Specific Crisis Indicators

Organizational size is a broad indicator.

There are other indicators more specific to a particular time and organizational or policy space.

Prior to the most recent liquidity crisis, the subprime rate fell below the prime rate, for example. The rate inversion was a very clear signal of crisis within the specific time and organizational space.

The space in which capital was organized for application was both consolidating and unregulated. Combined with the timing of the rate inversion, it was easy to see a big crisis of liquidity coming. For the policy makers and analysts in control, however, the inversion was being considered a positive signal, inferring confirmation of the tax-cut hypothesis. Inferring a negative signal did not fit the hypothetical effect in time and organizational/policy space.

Financing the Bush tax cuts with a surplus of Chinese dollars was a neo-conservative policy product that did not fit America at the time given the organizational/policy space. America was primed for strong economic growth.

A budget surplus and a strong dollar, however, resists China's growth and support for the price of commodities which were key to precipitating The Great Recession and development of a financially interdependant global economy that is too big to fail.

Instead of achieving a high rate of growth, the Bush tax cuts achieved an economic contraction of monumental proportion. Consolidated corporates can now consolidate even more, gaining even more command and control over capital investment. The cyclical consolidation is a specific signal in the space of capital investment. The Chinese economy is not threatended by the possibility of a more pluralistic American economy that includes increased manufacturing jobs.

The best-and-brightest Ivy League elite were, and still are, in control of this policy space, not the American people--a highly specific indicator of crisis in political-economic time and policy space.

At the time of the Bush administration, Alan Greenspan, Chairman of the Federal Reserve, considered the budget surpluses to be too high. The policy space was then fashioned to fit what, at that time, was touted to be a mandate for neo-conservative economic policy and programs. It was a very specific indicator of crisis.

Keep in mind that the Chinese dollar surplus was the direct result of an economy-of-scale model of efficiency. Specifically, the Wal-Mart model combined with consolidation and deregulation of the financial sector. The net effect has been to drive commodity prices up (exporting our raw materials) and labor costs down (importing finished products), organizing a "global economy." The result is a high margin of profit and capital formation without growth.

The time, however, is now for a distribution on that accumulation that benefits the American people. It is an undubious benefit that goes well beyond "always the lowest prices" that supports the lowest possible wages and the highest Wall Street salaries.

Presently, as we move forward with a very clearly disconfirmed neo-conservative economic hypothesis, having been very clearly and specifically indicated with a massive liquidity crisis and unemployment, consideration of financial reform occupies the organizational/policy space toward full liquidity and full employment, not just a means of keeping Wall Street safely rich without economic growth.

Crisis Indicators: Organizational Size

Much of the Senate's investigation into the role investment banks had in causing The Great Recession is to understand why they were short on their long positions.

Why, for example, did financial firms not simply sell their long positions rather than buy CDO's on the RMBS's to reduce the risk?

Either way, selling long or short, indicates a high level of risk, but shorting the economy--providing a disconnect, a timing differential, between the risk and the realization of that risk--locks in a larger profit than the zero-sum on the long position alone. The large short position is not to just simply hedge the risk, but to cause it.

Large investment banks, then, deliberately caused economic crisis to benefit from timing the trend by causing it.

It is an illegal manipulation of markets (rigging the market) to effect an equally illegitimate gain in zero-sum. The big short transactions incurred a very high risk of liability (a conflict of interest) that the banks consider an economy-of-scale efficiency that facilitates economic growth by "making markets."

A firm that goes long gives support, going short gives resistance. Going both long and short, especially operating with capital on an economy of scale, manipulates the market to fit the determined level of proprietary risk--none! The "free market" is effectively not operational and all that is left is the gamma risk.

Senator Levin, Subcommittee Chairman on Governmental Ivestigations, examining the specific case of Goldman Sachs, is incorrect to say that the financial crisis was not the result of "big size, but the big short."

Long or short, it is the size of the firms and their economy-of-scale transactions that give them the power, the reward, of systemic risk with limited or no liability. Organizational size is the source of the big profits (without growth). It provides the magnifier effect that commands trends and their sudden reversal in the exculpatory guise of undirected, cyclical trending. Since that trending is falsely attributed to the dynamics of free-market economics, and thus the need to hedge the risk of fluctuation, there is always the opportunity to cause the direction of the trend (the risk) with a very limited liability, if you are big enough.

Firms like Goldman Sachs defend their conduct as playing the game of freedom according to the rules of the game. Freedom reduces to the utility of pursuing one's self-interest. No one should be surprised, and it is no crime, to win the game in zero-sum. In fact, it is the moral good because it is the strength, the motive, to expand the pie and provide for the general welfare.

Firms like Goldman Sachs are not providing capital, they are accumulating it to a detriment. That detriment not only empirically indicates a measure of liability, but the probability of crisis. If allowed to continue doing business with a model of organized consolidation, which includes a collusively complex counterparty interdependence, the detriment and the risk of liquidity crisis is conserved, not reduced.

Being able to manipulate on a scale that causes systemic risk (and the huge profits we see big banks reaping from it) is a function of organizational size, not how ethical they are. As far as they are concerned, making as much as you can as quick as you can is the right thing to do.

In a free and unconsolidated marketplace, the level of ethical intelligence is sufficient but not necessary. People are not likely to do business with firms that cannot be trusted, unless they have to.

A genuine free market does not rely on an abstract moral intelligence, but a practical intelligence in a systematic environment that "demands" trustworthiness to survive the market in one's self-interest.

A free market freely forgives transgression, maintaining productivity in the fullest capacity. Rather than doing dirty deeds, being grilled before a congressional committee, going home and doing it all over again the next day, the transgressor learns how to survive the marketplace and contributes the desire for profit and power in the form of productive capacity (the alpha-risk distribution of power and profit).

Deconsolidation operationalizes the reduction of freedom to an ethical utility of seeking power and profit into a systemic benefit rather than a constant risk of detriment and deprivation (liquidity crises).

Deconsolidation will cause economic growth quickly and efficiently in pursuit of self-interest. It will be guided by the strength, the virtue, ensured by a high level of alpha-risk distribution rather than insured by the securitized bundling (consolidation) of risk that clearly indicates crisis.

Large banks and investment firms argue, however, that deconsolidation will put America's financial sector at a competitive disadvantage worldwide. Deconsolidation as a measure of financial reform, big banks argue, will inhibit America's ability to grow in a global economy.

Being globally competitive, they argue, requires firms with a large, economy-of-scale efficiency to command the capital necessary for large capital projects.

The argument for consolidation to achieve a competitive advantage is false both nationally and internationally.

Consolidation does not increase competition by reducing risk, it reduces competition and increases systemic risk.

Deconsolidation will increase competition and reduce risk, giving a competitively trustworthy advantage to America's capital markets. Others will follow to gain that advantage as well.

Crisis Indicators: Reducing Risk Without Reducing Growth

We all want to reduce risk. It ensures the probability of marginal benefit over time, but it can also mean ensuring the margin itself in zero-sum with an increased risk of liability-to-the-sum accumulated (increased gamma risk that will likely result in application of government authority).

Increased liability-to-the-sum accumulated (increased probability individuals and organizations can be held liable to a retributive value) is a cumulative risk that indicates crisis. The probable risk that Goldman Sachs would incur a liability to its cumulative benefit, for example, had been steadily accumulating, presenting in the form of high profit with slow growth.

Goldman Sachs is an investment bank. Its job is to form capital ("make markets") to produce growth. Most of what investment banks do, however, in league with hedge funds, is to consolidate industry and markets into economy-of-scale efficiencies touted to increase productivity at lower cost.

What investment banks and hedge funds really do, as was again confirmed with a recessionary trend rivaled only by The Great Depression, is organize the economy to reduce the alpha risk, ensuring the margin of firms in zero-sum. As the economy-of-scale efficiency reduces the alpha risk, the risk of liability increases, along with beta-risk volatility, indicating crisis.

Ensuring the margin in zero-sum virtually eliminates the risk of loss in the form of a constant accumulation of gain over time. It always leads to crisis because expanding the margin does not depend on expanding the pie for distribution, but consolidating it for consumption. The result is both inflation AND unemployment, two attributes that are not supposed to occupy the same space, but are supposed to trade off into inflation OR unemployment.

According to conventional wisdom, business-cycle analysts say recovery from an investment-driven recession takes about five years. The value of the capital formed within that period (inflation and unemployment), and prior, will be cumulatively retributive and liable to the slow growth (the value accumulated). Without a shorter term on the cycle, the liability will be difficult to avoid and, of course, the argument will be made that growth will not occur without increased risk that can only be had by consolidation into an economy of scale.

The recession, then, according to economy-of-scale proponents, produces the means of taking the risk (the consolidation of capital) that effects growth. (The argument is, of course, post hoc because the risk taken by consolidation of capital markets caused The Great Recession.)

Is it possible to reduce risk without reducing growth?

By reducing the gamma risk, it is possible to reduce risk without reducing growth.

Reducing the zero-sum reduction of risk (reducing gamma risk accumulation) is a pro-growth measure. The two variables are coefficient: zero-sum reduction of risk equals the consumption of growth so that the rate of reducing the zero-sum reduction is coefficient to the rate of growth.

When alpha risk is in reduction, the benefit accumulated is slow growth, keeping both inflation and unemployment high. The result is a high-margin whipsaw effect. All but the highest income class is affected by the whipsaw, accumulating the gamma risk.

Health care reform, for example, will support medical costs so that a class of professionals can achieve a sustainable income of reduced alpha risk like insurance and pharmaceuticals operating with an organized economy of scale. Since this will produce a massive accumulation of wealth, and power, that will likely integrate industries and markets within the sector, the risk of general crisis is increased, not reduced, with an economy-of-scale efficiency touted to control the cost.

If the accumulation is by government authority, the liability-to-the-sum accumulated is reduced along with the alpha risk.

Having gained the force and legitimacy of ultimate, legal authority, government "reform" of the health care sector was the ultimate achievement of risk reduction. Replicating that success with financial reform is all but sure with a government authority that favors an economy-of-scale measure of efficiency across all jurisdictional boundaries, both public and private (the Hamiltonian model of political-economy in which power efficiently consolidates into the capable hands of a power elite and guides the wealth of nations toward the general welfare).

Reducing the zero-sum reduction of risk (contrary to the Hamiltonian model--deconsolidating rather than consolidating) reduces the unavoidable gamma risk by distributing it in the form of alpha risk.

Organizing to maximize, rather than minimize, the alpha risk, maximizes growth and reduces systemic risk, reversing the specific indicators of crisis.

Crisis Indicators and Risk Reduction

As financial reform proceeds, the most prominent argument against the Transparency and Accountability Act of 2010 will be that regulation to reduce risk will reduce growth.

Since economic growth requires taking risk, reducing the probable risk through regulatory reform will, by force of the argument, reduce probable growth.

Post hoc as the argument may be, growth will be deliberately slow because deconsolidation is not the object of reform. Failure of firms that are "too big" is the proposed objective which, if allowed, results in deflationary crisis (negative growth).

The proposed reform seems to forget that large, economy-of-scale firms cannot objectively fail "because" they are too big. (We should note here the reason this issue is so complex is because every effort is made to ignore and avoid the obvious.)

The purpose of being "too big" is, of course, to prevent catastrophic failure of these firms in the midst of systemic crises they cause in a too-big-to-fail, economy-of-scale proportion. Since the economy is generally dependant on the survival of these large firms (the objective), not allowing them to fail is considered to be the general welfare.

Senator McConnell's criticsim of the proposed reform is, then, correct: it institutionalizes bailouts which, whether publicly or privately financed, uses an accumulation of capital to support the bad behavior to be discouraged and the detrimental reliance to be avoided. The Senator then correctly challenges proof for what is essentially an illogical argument--solving the problem by supporting it.

The result will be further consolidation, which supports the problem of the economy being at systemic risk to firms organized too big to fail. The proposed reform will conserve the risk-to-growth coefficiency argument that high growth only comes with the ability to take high risk provided by an economy-of-scale efficiency. It will conserve the means of consolidating capital, wealth and power into a self-supporting crisis proportion with the exculpatory appearance of promoting growth with an unavoidable cyclical ontology.

While financial reform as proposed will conserve a false economy-of-scale efficiency, being too big to fail and the unacceptable amount of risk a failure indicates can nevertheless be deconsolidated.

Democrats, however, support the economy-of-scale efficiency hypothesis. It is the primary cost-control measure of the health care reform bill and will be the primary model of efficiency shaping financial reform. The bigger the better; it is an organizational evolution that cannot be stopped and reversed. Instead of fighting it, use it to the public good. Being "too big" is good if it can be controlled to not fail the system (the "institutionalizing" Senator McConnell objects to).

The result then, of course, is a political-economy in a steady-state of gamma risk and an inelastic demand for elits that manage the risk, keeping it from reaching a crtitical, crisis proportion. It is a system always on the brink of disaster--not exactly the model of reform.

The organizational model that accumulates risk will still be fully operational, and the product of that model is, predictably, slow growth. The argument will then follow, post hoc, that government intervention in free markets impedes growth and causes crises. Thus, the reform indicates crisis.

(Regardless, the proposed reform will be pro-cyclical. With the reform, as Senator Dodd points out, or without the reform, recurrent crises will not be prevented.

Whether cyclical crises is preventable is a hypothesis that needs to be positively tested rather than left to the contortions of rhetorical analysis.)

Right-wing conservatives (as opposed to left-wing conservatives who are offering reform) will then argue, post hoc, markets "must be free" to determine (to consolidate) the level of risk (and the indicator of probable crisis) into an economy-of-scale model of efficiency (the coefficiency argument that high risk causes growth, and the distribution that occurs is therefore not a zero-sum liability).

The regulatory "scrutiny" the president refers to that will fail firms that deserve (but are too big) to fail (conserving what is too big to fail and the crises it will cause) is otherwise the alpha risk. It is the kind of risk that, if we want to ontologically indicate what is at risk of failure, should be unfettered.

Alpha risk is to be supported, encouraged, through regulatory reform, not resisted! It is the inherent risk of an unfettered free market that operates without the need for government regulation. It comes with deconsolidation of economy-of-scale modeling.

The best way to ensure transparency and accountability is to ensure the functional efficiency of unfettered alpha risk.

Encouraging alpha risk maximizes transparency by failing firms that are not transparent. The most trustworthy and accountable firms remain.
Accountability (the alpha risk) is then the risk that both does and should survive the marketplace.

At the same time, alpha risk maximizes economic growth. Success replicates itself and that success is the accountability that ensuring a pluralistic organizational model affords. Replicaton of that success (conservation of risk in the alpha form) is dependant on practical modeling.

It is a mistake, if not a malfeasance, to resist proliferation of the alpha risk in the name of eliminating all risk. By its proliferation, the "risk of liability" is reduced to success or failure in the marketplace rather than success or failure in a court of law or any other form of government intervention.

Instead of eliminating risk, whether public or private, alpha risk should be maximized.

Maximizing alpha risk minimizes the need for government--it minimizes an accumulation of gamma risk into a crisis proportion. It not only allows for the freedom to succeed by removing barriers to entry, but the freedom to fail by eliminating what is "too big" to fail, not "the risk" of failure.

True that a multiplicity of small firms will not take the big risk of a big firm because they literally cannot afford it--they cannot afford to fail (a coefficient that demands an efficiency far in excess of the bigger firm which is likely to be much more costly and abusive because it can afford it). The smaller risk of multiple firms is equivalent to the big risk of fewer firms except the small firms cannot afford to over-leverage into a crisis proportion (the crisis indicator) because the risk, and the crisis, is limited to that one particular firm--it is limited to non-systemic alpha risk.

So, which kind of risk do we want...the big risk or the small risk? Just like health care reform, we will be stuck with the false efficiency of an economy-of-scale for financial reform too. (The needle on the crisis-indicator meter just broke!)

Maximizing alpha risk through deconsolidation is the prudential oversight needed to achieve a form of government that governs least, minimizing the probability that risk will accumulate into the form of absolute power and corruptibility (the gamma risk) whether public or private. (The alpha risk distribution is essentially the ability to say "no" in the marketplace. It is the freedom to fail.)

An economy-of-scale model beneficially reduces alpha risk for firms, but the benefit of "taking" the big risk reduces economic growth. Reduction of both alpha risk and growth (expansion of the marginal benefit to firms) increases the gamma risk in proportion to the accumulation of the benefit. The need for government regulation and intervention (a distribution by command rather than market demand, or the risk "taken") increases, like we see now with the unpopular bailout of large, financial institutions and the call for a re-established regulatory authority that was dis-established to reduce the need for government.

(Note that the risk "taken" in the latest crisis has cleverly kept the benefit accumulated, rather than distributed, on command. The result will be a longer recessionary trend with a "jobless" recovery, keeping markets sufficiently inefficient to sustain the full marginal benefit. The inefficiency is the lack of alpha risk distribution that requires a distribution occur on the accumulated benefit in command form--the need for government. If the distribution does not come from the accumulated benefit, the result is a large budget deficit and stagflation, like we have now. The argument will then be falsely made that the deficit is caused by too much government which, in turn, results in slow growth.)

Again, the conservative argument for less government is post hoc.

According to conservatives, the absence of government in the marketplace causes less need for government (the argument is fallaciously "after this, therefore because of this"). It falsely argues a temporal sequence to indicate a causal relationship.

In the current case, for example, less government in the private sector caused the need for government in a measurably large, multi-trillion dollar proportion (the TARP plus the budget deficit). The variable in which "the need for government" depends (the dependant variable) is the degree of economy-of-scale. How consolidated the marketplace is (the gamma risk accumulation) determines the degree of (the need for) government presence (the gamma risk distribution).

Reducing government is dependant, therefore, on the gamma risk distribution (financial reform) being limited to largely ensuring maximum distribution of the alpha risk, or deconsolidation of the marketplace (what too-big-to-fail, economy-of-scale organizations do not want).

Starting with an unconsolidated financial sector, a model for maximizing investment in a disinflationary, pluralistic model of growth (full employment with low inflation and a high level of direct, alpha-risk accountability that renders less need for government) is entirely possible. It is what the ground-swell sentiment for change is calling for. Not a revanch of post-depression regulations, but a modality shift.

Instead of accepting the inflationary pressure of a highly restricted supply coefficient with a slow growth pattern that proliferates the economy-of-scale model of efficiency, events have transpired to support confirmation of an alternative hypothesis to the conservative model. It is a tired model being stubbornly applied despite miserable, overwhelming failure to promote the general welfare.

For example, mark-up on the current reform legislation entails derivative markets. It is a realm of finance that few people, including legislators and regulators, fully understand. This, then, is where the conservative model will be most fully supported and stubbornly applied--through swaps and futures. It is an area of the financial market that has a high capital requirement, defining an exclusive domain for large firms to apply an economy-of-scale efficiency inimical to the interests of Main Street.

Acting with minimal alpha risk and maximum gamma risk, accumulation of capital in the futures domain, with a variety of innovatively obscure investment vehicles and a regulatory arbitrage to hide the micro motive toward a macro effect, indicates low growth and impending crisis.

Innovative proliferation of "risk-transfer products" instead of investment in alpha risk distribution will surely trend into crisis. Accumulation of capital into derivatives will not support the value of its previous repository of toxic waste. This will be very damaging to the economy and must be hidden in some way despite the effort to make it all more transparent and accountable.

Even though derivative markets may be rendered more visible, it will be a means of influence that is more visibly not understood. The effect--manipulation of markets and trends with a highly limited risk of liability (accountability) to the consequences--will be the same even after the reform.

(All the means of risk transfer may be more visible, but we won't know what we're looking at until it's too late and the deed is done, just like last time. There will, of course, be those who can read the signs without being on the inside of the trade (the risk transfer), but they will be dismissed as paranoid crackpots obsessed with conspiracy theories...just like last time.)

Popular sentiment for a practical deconsolidation of power is highly salient because the benefit of the economy-of-scale model is highly exclusive. It is equally clear that accountability proportionally diminishes with the accumulation of wealth in the form of power.

It is clear that power does not trickle-down. It consolidates. It achieves an economy of scale. The risk of liability to the reward is so diminished (so consolidated) that bad behavior is reinforced and good behavior is not fit to survive, trading the alpha risk for gamma risk ("risk-transfer" being the "product").

Advocates of too-big-to-fail, economy-of-scale efficiencies argue that the bigger the firm, the more risk can be taken. Contrary to these advocates, and proponents of reform, however, the accumulation of risk that results is not the problem to be managed, it is the size of the firms.

Supposedly, unfettered consolidation of industry and markets (falsely refered to as free-market economics) allows for a level of risk to effect a level of economic innovation and growth (achieving a greater coefficiency) than the model of pluralism (free-market economics) will allow.

It turns out, however, that economy-of-scale efficiencies accrue massive systemic risk and unemployment (slow-to-no growth). The touted coefficiency is apparently to be found elsewhere.

It is no coincidence that equities are getting support as we proceed with a jobless recovery. This is not a function of capital formation, but a zero-sum coefficiency that was very clearly indicated well before the current crisis.

When capital was being overleveraged in the name of capital formation to achieve a high level of growth and employment, but resulted in negative growth and unemployment, crisis was being indicated by the level of risk. The gamma risk (the need for government intervention and the lack of free market economics), for example, finally reached a critical, crisis proportion. Bankers and government officials met on a weekend in the middle of the night to devise an ad hoc plan to allay what was, by mainstream, Ivy-League analyses, a high level of risk that did not exist.

Even though the risk was being hidden in dark-market investment vehicles and schemes does not mean it was not detectable.

Deniable but not undetectable, the perpetrators of this enormous fraud knew about the high level of accumulated risk because they were executing it, and the victims lost value in zero-sum.

Unemployment has added value to equities that were sold off in a panic to institutional investors. That value will be retailed back to small investors at a profit looking to recoup their losses on these and other assests lost (sold off) in the recessionary trend. When added to the value of borrowing at near zero rates to buy treasuries to be retailed at three-times the rate, banks continue to gain value at the expense of smaller victims who remain to pay the public debt being bought and sold by the banks to "finance" it. The zero-sum detriment side to the "trade" of "risk-transfer products" entails a gamma risk and a lack of public trust at a level of unsustainably monumental proportion.

Despite the inherent, unavoidable accumulation of gamma risk, the Hamiltonian model is well conserved and fully operational as long as the accumulated benefit is not the source of the distribution. The means of accomplishing this undergoes innovation culminating, along with the over-accumulation of gamma risk, in regulatory reform.

The risk to conserving the current practical model is to ensure maximum alpha-risk distribution financed through a progressive tax code (reorganizing the model for pluralism financed from the accumulated benefit in a disinflationary, rather than a deflationary or inflationary, manner).

The progressive code we have now, with a public debt progressing exponentially beyond revenues, serves to conserve the problem toward application of a solution. The risk of inflation is extremely high because the distribution is coming from a budget deficit funded from money borrowed from the accumulated benefit.

It's the dog chasing its tail. The public expenditure, with interest, overruns the ability to pay the debt without either inflating or deflating the economy.
(Inflation will be the policy preference because it has a distributive quality while still accumulating gamma risk.)

The gamma risk, instead of being reduced, just keeps accumulating to a crisis proportion. That proportion, of course, anchors the mission of reform to limiting the gamma risk to a non-crisis proportion.

If the choice is adversely inflation or deflation, the risk of crisis is very clearly indicated for the near and long term, especially if we reform the financial system by conserving accumulation of risk organized into economy-of-scale efficiencies, or too big to fail, which is what the $50 billion emergency fund is for.

Crisis Indicators and Financial Regulatory Reform

Regulatory reform of financial markets is proposed to indicate the probability of crisis.

Big banks shorting the markets they are "making" is a clear signal of impending crisis, but it cannot be in the dark. If the market signals are privileged (legally private--proprietary--information), then it is not a free market.

The lack of a free market creates a coefficiency of government regulation and regulatory capture to maintain a legitimately high risk/reward to liability ratio.

Going short was an easy call going into the latest liquidity crisis. If our too-big-to-fail banks, with their economy-of-scale efficiency to raise capital for investment to achieve economic growth and full employment, were leveraging the capital into counter-party arbitrage (selling capital instruments to each other) and not growth, the legitimate use (the utilitarian legitimacy) of the capital was false. The growth--the financial support--was not there to support the collateral on the debt. The result was easily predictable--easily engineered with consolidation of industry and markets.

Efficiency of the allowed, unregulated, integration of markets and accumulation of the capital was a fraud. Its legitimacy was as synthetic as the CDO's it produced instead of economic growth.

Since consolidation produced CDO's and not growth, shorting the entire economy with trillions of dollars of overleveraged capital (a private-sector expansion of the money supply that resulted in inflation without growth but attributed to too much government spending) was an easy call because that is what this "system" of finance is designed to do.

Consolidation of wealth, and power, is the measurable liability of the fraud. The value of capital converted into private property is now being processed legislatively and judicially into a legitimate consolidation of that value.

Regulatory reform functions to confirm consolidation of the value, reduce the risk of liability (the retributive value), and validate the too-big-to-fail (economy-of-scale) organizational model that "makes" the systemic risk. Surviving that risk (being too big to fail) is, then, the model of success instead of a free-market ontological legitimacy that does not require all that government support.

When large, integrated financial firms describe their activity as beneficially "making" markets, they are in fact making (rigging) the market for their command and control in the name of free-market economics. It is a systematic, organized consolidation of industry and markets that is generally inimical to a free society and is to be prevented by first ensuring financial markets be free and un-consolidated.

An unconsolidated financial sector will maximize probable investment in a disinflationary, pluralistic model of growth. Without it, instead of a free market we have a highly restricted supply as result of a slow-growth (unemployment) pattern of consolidation, causing inflationary pressure that creates the economy-of-scale model of efficiency.

The efficiency is, then, post hoc (the fallacy of arguing, "after this, therefore because of this"). It is a false efficiency-argument because the efficiency depends on the degree of allowable consolidation (as in "we need efficiency therefore we consolidate," rather than, "we consolidate therefore we need efficiency").

Consolidation of industry and markets immediately indicates a high level of accumulated risk, not its reduction. It is a highly visible indicator of crisis (along with being illogical).

The best way to "ensure big banks pay for the mistakes they make and not taxpayers" is to ensure they are not too big. They must be de-consolidated so that the liability is equivalent to the risk as it is in a free-and-unconsolidated marketplace without all that need for government regulation.

Risk Coefficients and Crisis Indicators: Organizing Risk With Liability

Financial reform proponents argue for an early warning mechanism.

Since crises cannot be prevented, being the result of an organized ontology and the business cycle, warning signals, according to Democratic lawmakers, need to be incorporated into the practical model that indicate a probable-risk coefficiency. When the risk is high, measures will be taken to reduce that risk, conserving the model that accumulates it. Its efficiency is then maximized with minimal risk.

The coefficiency is descriptively a command and control, organizational teleology. However, it will be disguised as a measure for controlling the exculpatory ontology of an unfettered free-market economics. It will be sold as the means for saving the free market when it is actually minimizing it to favor an economy-of-scale coefficiency that consolidates political and economic power (accumulating risk) into a crisis proportion.

The reform is not designed to diffuse risk, but to keep it consolidated. All the accrued benefits and detriments (the Hamiltonian hierarchy of incentives) are fully conserved and operational, but with a brand new wardrobe.

The intent of reform is to disassociate risk, like systemic risk, with liability. The risk coefficient is designed to limit the liability associated with accumulation of a benefit that, if not the result of a free-market ontology, has a highly probable retributive value.

An accumulated value at very high risk is likely to be retributed if not passed through a legitimacy of due process which the reform is to provide. The process effectively organizes the risk with the liability (a coefficiency) that scores the distribution of rewards and deprivations as legitimately true and final.

The risk, however, accumulates rather than dissipates, and allowing firms to consolidate into organizatins that are too big to fail is prima facie evidence of the crisis to be avoided.

If we really want to organize the risk with liability in order to disincentivize the accumulation of risk because there is no liability, we should ensure a free-market mechanism in priority. That is the change, the reform, we need.

The free market directly sanctions the risk with liability. It is a coefficiency to be supported, not resisted with the current reform being proposed which is to allow for failure without a free-market coefficiency.

Without plurality of industry and markets, allowing for failure is catastrophic because the risk accumulates into an economy of scale, or into a crisis proportion.

Risk is limited to the liability in a free marketplace. If the risk is being accumulated and shifted to the system in the guise of an unavoidable and exculpatory ontology, like we have now, the excess of risk to liability has a crisis coefficiency of 100 percent and indicates the lack of a true and legitimate free-market ontology.

Financial Reform: Support and Resistance Indicators

Analysts discern the practical model being used for the development of public policy by identifying patterns and relative levels of support and resistance.

As the congressional debate proceeds on financial reform following the crisis in 2008, both parties are predictably poised to define the problem as the solution.

Democrats argue their reforms will end the too-big-to-fail organizational ontology that commands government bailouts. The Republican party, in faux opposition, contends proposed reform will "institutionalize government bailouts."

Equity valuations for large banks are getting support because the probability that any reform will end the too-big-to-fail model is virtually none.

While the Republican critique is correct, the party's solution to the problem is to stand in opposition to reform. The overall effect is to support the problem (and the associated equity valuations).

The entire reform process is in a prima facie state of regulatory capture to conserve the economy-of-scale modeling that consolidates wealth and power.

It is no coincidence that Wal Mart, in the midst of the recessionary trend, has now surpassed Exxon-Mobil at the top of the Fortune 500 list of largest companies. Consolidation into economy-of-scale "efficiencies" both precipitates the recessionary trend and validates the value of the efficiency.

As long as the means of consolidation is conserved, subsequent measures to counter its negative effects and support an economic recovery, like a more progressive tax code by letting the Bush tax cuts expire, for example, are rendered ineffective. The recessionary trend (unemployment) and equity values get support while a less accomodative monetary policy is resisted. Cheap money is available to the too-big-to-fail banks through the discount window to finance mergers and acquisitions (the economy of scale efficiency). The problem is supported, the solution is resisted.

A persistent recessionary trend will then be blamed on a progressive code and a value-added tax will be installed to finance the deficit in Hamiltonian fashion (with a regressive tax burden).

Since the tax on the value added is included in the consumer price, the tax increase will be regressive and deflationary (reducing demand), supporting the recessionary trend and the budget deficit while resisting higher interest rates.

The type and strength of support and resistance strongly indicates a persistent stagflationary trend that supports an arbitrage economy with high volatility, expertly engineered to favor firms that are too big to fail and a system of finance designed to generate profits without employment or economic growth.

While the reform debate correctly identifies the problem to be solved as organizational, it critically fails to identify that being "too big" is the determining variable. The practical model in operation is decidely, then, not pluralistic.

If analysts and policymakers rely on the pluralistic model for a predictive utility, the model will predictably fail.

Being organized "too big" will predictably fail the model of pluralism.

Government bailouts are necessary to avoid the catastrophic consequences of conserving the Hamiltonian model in a post industrial society.

The solution is to finance a more pluralistic model, not a more consolidated one.

Spreading the Risk: Managing the Risk Coefficiency

Much of the current discussion for financial reform that precipitates from the current liquidity crisis is about measuring risk.

Since managing risk requires a measurement of it, much of what is risk management is managing the risk coefficiency, or what is the perceived risk and the liability associated with it.

First, it is necessary to identify the source of risk in order to measure the coefficiency of probable reward and possible liability (assets less liabilities, or a fair-market-value-to-book-value differential based on the value of the risk).

For example, if the risk can be identified as "systemic," the liability associated with it can be considered ontologically exculpatory (it is a shared liability). It is possible, then, to share in the reward of the risk without any liability, or not share in the reward but share the liability.

Limiting liability is largley a function of managing the risk coefficiency, or identifying the source of the risk, which determines the divisibility or indivisibility of the liability for the risk taken.

Avoiding the risk does not necessarily avoid liability in the same measure because it is possible to forsee consequential liabilities associated with the risk being avoided. If avoiding risk causes harm, it can then be considered tortious, if not criminal, behavior depending on the source of the risk being avoided.

So, what makes for "the risk?"

The inception of capitalism is marked by the reduction of risk (risk avoidance). So, the implication is that economic activity assumes (takes) risk (the doctrine of "assumed risk"). The liability is equivalent to the risk assumed (the action taken) in the marketplace.

Separating the risk from the liability requires a court of law and a jurisdiction in which to sue. "No taxation without representation" essentially speaks to an assessment of risk based on the expected, probable liability of the king being the source of the risk that determines the value of "taking" the risk, which eventually evolves into "making" the risk (managing the risk coefficiency) as capitalism evolved from feudalism to post-industrial society.

While the corporation was originally a means of spreading the assumed risk, it later developed as an organized means of limiting liability (reponsibility) for the risk along with its probable reduction. (You can't be held liable for the risk if you can blame it on royal fiat, or an uncontrollable--unavoidable--gamma risk.)

Just because you take the risk and fail, or avoid it, does not mean you are not liable for the consequences, especially if you knowingly and willingly assume risk despite the probable consequences. Supposedly it is "necessary," then, to consolidate into large corporate bodies that can afford to assume (to take) the risk (the economy-of-scale ontology).

The best way to reduce risk was, as it is now, to "network the externalities" (to control the probable risk factors). The gamma risk, like the value of your goods or services being determined by royal fiat, was a risk that accumulated into a revolutionary proportion; and the revolution, as Thomas Jefferson surmised, continues long after The Revolutionary War.

Supposedly, economies of scale reduce market risk. If we want a free-market mechanics, it is necessary to not allow for this control of the risk because it requires firms be "too big to fail." It defeats the structural incentive of free-market economics which is, "the risk of failure."

Defeating the free-market model is not the product of an exculpatory ontology. It is a deliberate act of design to knowingly and willingly avoid the alpha risk. While the action deliberately increases beta-risk valuations, it also increases the value of the gamma risk--it increases the need, the demand, for government authority.

If we want to reduce the need for government (the gamma form of the risk), look no further than reducing the deliberate act (increasing the liability) of reducing alpha risk by organizational means of economies of scale.

Instead, however, current financial reform is looking to regulate, rather than eliminate, what empowers the model of consolidated risk and its elite regulators. The action "taken" will empower the too-big-to-fail model with "fail safe" measures because being "too big" is for the purpose of avoiding failure without risk of liability.

Failing safe means that the too-big model is safe from failure, not that the marketplace will be empowered with the risk, and the liability, of failure.

Financial reform being offered will not empower the alpha risk because it will not reduce the purposeful size of organized economic scale to avoid, and accumulate, the risk into a crisis proportion that protects the model from empirical failure (the coefficiency of organizational size to economic success based on an otherwise probable of failure).

So, instead of progressing into an ontological model for managing risk without crises, we regress back to reliance on the gamma-risk ontology of government fiat. (Would Obama and the legislative realignment transform our economy into a model less prone to catastrophic risk? Your "guess" was as good as mine, and the answer is, no!)

The gamma risk is getting support where it needs resistance, and the alpha risk is getting resistance where it needs support. It is the formula for continued cyclical crises that is clearly considered to be a social benefit to be conserved.

As long as the means of surplusing risk and the means of managing it is considered to be a function of managing the risk coefficiency by deliberately (reliably, predictably) causing it, the pent-up demand for an equitable distribution of risk, and power, will eventually propel us forward.

Destiny is no slave to a hard determinism. We can choose to completely progress out of feudalism and the tendency to consolidate power (the risk) with a deliberate, genuine self-determination that spreads the risk with a measurably self-evident coefficiency.

Surplusing the Risk

Economies of scale surplus risk. The too-big-to-fail model avoids the risk of failure in the marketplace and thus limits liability. The risk is accumulated, surplused, for distribution.

The distribution of the surplused risk presents as crises.

A pluralistic model does not surplus risk. It diffuses it. The risk is fully applied rather than avoided. The risk is in full operation to prevent crises with little-or-no need for complex manipulations to avoid it with, as we observe, little success (unless, of course, you are too big to fail).

The liquidity crises that results is a functional, coefficient constant we call the business cycle. The system's failure is really its intended success, and gives an economy of scale its preferred, functional coefficiency.

Horizontal and vertical integration of the financial sector, for example, was argued to be an economy-of-scale efficiency that, along with a favorably progressive tax code, would produce the economic growth to sustain expansion of the mortgage market. While investment in economic growth was offshoring, the investment in sub-prime mortgages was booming. The two events are antithetical and accumulated risk.

The economy-of-scale functioned to "make" the risk (referred to as "making the market" to supply the demand for fixed-income investments) with a structured, hierarchy of incentives that does not allow the market makers to "take" the risk. The result is a huge budget deficit that according to the Hamiltonian model in operation (clearly confirmed with the progressive tax policy) is the responsibility of the non-elite to pay. Having the elite pay the tax bill is a moral hazard because it prevents the wealth from trickling down, which supports the value (the success) of the sub-prime market (risk) that was made.

The success of the Hamiltonian model is economic expansion, not the contraction that has occurred. Since its success is dependant on economic expansion (so that maintaining a class of wealthy elits is not a zero sum), the correlation coefficient is virtually "0."

The constant value of the coefficient is surplused in the form of risk. The accumulation of risk demands government authority to resolve it. Thus, it becomes the gamma risk with the latest example of its management being the current "demand" for financial regulatory reform.

The best way to manage the risk is to ensure a pluralistic coefficiency in priority. That is: recognize the economy-of-scale efficiency is a disconfirmed hypothesis. Instead of supplying the demand for an accumulation of risk, we will be supplying the demand for economic growth and distribution of the risk, otherwise known as "spreading the risk."

Whether it is the health-care sector, the financial sector, the energy sector..., ensuring pluralism, rather than organized consolidation of industry and markets, will provide the coefficiency of growth we are all looking for.

Economies of scale verifiably do not adequately spread the risk.

Pluralistic Coefficiency of Markets

Enlightened self-interest is a term that essentially refers to distribution of risk and liability.

Even absolute monarchs realize they cannot rule without limiting risk and controlling liability.

The easiest way to limit risk and control liability, without the enlightened self-discipline (self-determination) of a free-market pluralism, is to consolidate. King George, for example, prior to the American Revolution, commanded all products from the colonies be shipped directly to England for distribution. This consolidation (centralization) of power not only set the price of tea for consumption, but whatever the King decided the labor was worth to produce it. A "tea party" ensued, and the rest is history.

The King was unreasonably sure of his risk and liability being as absolute as his royal classification. He thought for sure he could control the risk and liability to him by consolidation of the value into his divine authority to govern without consent.

He found out it is a free market afterall (accumulation and distribution of a gamma-risk ontology) and the result of resisting the natural distribution of risk and liability is conflict (accumulation and distribution of a retributive-value ontology).

(The ontology refers to risk and liability that cannot be eliminated or reduced. It can only be managed and/or avoided. The probability it will occur has a coefficiency of 1.)

The probability of risk is coefficiently constant. It is more visible (measureable) if it is allowed to accumulate. It is also possible to then structure a regime of incentives that legitimize the distribution of risk into a probable liability correlative to its accumulation, actuated by the "level of probable risk."

An economy of scale, for example, affords a low level of probable risk. The risk "maker" (actuator of the risk) is not the risk taker. Anyone that tries to compete with the economy of scale is "taking" a big risk. The risk is not likely to be taken (a negative incentive that results in an adverse selection). Thus, the low probable risk, and the level of risk, accumulated and distributed, is coefficiently conserved.

Recent health care legislation, for example, is being sold as an economy-of-scale efficiency. The pluralistic coefficiency is largely reduced to an adverse selection for both insurers and consumers to "spread the risk."

Actually, the risk is being accumulated in a non-pluralistic manner to be managed in a too-big-to-fail capacity.

Insurers will consolidate even more than they already are to absorb the rising cost of health care providers, whose prices are in support, and the increased cost of mandatory coverage. The entire system, both public and private, is a too-big-to-fail economy of scale. It is a non-plurlistic organizational modeling that verifiably consolidates risk into an extreme detriment (transforming a small, beneficially weak force into a big, detrimentally strong force) with minimal accountability of process. It is the problem, not the solution.

Rather than focusing on consolidation as a model that progresses us toward efficiency, let us look at the differential much like our founders did toward a practical coefficiency.

The American Revolution combined and mitigated the positive and negative effects of elitist and pluralist models with a representative form of government. Free-market economics would provide the larger pluralistic aspect to the ultimate and arbitrary power of public authority (the gamma risk).

Without a fully empowered free-market pluralism and, therefore, limited government with a strict constitutional construction, as Jeffersonians argued, the Hamiltonian model of political economy would result in a tyranny from the private sector relying on a false pluralistic legitimacy in which bankers rig the system to favor accumulation and privilege (like we have now). Distribution of power would "determine" from the top down, not the bottom up. Self-determination would be the "privilege" (a coefficient) of accumulated wealth and power and not a pluralistic pursuit endowed by a constitutional constant (a natural right) with "liberty and justice for all" (legitimate distribution of risk and liability).

Jefferson's prescient critique of the Hamiltonian model should sound very familiar. Now, as it was then, the wealthy elite claim that supporting a stable aristocracy in priority, from the top down (like bailing out Wall Street), is the right thing to do. It is the right-wing moral imperative that always trumps the "moral hazards" (adverse structural incentives) of welfare whether it be for the rich or the poor. By this logic, however, it is only a hazard for the non-elite, categorically defined by measure (the coefficient constant) of income.

The moral hazard refers to what economists call, the hierarchy of incentives. It essentially refers to the distribution of risk and liability that is the power structure. The distribution of power is euphemistically referred to as incentives. The structuring of these incentives suggests an ontology that if defied creates a moral hazard, with the inference being, of course, that the hierarchy is naturally moral and adherence is categorically imperative. The "given" structure is then neither immoral or a hazard. It is also not surprising, then, that economic predictions are often full of surprises and uninetended consequences of an exculpatory, ontological import.

If, for example, by means of a cyclical crisis, people find the value of their debt to be more than their assets (like we have now), the differential then has an adverse incentive. Having a declining income enslaved to a rising value of debt has a non-productive incentive, contrary to the value of the moral imperative with a coefficiency of economic expansion.

Also consider that a recessionary trend is inherently non-productive. The incentive to be highly productive results in overproduction and a cyclical, recessionary trend. Unemployment is not especially productive and does not fit a coefficiency of economic expansion. The hierarchy of incentives does, however, fit a structural model that supports prices and resists employment--the opposite of a pluralistic coefficiency.

While Hamiltonians are quick to argue the non-productive incentive (the moral hazard) of taxation, they argue the productive incentive a recessionary trend has because it readjusts costs and forms capital for reinvestment which is the fuel for economic growth (the trickle-down coefficiency). With the affect on income being the same as taxation, the effect of cyclical trending is nevertheless considered to have a positive value that fits the hierarchy of incentives (the elitist model of power).

The differential between the effect of taxation and the effect of the business cycle is actually complementary. According to the Hamiltonian model, the elite buy the debt and the non-elite pay it. The power structure is thereby stable (conserved) and the debt is secure (its value coefficiently conserved with the enduring value of a categorical, moral imperative).

The coefficient of the Hamiltonian model is to secure the debt. According to Hamilton, the trickle-down economic model of finance (like bailing out too-big-to-fail banks in priority) is the formula necessary to build and maintain the wealth of a nation: the formation of capital to be trickled down to the non-elite mass of "The People" just enough to keep them productive while, at the same time, exercising the cyclical means of accumulative crises to consolidate their wealth to pay the debt in the future.

Thomas Jefferson strongly opposed Hamilton's top-down model for structuring power (the hierarchy of incentives).

Since non-elits struggling to achieve the category of elite status is, supposedly, what productively expands the pie into a surplus (the declining rate of profit), it is morally imperative not to eliminate the incentive with a distributive justice imposed by government authority (the gamma risk).

Diminishing the capacity for gaining a surplus and gaining capital diminishes the general welfare according to Hamilton and the Federalists. The limit of government is where that capacity (that power) is diminished by government action, and according to Jeffersonians where the power of government begins to keep the pluralistic coefficiency of markets fully operational in priority.

Both camps fully recognized the power of pluralism. Hamiltonians knew it is an effective means of diffusing risk and limiting liability to the actuators rather than distributing it as an indivisible public good with exclusively divisible benefits to be trickled down.

Hamiltonians knew a government that ensures pluralism in priority would prevent the emergence of a power elite, what they then, and now, consider to be a moral hazard.

America's founders recognized the pluralistic coefficiency of markets. Hamiltonians and Jeffersonians alike recognized the reliability of free markets to deliver a legitimate liability of risk.

The founders recognized, as King George found out, that it is a free market afterall. It is a truth "self evident" in complement with enumeration of our natural rights--coefficient constants with a re-liable measure of risk and liability.

For Hamiltonians, the risk of liability is to be a reliably limited coefficient with a strong force (the more wealth accumulated, the stronger the force). For Jeffersonians, the risk of liability is reliably unlimited (continuously retested) with an inherently weak-force distribution.

The pluralistic model of power keeps the risk in constant application so that it cannot accumulate into a crisis proportion.

The elitist model of power constantly surpluses risk so that it can be applied in what appears to be an ontological proportion of crises that effectively limits the liability.

Constantly avoiding the liability accumulates risk. It is then surplused and managed into cyclical crises with an exculpatory ontology described as legitimately undirected (self-determined) market mechanics--a fraud that Jeffersonians knew would perpetrate if consolidation, rather than pluralism, was allowed to become the coefficiency of markets and, consequently, the structure of power.

The re-liable coefficient constant of pluralism is considered by Jeffersonians to be the primary function of a representative form of government. Legitimacy of power is constantly re-tested so that the liability of the elite is not limited to a set of philosophical principles with the absolute power (the legitimacy) of moral obligation like avoiding the moral hazards (the hierarchy of incentives that makes it right to bail out what is too big to fail in zero sum).

For Hamiltonians, surplusing the value of the risk (consolidation of value that allows for taking "big" risks) is the moral obligation of the power elite. Consolidation of power is the test, and the re-test in the public domain of representative government is coronation of that power.

Validation of power is exactly what Jeffersonians expect to prevent by ensuring the empirical power of pluralistic processes both economic and political with an easily verifiable coefficiency.

Limited Liability and Economies of Scale

Within the mechanics of structured ontologies, we look for culpability. To reduce errors (risk), there is a natural tendency to find fault with the actors that structure the system and work within it.

Continuous improvement is a coefficient in which errors are reduced over time to achieve the intended effect. There is a cause (the organized structure and its actors) and an effect (the intended result). Of course, the result may not be generally desireable or self-determinant (a differential equation that results in an arguable coefficiency). The coefficient is then reduced to the ability to organize and apply power to the intended outcome which includes responsibility for the outcome.

The argued economic efficiency of the "economy of scale" is a means of limiting liability to the benefit (the utility) of that efficiency. Whatever tendency there is to an abuse of the power accumulated--what a free-market system prevents by not allowing for this consolidation of power--is forgiveable because the actors are the elite that organize expansion the pie.

Economic growth is, then, the coefficiency of power. When it is not achieved, but results in contraction, like we have now, the argument is still maintained for a limited liability; and this limited liability is achieved through an economy-of-scale efficiency that presents as "too big to fail" (i.e., big enough to avoid the alpha risk and the process of continuous improvement that reduces error and achieves the fully intended consequences of a free-market ontology).

Forgiving the liability of a negative coefficient is considered to be a necessary correlative, falsely argued as the "paradox" of thrift. The negative coefficiency is best achieved, with as little sacrifice as possible, through organized economies of scale both micro and macro.

Nothing is more forgiving than a free-market pluralism, however. The real truth to be found in the paradox of thrift is the contradiction of the negative coefficient inherent to systematic consolidation of power.

Where consolidation results in expensive litigation and regulation, which presents a barrier to both entry into the marketplace and sanction within it by the consumer (the alpha risk), fraud and abuse is likely to fail a free-market in priority. Bad behavior must be modified in order to stay in business rather than encouraged with an organizational model that defeats free-market mechanics in order to be "competitive."

Consolidating industry and markets not only increases the probable risk of an abuse of power, but reduction of the "competitive," free-market effect causes the need for government authority.

Ensuring that the direct and facile accountability of a free-market mechanism is not defeated by economies of scale, the ethic of forgiveness is most fully exercised and the ethic of "government that governs least" realized.

There is an ethical coefficiency of markets that is not to be ignored with economy-of-scale efficiencies. Competition for power freely pursues a competitive advantage, and despite how we may try to consolidate to an advantage, it is ultimately a free market.

Striving for a competitive advantage is easily structured for provision, rather than deprivation, of the general welfare.

Progress does not render free-market mechanics passe'. Progress recognizes the problems we face are perennial. They are algorithmically recurrent, and if not so properly recognized and managed, we are condemned to a self-determined recurrency of crises in pursuit of a competitive advantage.

Progress is not linear, but recognizably dynamic. It moves forward with a differential dialectic that at times seems to be moving back, but is the momentum for change that propels us forward. It is the inexorable pursuit of liberty that is the truly progressive force that transforms competitive advantage into a process of continuous improvement and reduction of systemic risk.

Realization of an organized ontology that operationalizes pursuit of competitive advantage (the distribution of risk and liability) with the natural pursuit of the general welfare is an enlightenment we should continue to share with our founders.