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.