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I have been thinking about this word.

Daily I hear about how the “markets” will react to what the European Central Bank or Federal Reserve is or is not doing to stem the latest and continuing fiscal crisis through monetary policy. Apart from the fact that such monetary solutions are now deficient I am unsure who these “markets” are. Do they have a homogenous interest or are they a multitude of differing interests? If the latter, are policymakers trying to please only a few, perhaps the more political or economically influential? If so, who are they? If interests are varied, how can you please them all and why try? The media never answers these and other questions. In their defense the human brain can only get the head around a certain number of variations before it all becomes gray matter. Nonetheless, this simplification and distortion has a huge impact on economic perception and policy.

It is no different when it comes to terrorism. I often think of Al Qaeda as the doctor’s equivalent of allergies or asthma. You are having trouble breathing and you know its not COPD. You are not sure of the cause and neither is the doctor, so he or she says that you probably have asthma or an allergy. Asthma and allergies are real and identifiable, but is it beneficial to classify that which is unknown under one title just for convenience. There is a fair amount of such aggregation in medicine. Terrorism is no different. Al Qaeda is such a bogeyman. Clearly there are known elements of Al Qaeda and the nuances of it in different countries are known to intelligence officials. Nonetheless when a terrorist event is in doubt classifying it as Al Qaeda is easier. By aggregating even a disaggregated but linked network, it commands more attention than a few splinter separatists, nationalists, criminals, acting locally for local reasons. Even in a connected world, size of problem matters if attention is to be commanded and sustained.

I recently came across a Supply Chain financial study that is being undertaken by Rainforest Alliance a non-profit (rainforest-alliance.org) that promotes sustainable agriculture, forestry, and eco-tourism through certification of consumer produce of companies that have adopted auditable sustainable policies. They work with the Forest Stewardship Council. The study that they are doing with CitiFoundation, financial institutions and development organization aims to enhance financing of the supply chains that are sustainable. They should be commended for thinking outside the NGO box and involving for-profit entities in sustainability problem-solving. While the study is at a formative stage it thus far seems to be viewing the issue from a financial institution’s point of view: aggregation. Financial institutions need scale and administrative efficiency to creat a viable product beyond micro-finance and micro-insurance. They prefer turnkey operations through a reliable group that can verify, audit and organize the non-financial solutions to the problem. Accordingly, cooperatives and distributors become the likely customer rather than a subsistence farmer. There are economic benefits to this, but there is also a social cost. There are socio-economic and health benefits to development, but development already implies that someone wishes to be developed. They are often asked later in a study if at all. The study groups recognizes that local buy-in is an issue, as this is a top down rather than bottom up project. Climate change is an aggregated problem often missed by someone just trying to feed their family. There may be ways to do both which could be positive development, but even positive development can alter a culture. Not everyone wishes to be aggregated.

Insurance is another example of aggregation. The law of large numbers is at the heart of it. The premise is risk is economically transferable by aggregating a large volume of homogenous risks. Individuals or businesses that do not have the financial resources to self-insure can pay a relatively nominal premium and be covered for certain fortuitous events that befall them. A few decades ago larger companies realized that they could insure their own risks and get a tax deduction by forming captives. More recently protected cell companies or risk retention groups have also been employed. Insureds realized that if they organized into larger groups through associations or purchasing groups they would have more leverage to obtain better terms from insurers. The ongoing reform of the US healthcare system, being all about insurance, is all about aggregation. The Supreme Court pretended not to understand this. Health insurers and hospitals are aggregating (merging) to reduce the leverage of health exchanges. To big to fail is not the mantra here. The wrinkle, at least as far as healthcare in the US is concerned, is that the supply of doctors is not aggregating as fast as the demand. Some are folding into hospital practice to be sustainable. Others may decide they don’t want to participate in the system (especially Medicare). Then what? They are the content in a field of distributors.

I spent most of my career as a corporate insurance lawyer. I have never believed in the law of large numbers outside of catastrophes. Some risks are truly better than others. Insurers try to find and retain these risks. Policyholders tend to stay with the same insurer and insurers know this. Increasingly computer analytics are being used to find these risks. In some sense this is an aggregation, but one that I believe will ultimately lead to disaggregation. Analytics can be used by the consumer and eventually will. At some point, I think insurers will be aggregated into mere capital companies and maybe absorbed by banks (although there are major regulatory and operational roadblocks at present). Banks of course are the ultimate aggregators. They pay you no interest on the money they borrow from you on deposit all the while not lending to viable businesses and threatening the financial well-being of countries through their trading platforms.

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