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.