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.