalism, a better service, because they're closer to the ground, or somesuch.

That is, of course, a strong feature of the evolution of capitalism: the increasing divorce of ownership from management.

The biggest implication for today is regarding the fad for privatisation of government services. If you care about the service sufficiently, don’t privatise: the service will worsen.



A small diversion
This has interesting applications – if a few years late – for my area of postgraduate study, demutualisation. That is, where a non-profit organisation has transformed into a joint-stock – and thus profit-oriented – company. NRMA, St George Bank, AMP, etc. – most large member-owned organisations in Australia have gone down that route. Typically, the move is pushed entirely by management, who are concerned to improve the ability to raise further capital (for expansion, takeovers, or protection from takeover). I suggest that when a mutual organisation gets large enough, management and ownership are sufficiently divorced that the quality of service is no longer on a par with community-based organisations, with the added detractor that managers do not get the same level of steerage that joint-stock owners give, simply because the ownership is so dispersed. Managers managing for their own ends. With joint-stock companies, there are usually large enough agglomerations of shareholdings that institutions – typically – steer the boat. Note that when St George privatised, they added a sunset clause to ensure that in the first few years, no institution was allowed to own a significant shareholding. It gave the managers a few more years in the sun to better raise capital, without the interference of pesky owners. Never forget that managers and owners have divergent interests.