Problems with the Connectiveness

By Fester

Thomas Barnett made a name for himself by arguing that the overriding geo-strategic imperative for the next two generations would be to create a massively interconnected globe and a common minimal rule set.  He theorized that the new rule set would allow strong members of the Core to coerce and invade the Gap for their own good as well as for positive global externalities. 

He then theorized that mutual interconnectedness would lead to a positive feedback loop of market state creation and Gap areas plugging into the Core via Core based System Administration forces.  Connectiveness is his Holy Grail. 

Daniel Gross over at Slate has a very interesting column on the problems of connectiveness:

In the entire continent of Africa, whose banks don't stray too far, I count just three (in Egypt). We haven't heard much about bailouts in Central America, where Starbucks has no presence. South America's banks may be buckling, but they haven't broken. Argentina, formerly a financial basketcase, and now a pocket of relative strength, has just one store. Brazil, with a population of nearly 200 million, has a mere 14. Italy hasn't suffered any major bank failures, in part because its banking sector isn't very active on the international scene. The number of Starbucks there? Zero. And the small countries of Northern Europe, whose banking systems have been largely spared, are largely Starbucks free (there are two in Denmark, three in the Netherlands, and none in the Scandinavian trio of Sweden, Finland, and Norway).

My tentative theory: having a significant Starbucks' presence is a pretty significant indicator of the degree of connectedness to the form of highly caffeinated, free-spending capitalism that got us into this mess. It's also a sign of a culture's willingness to abandon traditional norms and ways of doing business (virtually all the countries in which Starbucks has established beachheads have their own venerable coffeehouse traditions) in favor of fast-moving American ones.

He goes on for a while that the best predictor of serious financial trouble is the degree of connectedness to the Anglo-American financial systems. The big problem with this theory is Canada has numerous Starbucks, but due to effective regulation, it does not have a significant liquidity or deleveraging problem right now.

The interconnectivity of the financial system allows for far higher degrees of damage from mutually reinforcing and reverbating shocks. Problems from California, Arizona, Nevada, and Florida have taken down Iceland, and is forcing the IMF to consider mass bail-outs of Eastern and Central Europe. Infections can spread very quickly.

One of the better defenses against the financial crisis has been disconnecting. Countries that have not bought significant numbers of mortgage backed securities and derivatives of those securities have gotten out of this round of the crisis far easier.

Comments

[Klaus]

Can't vouch for the others, but Denmark certainly has not been spared. Several bank failures. And where's Switzerland in all this?

[Mark]

Though I am far from an expert on this stuff, Switzerland actually seems to present an interesting case (not least because it is arguably the world's most libertarian country). Per this WaPo article last week (http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101402647.html?nav%3Dhcmodule&sub=AR), UBS - which of course was massive, has suffered major investment losses, but is still turning a profit. Its shareholders are pretty much furious with the investments that were made and its reputation is in tatters, but there are no plans for a bailout and it looks like the banks will wind up being fine (they did have to lay off 7000 employees globally, though); Credit Suisse is in a better position than UBS. According to the article, the Swiss central bank has thus far taken no action other than joining in the coordinated reduction of interest rates with other banks - no bailouts or capital injections.

Also interesting is the status of Austrian banks (Austria has many Starbucks despite its many legendary local cafes). So far, Austria has been relatively unaffected by the financial crisis; however, it is facing a potential, separate crisis similar in making to that of Iceland (though not nearly to the extent) because its banks are so heavily invested in loans to borrowers in neighboring countries that are denominated in Swiss francs: http://www.stratfor.com/analysis/20081020_hungary_hungarian_financial_crisis_impact_austrian_banks