Assumption of Risk: Internalizing the Debt

Externalizing risk also externalizes debt.

The Hamiltonian model, for example, is expected to yield the certain value of risk in the form of public debt. The risk to the accumulated value is assumed by the full faith and credit of the government. It is the perfect environment for externalizing risk and an accumulation of debt to manage the externalities.

Both the public debt and the authority to pay it has an absolute value. The risk, and the valuation of the risk, goes gamma, and if it is not purposefully managed into an alpha-risk ontology, the externalized gamma risk accumulates into a crisis ontology (The Iron Law).

British Petroleum, for example, intends to maximize the government's assumption of the risk and limit its liability for the Deep Horizon disaster with the economy-of-scale proportion of its firm.

The U.S. has a big appetitie for the oil BP produces, and an inelastic demand supports dependance on large firms like BP, rendering them too big to fail. Despite the government's resistance to assume the risk, the damage will be rendered an externality that falls in the public domain. Debt externalizes with the risk--a perfect fit to the Hamiltonian model.

Public debt on the externality reduces the risk to BP's margin.

Contrary to its described efficiency, the amount of risk assumed by an economy-of-scale reduces rather than increases. The result is a false coefficiency of private profit to public benefit.

The public both assumes the risk and pays the debt bought by income valued with externalized risk. The market is rigged for accumulation of debt that conserves the value of assumed risk--the higher the income, the less risk assumed.

Debt to be paid by the risk-holders (risk being determined by the regressive value of income, or the economy-of-scale coefficiency), renders the risk-holders with non-elite income devalued with the assumption of risk. Contrary to the legitimate risk/reward hypothesis, the party with the least risk (the economy of scale) gains the most reward, conforming to a model of assumed risk (the value of risk) that is descriptively Hamiltonian.

Income is either elite (internal and private) or non-elite (external and public) to support the value of the risk in zero-sum. The sum is accumulated with the legitimacy of providing the funding (the externalized debt) the non-elite need to survive economic distress (the externality of assumed risk) without sacrificing the capital (the internalized benefit of the externality) needed to relieve the stress.

In order to participate in the economy, there is an assumption of risk, and if risk is being externalized (transferred) and accumulated into an economy-of-scale crisis proportion, resulting in a budget deficit (like we have now), the participant also assumes the debt in proportion to income. The debt externalizes with the risk.

The simple, easily accomplished solution that requires very little government intervention is to internalize the debt, realigning the assumption of risk with firm risk.

Aligning externalities with firm risk will revalue both the debt and the-risk-to-the-debt to reflect both the source of the risk and the reward associated with it. Mortgages, for example, that do not reflect the present value of externalized risk (the ability to pay it) will default in a crisis proportion. The "austerity" required to give value to the debt (the reward) is then retributively valued, presenting a high level of gamma risk with beta-risk volatility. The beta re-presents the retributive value in variuos forms to mask the true source of the value (the externalized assumption of risk).

The same valuation-of-risk dynamic occurs with the sovereign-debt crisis, now fully involved with identifying the debtors (the party that assumes the risk) and the creditors (the party that collects the reward of the risk assumed). Since the risk is externalized, and the reward is detached from the risk taker, the value of the risk/reward is an arbitraged value of uncertainty to avert the value being transformed into the certain value of a redeemable gamma risk (the present value of margin without growth, or the amount of risk externalized into debt).

Internalizing the debt with the assumption of risk, uncertainty will reduce to the value of firm risk and distribute the "austerity" needed to give the debt value a disinflationary presence rather than a destabilizing, deflationary trend.

Internalizing the Risk

When alpha risk is externalized and accumulated into a gamma-risk ontology (managed by government authority, like bailing out the financial system to avert collapse), the value of the risk is highly uncertain.

Extreme beta volatility results from the more uncertain value of the risk.

What is the risk discount or premium of any particular firm in any particular sector going forward?

The present value (based on expected future value) is uncertain because the risk is externalized and accumulated into a gamma-risk, economy-of-scale proportion.

By consolidating risk in the public domain, systemic, gamma-risk management is subject to political sentiment and regulatory arbitrage. Despite the effort assumed to reduce the beta, the value of the risk is nevertheless unstable, which provides fertile ground to arbitrage the risk (the derivatives market).

The source of the instability is not the public sector, it is the private sector. The public sector is the problem post hoc, empowered with the popular demand for economic stability the private sector does not provide because it is allowed to externalize the risk.

Rather than being a post-hoc extension of the problem, if the public sector were to respond with reform that internalizes the risk, the problem will be solved.

Instead, risk is stabilized with pro-cyclical value. The beta is transformed into a gamma-risk ontology, rather than alpha-risk. The gamma ontology algorythmically provides both the value of certainty and the appearance of legitimate process at the same time.

The risk appears to be an unstoppable, cyclical ontology. The best we can do, then, according to economy-of-scale proponents, is externalize and consolidate risk into "the systemic risk." Government authority is then empowered to manage the externalized risk into the stability of an expected value (what we have now).

It is necessary to be "big" in order to protect productive capacity (economic growth) from all that external risk. Small firms are at a disadvantage to management of external risk (the operation of government authority).

An ontology of externailzed risk is created that rigs the market to favor firms that are too big to fail and externalize the risk.

Not only are small firms that create jobs put at a disadvantage, but the mechanism that internalizes risk--free-market economics--is de-operationalized.

The bailout subsidized beta risk, so we have more of it, which accumulates into a gamma-risk ontology. The result is a risk "tautology" that recycles risk from beta to gamma, falsely argued to be a free-market ontology.

If there was a free-market ontology in operation, the risk would be internalized alpha risk. Firms would be allowed to fail without "fear" (the risk) of systemic failure.

In a free-market system, the corrupt always operate with the fear of failure. In order to succeed with abusive, corrupt and otherwise unproductive practices that result in a zero-sum game, it is necessary to externalize the risk. The effect is a tautology of risk in the guise of an unavoidable, natural ontology that supports "The Iron Law of Oligarchy."

Government that is constitutionally empowered to ensure the general welfare does not operate to support oligarchs, as Alexander Hamilton contended it should. It allows everyone to assume the risk of life, liberty and the pursuit of happiness without being enslaved to tyrants who operate without fear of failure with the force and legitimacy of government authority (the gamma risk ontology).

Sovereign authority does not have to operate for consolidation of power and the accumulation of risk. It can be for deconsolidation of power and the disaggregation of risk.

An alpha risk ontology can be established and conserved with the force and legitimacy of sovereign (gamma risk) authority, endowed by Nature, forming a power structure in which aspiring elites operate only by the will of the non-elite. We then achieve the ideal, republican form of government Thomas Jefferson envisioned, allowing for a natural ontology that neither operates despite free will, or assumes the value of a more competent elite, but authentically empowers free will right down to each and every individual with value that is all but uncertain.

The sooner we start internalizing the risk, the sooner we realize the value of freedom and responsibility, rendering what appears to be an improbable ontology, like "the meek shall inheret the earth," the empirical value of a testable hypothesis, rather than the mere muse of moral sentiment.

Internalizing the risk, ensuring the ontology of alpha risk in priority, will smooth the risk volatility and provide the certainty needed for pro-growth investment. Risk will then be valued more on growth (pluralistic expansion) than the value of consolidation (economy-of-scale contraction).

With the more certain value of internalized risk, the small business is more likely to assume the risk for economic expansion.

Externalizing the Risk

The formula for maximizing margin is to minimize the risk to that margin.

As an economy consolidates into economies of scale to reduce the alpha risk, the risk accumulates into beta and gamma risk. Since the risk has been detached from the alpha fundament, and it has to go somewhere, the formula for maximizing margin then becomes: internalize the profit and externalize the risk. The result is the economic condition we are in now with large, consolidated corporates accumulating profit and distributing the risk.

Profit is detached from the risk, increasing the marginal profit. The risk is transformed, not reduced, and redistributed without the profit. The risk is transformed into crises that cyclically occur at a depth and frequency of the distribution. Currently, the risk has become so external to the profit we now see the prospect of a lengthy recession and a possible double dip with the threat of deflation.

When the profit does not distribute with the risk, gamma risk accumulates and crisis will occur.

In the form of alpha risk, profit distributes with the risk, providing a disinflationary, distributive, pluralistic benefit to the market.

Accumulation of value, on the other hand, like we see with an economy-of-scale efficiency, provides a non-distributive, non-pluralistic, inflationary benefit (the marginal profit). The accumulated benefit harbors the risk of deflation--negative growth, unemployment and declining prices (general economic crisis that causes the need for authoritarian management of the risk, or The Iron Law of Oligarchy and emergence of The Iron Triangle form of government).

By ensuring an alpha-risk distribution, pursuit of profit not only externalizes as reciprocal value, providing goods and services with good and adequate consideration, but also imparts a distributive value that stabilizes prices with adequate, disinflationary liquidity. The result is positive growth with declining unemployment, debt reduction, and reduction of systemic risk at the unaccumulated fundament.

Alpha management of accumulated (externalized) gamma risk is a strategy that could have been easily employed by the Obama Administration and a Democratic congress.

Instead, the government (The Iron Triangle) engaged an inflationary risk-management program (described as "Keynesian") that has kept the risk external to the profit (thus, the bull market up to now, and the false signal of being descriptively pro-growth).

A top-down, trickle-down Hamiltonian model is to command and control systemic-risk (business cycle volatility), not reduce it.

Employed by the Obama administration and Congress, the Hamiltonian model of finance has supported a recessionary trend and increases the probability of a deflationary dip (lack of demand to support growth). Instead of alpha-risk stability, they achieved beta-risk volatility--exactly what we do not need.

In the alpha form, risk to the profit margin inherently distributes with the benefit. The margin is then at verifiable risk, accountable, to the free choice of market participants. When that choice is minimized by organized consolidation, internalizing the profit by externalizing the risk, the risk goes gamma.

With organized consolidation of the risk, managed in the aggregate (externalized) independant of the profit margin, the present value of the risk goes beta. Its marginal value becomes more dependant on political sentiment. It is more difficult to measure and, with a more uncertain future value, more volatile.

A speculative market (regulatory arbitrage) then emerges to command and control the gamma risk, and the beta volatility, in the guise of reducing it.

The bureaucratic model of power and political economy emerges (The Iron Triangle) to conserve the distributive value of the Hamiltonian model. This neo-conservative, post-industrial innovation of the model, especially after the Great Depression, provides "the risk" with a predictable presence of value.

The purpose of the neo-conservative model is to phenomenologize a legitimacy of internalized risk. It is a false legitimacy with power literally being a top-down "derivative."

The risk to gaining power and keeping it is not a pluralistic ontology, like a free-market legitimacy, derived from the bottom up. It is being imposed from the top down.

Alpha-risk modeling that ensures a free-market mechanism is what genuinely internalizes "the risk" so we are not slaves to the Iron Law.

Conserving the Value of the Risk

Pending financial reform will conserve the present value of the risk in a fractile, chaotic oscillation.

In order to forge order from the chaos, fitting the assumptions of the Hamiltonian model, the fractile dynamic demands an economy-of-scale efficiency. Reform is designed to conserve a financial system with an efficiency for "making markets" to command the risk.

According to lawmakers and the executive, the reform provides protection for everybody. Main Street is protected from Wall Street, and Wall Street is protected from Main Street.

It is assumed that as long as the risk of systemic failure can be controlled, big financial firms will "make the market" so that the consolidation of risk has useful value other than generating profit without growth--the source of the risk.

The reform does not consider hedge-funds and private equity firms a source of systemic risk, but a source of disinflationary capital, providing financing for small businesses.

The assessement is entirely incorrect. Reform, however, protects tax breaks for hedge-funds and private equity, for example, that do most of their business with Goldman Sachs, and will surely cultivate the next crisis reformers correctly predict, but incorrectly support.

Since pro-growth capital is not likely, having no mandate because the risk of failure will supposedly prevent overleveraging, the reform provides a fail-safe mechanism to protect the public from overaccumulated amounts of leveraged risk. At the same time, the accumulated reward of the risk is protected from the accrued retributive value, conserving the value of the risk.

As financial reform nears reconciliation, support for financial equities supports the hypothesis of conserved risk value.

It was an easy call, clearly indicated by an unwillingness to disaggregate the risk. Instead, reform measures will consolidate financial markets further
in the event of an overleveraged crisis of fractile risk that the Senate Banking Committee chairman says will surely happen.

Despite reform that calls for the orderly resolution of fractile risk, the causal factors of accumulated risk are conserved and supported by the resolution authority, which is exacly what we do not need.

The reform buys-in to the use-value of conserving the risk and the too-big-to-fail organizations that both create the risk and value the presence of the risk into a fractile, chaotic volatility. As the risk compounds and accumulates into a crisis proportion, the technical expertise of big-bank executives and staff that get it there will then resolve the risk and consolidate it into a bigger, too-big-to-fail economy of scale. It is the problem offered as the solution and, again, an easy call.

Despite the authority reform will endow to resolve firms that overleverage the capital into crisis, the cost of unemployment, for example, and lost productivity is not included in the concept of not providing a bailout. These costs are just as much a bailout for too-big-to-fail firms because they benefit from it in addition to the big profits made causing them. The value of the "big risk" is every bit conserved.

Investors can expect the risk differentials to be essentially the same. The daily narrative of present value will set up sudden inversions that require a close monitor of massive accumulation and distribution of capital that manipulate future value with an aversive sentiment.

The reform is not risk averse. It is risk prone, which drives market sentiment into sudden and salient oscillations of greed and fear that support the profitability of too-big-to-fail financial firms, hedge-funds, and private equity adjuncts.

Unfortunately, financial reform will give the problem to be solved the legitimacy of deliberative public process toward securing the general welfare. It will force us into adverse choices that economies of scale bundle (oligopolize) into what only appear to be a bargain in the absence of a free-market, alpha-risk ontology.

Deficiency of the Use-Value Argument

Deficiency of the use-value argument is readily apparent. The capital is absorbed into hedging the risk caused by not being invested in economic growth and stability.

Continuous use of the capital to hedge the risk--the industry of making markets through derivatives--causes the fractile transformation of risk that justifies the valuable use of consolidating it into an economy-of-scale efficiency. That is, the risk becomes so complex that it must be managed into a form that is characteristically too big to fail.

The use-value of the argument is essentially this: failure cannot occur because the risk is "too big." The argument falsely implies that resolving with alpha risk is tantamount to allowing failure, which if allowed will result in systemic failure (failure in a gamma-risk proportion).

The argument is entirely false. Alpha risk does not exist in gamma-risk proportion. It is unaccumulated risk. The risk is spread to avert accumulation, and if accumulation does occur, it will likely fail if it is an abuse of power in the alpha form without failing the whole system.

No bailouts are needed to conserve the value of alpha risk--the risk of failure. An alpha-risk system (ensuring a free-market legitimacy) is inherently risk averse.

The system we have now is verifiably risk prone.

The risk is caused by hedging it so that causing risk, rather than hedging it, is the reward. Risk becomes fractile and cumulatively unstable with risk being compounded on the probability of the risk. Risk then becomes so overweight that the probability of default is 100 percent (what Germany is trying to avert by inverting the risk hypothesis, or the expected, directed value of the risk).

Timing a market space is then a function of tracking the transference of risk, and who exactly is qualified to do that without gambling with the capital?

If you are not a favorable credit score, you are likely to lose by being positioned to intersect with the transference of risk (by always being "put at risk").

Always being put at risk, or in harm's way, naturally accumulates risk at a higher level that requires a high level of power to manage. The benefit becomes retributively valued and the risk to that value gains a gamma proportion that requires either force or finesse to conserve.

Exercising power in zero-sum does not require political finesse if it is absolute. An inscrutible derivatives market combined with the legitimacy of free-market economics provides finesse where absolute power is not legitimate, like in America where The Revolution rendered absolute power not only crude, obsolete, and unproductive, but illegal.

In the case of a free-market legitimacy, finesse is required where force cannot be legally accomplished without a risk of liability on the zero-sum. Economies of scale, however, operate with impunity because they are too big to fail, which also means they can operate with illegitimate force and stay in business. That is, economies of scale operate with minimal alpha-risk accountability. The risk is transferred, or transformed, into beta and gamma risk.

Financials are currently high beta because they are the target of regulatory reform, having accumulated excessive gamma risk (having excessively reduced the alpha-risk, cost/price-to-accountability coefficient). This is the space where finesse critically operates to prevent disaggregation of the risk to correct for an abuse of the market mechanism (the over-accumulation of risk).

Instruments used to transfer risk accumulate the risk into a bubble. Inflation and deflation of bubbles is accomplished by bundling (combining) the causal factors into the control of the elite insiders, who bundle the products to define the risk. The risk can then be inverted at will, at any particular time, in any particular space, to score a profit. The score is what makes the elite insider more credit worthy, providing the liquidity to hedge, or define, the level of "perceived" risk.

Prop desks of big banks, for example, positioned against bonds they issued for municipals, putting the bonds at higher risk, "making" a short-term profit differential at the expense of both buyers and sellers. The profit generated can only be considered legitimate if the abusive practice can be considered useful, mitigating the perceived loss in zero-sum.

The illegitimately gained benefit actually belongs to the loser, less the useful value which will largely be realized by having reduced the alpha risk. The abuse will survive the marketpace as beneficial because it is "too big" to fail. The abusive firms are not smarter than the losers, just bigger.

While economies of scale are much more credit-worthy, they are much less trustworthy. Replevin is considered to be revenge since they have "successfully" transformed alpha into beta risk. The risk of liability accumulates and transfers into the space of gamma-risk authority where it is managed to legally mitigate the possible loss to the gain, accumulating the gamma risk to a crisis proportion over time.

The perceived risk and market sentiment can be technically changed in a flash. Effective financial reform will have to deconsolidate the risk in order to keep the risk-transfer market being re-made faster than reform.

Accumulated risk must be transformed into an alpha-risk ontology in which the technical indicators reflect the fundamentals rather than the beta-risk mainpulations of collusively consolidated financial entities.

The question is then, will the specific measures offered for financial reform devolve the risk into a more fundamental form of risk ontology, utilizing the collective wisdom of a free marketplace rather than the elite manipulations of plutocracy?

Transferring Risk: Aversion and Inversion

Transferring risk is a mega industry. Not only are financial markets made to reduce perceived risk, but capital is invested to reduce fundamental, firm risk (the alpha risk).

Aversion to risk has developed into a highly technical means that results in an unexpected inversion of its indicators. The price of gold, for example, has been in an overbought condition despite the risk of inflation being low with a strong recessionary, if not a deflationary, trend.

Buying gold with the massive infusion of liquidity to resist deflation has supported both the recessionary trend and the price of gold into a market (beta-risk) bubble.

If a "market maker" wants to support the recessionary trend (unemployment) and gain capital at the same time, support commodities. The support suggests both a jobless recovery and a recovery indicated by rising commodities prices at the same time.

Rising commodity prices have been a false positive. Now, markets are worried about deflation. How can that be? The global economy is flush with anti-deflationary liquidity. The risk indicators are inverted.

If you are assessing the risk to do business, you will notice that the uncertainty (volatility of markets) does not stem from the public sector. It is doing what is fully expected--averting deflationary risk with inflation (currency devaluation). The source of uncertainty is from a consolidation of capital and risk in the hands of a few corporates in the private sector that far exceeds the monetary muscle of government spending.

According to the CFTC, the futures market is approximately a $34 trillion capital market. So, it is you versus trillions of dollars of market-making risk that can literally turn in a flash, likely determined by whatever position you have--if you are long, they are short...until you are trapped. Thus, for example, a government will protect its public policy position with the application of gamma-risk authority. Like Germany recently protecting (averting the risk to) devaluation of the Euro, by banning naked shorts on its largest financial corporates.

Germany is averse to the risk of infused capital (its devalued currency) being trapped in a speculative bubble rather than being trickled down. While the action is too late, it indicates the source of the uncertainty and instability.

Germany is also acting to invert the risk directed by the big demand for derivative-driven, risk-transfer products. In an effort to cause growth and economic stability, giving real support to the value of European debt, German authorities are doing what derivative markets purport to do.

The public and private sector are at odds (the risk aversion and inversion), struggling over who determines the distribution and timing of value (aversion), and the direction of the risk (inversion), causing a high level of uncertainty.

The aversion to, and inversion of risk (the uncertainty) has been transferred to gold, and will be transferred to other commodities with the assistance of highly technical, difficult to discern risk-transfer vehicles. The market for these aversion/inversion vehicles is made with the derivative/futures markets, which largely exist in the dark.

These denizens of the dark sneak up behind you and... surprise! The risk is suddenly reversed.

Black boxed, with the risk only apparent and available for manipulation to elite insiders who have the most credit-worthy access to the discount window, the market-risk makers command and control the distribution of the risk. Just as important is to control the narrative that explains the shifting patterns of risk, which controls both the direction of the risk and, even more important, mitigates what is otherwise a questionable free-market legitimacy.

The testable hypothesis of a free-market legitimacy is the only remaining liability of the averted (re-directed) alpha risk--the risk of accountability the averted alpha risk would otherwise provide without question, and without lengthy legal process. The more time spent applying accountability in public process, the more disconfirmed the free-market hypothesis.

To mitigate the probable risk of liability, market makers argue the use-value of making markets.

(Keep in mind that legitimacy is a critical function of power, and the exercise of power to a detriment without complaint or fear of reprisal is a measure of power. Use-value is an eristic for reconciling theory with practice; contending, for example, that reduction of alpha risk produces more useable value than the legitimacy of its full, theoretical value.)

Markets are made to hedge shifting patterns of alpha risk (that it averts) and beta risk (that it inverts). If markets are not made to absorb the risk, market makers contend, with trillions of dollars to manipulate the market, capital investment would be sub-optimal because there would be too much risk. They liquify markets by reducing the level of risk (by transferring the risk).

Pending financial reform will do well to redefine the problem by questioning the use-value of transferring risk.

Reform has been so far dominated with negotiating what the problem is, which indicates an aversion for inverting the current risk hypothesis to a more useful form of legitimate risk that distributes the austerity of the debt into a peaceful and prosperous pluralism.

Prosperity comes through retransformation of systemic risk into an alpha risk ontology, giving risk a real and present value that is peacefully verifiable.

Rather than conserving a fractile, geometric progression that appears to be the ontological legitimacy of a random walk, financial reform must consider the deficiency of the use-value eristic that falsely characterizes consolidation of risk being analagous to the legitimacy of an alpha-risk ontology.

Naked Shorts and Present Value

Naked shorts on German banks have been banned to stanch valuation of risk in derivative markets as the Euro undergoes devaluation.

Naked shorts, rather than making the market to provide liquidity, reduce the benefit of the Euro's devaluation (economic growth) and its present value.

The German economy stands to benefit significantly from a weak Euro, reducing the risk of default on loans to other EU members with a higher debt to GDP, increasing the prospect of higher economic growth for the Community.

The differential between the future and present value can be increased by naked shorts on bank equities and credit default swaps. Banks that are short, including European banks, gain capital, yielding a lower probability for economic growth which is, in turn, reflected in the current value, depreciating the positive value of its currency devaluation.

The spiraling depreciation results in the need for an even larger infusion of capital. Derivative markets (naked short interest and swaps) would then be providing liquidity to the marketplace, but by reducing present value.

Capital that operates with an economy of scale, buying insurance on the risk it commands, indicated through the "laws" (the measures) of supply and demand, taking a big short interest indicates a higher risk of default. The result is a capital gain without the growth that would reduce the probability of default.

Proponents of derivative markets posit they act to provide the liquidity for growth. The added liquidity to cover the lost presence of value will cause even more growth than would otherwise occur in the future. The argument fractionates the risk into a highly inscrutible liability with the outcome empirically verified by the debt amortized into equity value which is owned by, and visible to, the public, fully internalizing the risk and the reward.

Although the risk does undergo transference and accumulates in the public sector, derivative proponents argue, it distributes to the public with the reward derived from future fundamental value, present in the more accurate empiric of an oscillating current value representing changing market sentiment.

Rather than being externalized, and subject to regulatory authority, the risk is genuinely authored and internalized by the derivative value.

To the market observer, the argument for a useful derivatives market has a plausibly convincing, if not a forgiving quality.

Flush with liquidity, the lack of growth is then falsely attributed to a lack of economic austerity rather than the gross application of greed at the expense of growth, destabilizing markets and increasing risk to justify making the market for derivatives.

Rather than creating market stability, derivatives are being used to rig the market.

Market rigging is illegal because it is destabilizing. Instead of reducing risk, it increases it.

Being naked short on German Banks is being banned because it is market rigging, supporting speculative demand, resisting the economic growth needed to give real value to the debt. It is a zero-sum detriment that, at this point, has little-to-no risk of liability.

The tendency to short the Euro naked signals the will to deflate the global economy. Capital infusions to liquify markets after the Great Recession have been consolidated. Accumulation of the capital, rather than its benefical distribution, has a deflationary effect; and deflation of commodities, rather than inflation, will then signal a recovery.

The differential is in who controls the distribution of the value on the accumulated risk, which is what "making markets" with derivative, risk-transfer products is all about. (See recent articles about transfer and transformation of risk at griffithlighton.blogspot.com).

If the positive value of devaluation is denuded by a short interest in nothing but the value of the risk as determined by merely having that position, the market is being rigged to cause a loss in zero-sum. It is intended to liquidate the market, not liquify the market for economic growth.

Being naked short is being considered a financial obscenity because it produces a highly restricted value that distributes to too-big-to-fail economies of scale, which includes the banks being protected by the ban.

Ironically, banning naked shorts will do more to prevent nationalizing what is too big to fail than what being too big to fail is intended to prevent--socializing both the risk AND the reward into a present value.

Transformation of Risk and Popular Culture

We all know the popular saying, "the bigger they are the harder they fall." It is a simple and accurate description of the problem to be solved through financial reform.

Simplicity of the problem, and verifiable accuracy of the solution, poses considerable risk to the status-quo ante. The risk needs to be transformed into a different space and time to induce conserving the value of its reward. Preferably, to cast the value into an endurable "iron law" that implies the proof of its own confirmation, having withstood the test of time, worthy of occupying organizational space.

The benefit (the use value) economies of scale provide are, over time, equal to the cost. The cost is as big as the benefit.

Shifting the value and presentation of the risk over space and time, however, phenomenologizes the risk into a cultural heritage of expected value. Deficiencies are presented as coefficent with the general good of the accumulated value, always to be realized in future value.

With the value of the deficiency-coefficient priced into the present value, however, the zero-sum deficiency of value is realized both now and in the future (crisis). Only the risk on that value is transformed into gaining value (the empirical value of the crisis), similar to the way options are valued only on the probable future price differential at the present value (an empirical presence of potential value).

The gaining risk value is then arbitraged into value derived and accumulated from the fundamental (alpha) risk. That value is fractionated and securitized (bundled) into an inscrutible hyper-risk that presents an insurable value of uncertainty.

An insurance-based economy of scale is born. The differential between present and future value (the derivatives market) becomes so complicated that reduction to a simple and easily verifiable reform hypothesis does not seem credible, and the economy of scale efficiency (transformation of alpha risk into beta and gamma risk) is allowed to grow. The result is a culture based on the value of uncertain risk that is all too certain.

Retail investors, for example, that sold out in the last liquidity crisis were invested in the cultural expectation of sharing in the wealth. It was a redistribution of wealth that suddenly reversed. It was not a failed expectation, but a false expectation. The loss was always present in the value, but not realized until the risk-value was transformed into a derivative space to be actuated at a particular time.

Retail investors are always told not to try and time the market, but that is what is required. What they are not told is why.

As value accumulates to retail investors, a distribution is imminent. Always present to the value in derivative form, the probability of risk nears 100 percent dependant on the position of the investors. The accumulated value is the source of the risk, but it is not culturally visible to retail investors expecting to share in wealth that cannot, by definition, be redistributed without, as conservatives argue, a liquidity crisis.

Subsequently, since the value is not fundamental but it has to come form somewhere, the crisis is falsely attributed to the "herd mentality" that was cultivated to chase the value without recognizing the transformation of risk, culturally valued as fundamental, alpha risk.

Investor remorse is also culturally valued, which transforms the risk of reform into a less probable space. "I should have sold before the crash" is the popular sentiment that transforms the risk of liability into an exculpatory ontology.

The risk gains an exculpatory value despite having been deliberately executed with current value always having been derived from the certainty of future value. The loss confirms a cultural expectation of a free-market (alpha risk) ontology--that the most fit survive, and the least fit fail.

The exculpatory value is culturally endowed. It is not a free-market endowment since the value is derived from reduction (transformation) of the legitimate alpha risk.

Bad timing of certain risk has no exculpatory value if the position of investors is the determining variable at any particular time, dependant on the present value of a hidden, derivative risk destined for certain failure based on the false expectation of a too-big-to-fail coefficiency.

What is too big to fail becomes so massive that it collapses under its own weight. The result is one huge failure that is easily prevented by pluralizing the risk (maximum distribution of the alpha risk), not consolidating it.

Bernard Madoff, for example, built an economy of scale based on a false coefficiency: the more consolidated, the more value produced. The bigger the fund grew, the better to generate profit without risk. The risk, however, was just being transformed into a gamma dimension to create the value.

Madoff's victims popularly believed the risk was being reduced when it was really increasing with the consolidation of their capital. They popularly believed that alpha risk was in full operation when it was actually being accumulated into an economy-of-scale, gamma-risk, crisis proportion.

Popular understanding has been cultivated to accept the compatibility of free-market economics with economies of scale.

Free-markets legitimately operate with unimpeded alpha risk. Economies of scale operate to minimize the alpha-risk ontology.

Combining economic consolidation with a free-market legitimacy has been such a successful application of power, however, it seems invincible. It is an organization of capital that seems, especially to the power elite, to be the pinnacle of human development. The success supports a false sense of being beyond liability.

Many conservatives realize there is a false sense of security. Neo-conservatives recognize that conservative philosophy loses a convincing relevance as a sustained zero-sum accumulation demands a distribution.
Issues like "the war on terrorism" keep conservative philosophy relevant.

(Security analysts need not wonder why it was necessary to secure Iraq before finding Bin Laden, who has, apparently, slipped away, securing a popular culture of conservative relevance for some time to come.)

Since, however, national security does not directly address the discrepancy between what the combination of free-market economics and organized economies of scale promise and deliver, the tactic of invoking the salience of national security has a limited effectiveness for transferring risk into a different policy space.

Scarcity of resources is, and will continue to be, the issue at the forefront of maintaining the relevance of a conservative, utilitarian philosophy and the contradiction of a free-market/economy-of-scale-efficiency. Sovereign debt will also be a hobbyhorse, being narrated into a false sense of crises for the application of conservative philosophy.

While scarcity is a product of an economy of scale, resisting alpha risk and growth, conservative philosophy falsely attributes scarcity to too much growth. Thus the need for the economy-of-scale efficiency, and the ability to take "the big risk" to innovate.

Characteristically post hoc, the conservative argument posits the big risk allows for innovation, and growth, in a proportion alpha risk cannot provide. Actually, it impedes it. What is innovated is management of the risk, proportionally transforming optimal alpha-risk innovation, growth, and stability into beta and gamma risk volatility.

Resource scarcity and debt crises rely heavily on derivatives markets. Derivatives are both the means and ends of maintaining a relevant conservatism.

Derivative investment both consolidates the marketplace and inflates prices on a limited supply, causing the crisis that popularly demands treatment (populist reform) from the oligarchs that cause it, keeping conservative philosophy relevant.

Participation in derivative markets is also a cultural icon of wealth and the administration of power well in excess of government power. Being a member of the corporate body is to be a member of the ruling class that transforms a naturally pluralistic identity into the iron law of oligarchy.

With both Democrats and Republicans continuously casting cyclical problems into iron-law solutions, politics has become a farce of popular culture, rather than an application of finesse, in which fallacy rules over reason.

Most political argumentation is grossly absurd, full of passe' palaver that attempts to justify the nobility of a "useful" deprivation; whether it is the Republican application of capital formation, or the Democratic application of behavior modification for a clean and healthy, puritanical lifestyle, freedom is evermore captive to an arrogant application of power.

We should patriotically resist befalling the fate of want-to-be tyrants bent on the utlility of providing by means of deprivation.

When we have our next economic crisis, "and we surely will," and go marching off to the war on terror, at least we will be well adjusted, healthy and happy?

Transferring risk is not limited to complex investment vehicles and consolidated organizational technologies. It is also a function of identity and popular culture.

We thrive where pluralism abounds in the realm of pop culture. It is an oasis in a world in which utility is increasingly defined as a monolithic economy of scale--WalMart, health care, insurance, financials..., usefully absorbing the probable risk of change we really need into an ephemeral world of fleeting tastes and preferences, giving the appearance of a pluralistic ontology.

Pluralism is transformed into the perception of a chaotic, mob rule; and in the practical, non-idealistic world of politics and government, power always chooses oligarchy over ochlocracy by the dictate of a wise aristocracy, if not by the popular consent of the governed.

The conservative argument reduces to essentially this: where popular consent is constitutionally endowed, whether by nature or by law, the populace chooses the security of consolidated risk over a pluralistic condition of fundamental uncertainty.

Whether the populace likes it or not, recognizes it or not, the elite rule by popular consent (from the fundament). Oligarchy (the accumulation of risk into a manageable condition) is an "iron law" ontology. It is, according to conservative philosophy, a categorical imperative, dictated by nature.

Just as the elite rule from the fundament, the financial instruments for the application of power are "derived" from the fundament to give security to what is fundamentally unsecure and unstable. Derivative markets enable price security, for example, giving stability to the marketplace, providing a predictable margin of profit to transform productivity into capital for investment and growth.

The reason derivative transformation of risk is not considered rigging the market is because it is accomplished by means of market mechanics. A "dark market" loses that market legitimacy, however.

A market is by definition free and openly accessible so that it operates with a legitimate alpha-risk ontology. Transforming the alpha risk means the legitimacy of the process is compromised, and that loss of legitimacy is filled with a regulatory authority to prevent, but more likely to manage, an abuse of accumulated power.

Regulated gamma-risk accumulation gains the legitimacy of a due process. The legitimacy is then transformed into the collective legitimacy of a free-market process, post hoc. Just referring to derivatives as a market ("the derivatives market") invokes the image of a collective ontology needed to be considered a market phenomenon, whether it actually is or not.

A zero-sum will have the legitimacy of due process nevertheless, tranferring the risk of liability into the the public policy space (the phenomenon popularly described as "privatized profits and socialized losses").

The post-hoc legitimacy of risk transformation through derivative markets is highly questionable. According to conservatives, however, it does not matter if derivatives operate in dark markets because access is highly specific.

The use-value of derivative markets is highly specific in both function and capital requirement. It requires, and accomplishes, an economy-of-scale efficiency. Making it more visible and accessible, conservatives argue, would defeat its purpose of stabilizing markets, which is the point in question: will deconsolidation of the capital and re-transformation of the risk into an alpha state prevent the very instability derivative markets purport to stabilize?

Regulating derivative markets, according to conservatives, is to disrupt the natural order of things developing into more complex and more stable forms; and deconsolidation of the risk would be nothing less than catastrophic.

Popular demand for reducing the systemic risk (losing a job or reduction of net worth) will result in regulation (a re-formation) that does not deconsolidate (re-transform) the risk. When crisis occurs, "and it surely will," regulation will be fallaciously argued as the cause, post hoc, rather than the lack of a free market the regulation measures.

Regulation indicates transformation of risk and predicts the form a crisis is likely to take (deflationary, recessionary, stagflationary, single or double dip, etc.), as well as the regulatory arbitrage (reform or innovation) of the risk that will occur in sector spaces over time.

The error of fundamental attribution occurs in two ways. First, regulation is caused by (is a measure of) a lack of a free market. Second, regulation enables the continued accumulation of risk, falsely argued to secure economic stability and growth, which causes the problem.

Risk is transformed into the perception of a false security, induced into a lack of pluralism that is the source of economic crises and insecurity that will surely occur if we let oligarchs accumulate and manage it in the gamma, rather than the alpha, form.

The iron law of oligarchy is actually more plastic than we are induced to believe. Its rigidity is a cultural myth that elicits the value of our vices, to be managed and controlled, rather than our virtues, to be the self-ruled expression of freedom in its natural state.

The Profit Margin as Empirical Measure of Risk

As economies of scale accumulate systemic risk, there is a demand for government authority.

Instead of less government, there is more need for government if we allow industry and markets to consolidate. The call for reform is a call to deconsolidate the risk.

As we have seen, consolidation of industry and markets allows loss (the risk) to aggregate in the form of public debt while the reward (the profit) is retained in the form of private property. It is the Hamiltonian model in the modern world of Keynesian inflation.

Expansionist monetary policy overleverages the private sector, resulting in liquidity crises with a private accumulation of profit and a public accumulation of loss.

Curious that providing large amounts of liquidity results in liquidity crises.

Borrowing at the Fed's discount window to buy the public debt conserves the Hamiltonian model with Keynesian measures.

Liquidity is used to build an economy of scale, producing a budget deficit. Liquidity is then needed to finance the public debt bought by the liquidity. The liquidity is trapped in a perpetual accumulation of debt in which the rich (the elite) buy the debt and the non-elite pay it.

Since the non-elite do not have the means to pay the debt, the result is a default on the debt if it is not monetized.

A sovereign debt crisis is very unlikely to occur, however, unless the sovereign decides not to sell new debt to cover the old debt. If that happened, the gamma-risk accumulation would catastrophically disaggregate. It would be a disorderly resolution of risk that would make The Great Depression look like a good time.

The non-elite cannot pay the debt. Income is, by definition, deficient even when the non-elite are employed (the burden of debt must be regressive in order to maintain the elite). Thus the need for more liquidity, which is leveraged into buying a dwindling supply. Prices and profits inflate financed with private debt and public transfer payments.

Despite the inflation, the result is a crisis of deficiency--a liquidity crisis. Public debt is a measure of that deficiency which conservatives argue, post hoc, is the result of too much government spending.

The accumulated deficiency is an accumulated efficiency of the profit margin organized into an economy-of-scale consolidation of industry and markets that aggregates risk in the public domain. It is the Hamiltonian model in which the rich get richer and everybody else gets poorer, like we have now.

Not only are non-elits expected to pay the public debt (the aggregated risk), but pay elits to cause crises and take the value (the liquidity needed to prevent crises) in zero-sum. It is completely unreasonable to expect this to result in anything but a populist sentiment (reduction of the gamma risk).

Resisting the populist sentiment is an entrenched Hamiltonian model in which the elite buy the public debt (the liquidity) and the public pays it. The difference in value between elite and non-elite is what classical economists call the economic rent--the margin of profit accumulated that is the categorical measure of elite status and the cost of non-elite participation in the benefit the profit produces. Its conservation is necessary for economic growth and, according to Alexander Hamilton and the Federalists, the general welfare.

Measures taken to conserve the power elite (resist populist sentiment) is, then, a moral imperative. It is why, for example, taxes should be paid by the least able to pay (and the reason government spending should be minimal), and why liquidity (and the economic rent for liquidity) costs more for those that need it the most...because, according to conservatives, they are a bad risk.

We see then how the operational model defines the risk. The Hamiltonian model defines risk as a measure of the ability to accumulate value so that instead of paying the rent, you are collecting it (instead of paying the debt, you are buying it). The difference is the profit margin, the category of elite status, and the defined level of risk.

From the start, the model of capitalism is organized to eliminate alpha risk. The risk that holds the elite directly accountable to the renter is, as was described previously, inimical to the general welfare.

Alpha risk, according to the Hamiltonian, should be limited to the masses. It is inappropriate for the elite to be held accountable to non-elits. Thus, the concept of limited liability and the corporate, economy-of-scale model of efficiency that transforms alpha risk into an unavoidable, gamma-risk ontology. Risk aggregates in the public sector where government distributes that risk with the force and legitimacy of ultimate, sovereign (legal) authority.

According to Hamiltonians, it is in the best interest of the masses to accept the legal authority of property being the privilege of the ruling class. The difference between ruler and ruled is defined by income (the profit margin). It is a clearly empirical measure of power, and who should have it, as long as government does not act to redistribute it.

Redistribution of wealth distorts the natural hierarchy of economic incentives (class mobility) that causes innovation, productivity, and economic growth. As long as everyone is free to maximize the profit (to move up the hierarchy), conservatives posit, the risk is proportionally reduced.

The profit margin (maximizing the economic rent) is for the Hamiltonian, however, entirely a measure of negative risk. The more risk you have to take (the more rent you have to pay to participate) the more non-elite you are. Being without risk means being unaccountable, which means more risk for everyone else, not less.

The Hamiltonian model deliberately resists plurality with a higher risk assessment, and where plurality is resisted in nature, risk of failure is increased, not reduced.

As the Hamiltonian model has matured, with the alpha risk ever more minimal, the margin of profit becomes focused on the risk premium. The profit becomes a measure of pure financial arbitrage.

Generating profit with as little growth as possible is a measure of sophistication, and growth is a measure of how big an economy of scale can be built to limit the risk of liability in the corporate form (how much you can get away with operating in zero-sum, avoiding the gamma risk).

The risk ontology becomes a function of avoiding the gamma risk (politics) rather than minimizing the alpha-risk accountability. Rather than the profit being an empirical measure of accountability, it becomes a measure of unaccountability.

Instead of success determining the profit, the profit determines success. The profit margin, then, is a measure of risk accumulated rather than reduced, and its management is a function of an arbitraged transference.

Risk becomes a fractile probability that takes the form of beta risk. It requires evermore liquidity as the risk is hedged against the probable risk that is hedged against the risk...into a crisis (gamma) proportion.

The risk propagates with higher frequency as capital is used to finance its propagation rather than growth. It cannot be considered gambling because the level of risk is determined by the amount of capital invested in its propagation, including building economies of scale with mergers and acquisitions.

Fractile risk management is rationalized with use value. It harbors the utilitarian-value hypothesis posited by the Hamiltonian model: conserving the value of capital, making markets, efficiently allocating capital to maximize growth with minimal risk, securing the general welfare.

Confirming whether the welfare is generally secured by the model is, well, complicated, of course.

Economically securing the general welfare free of government intervention (allowing for organized economies of scale to manage the aggregation of the alpha risk in a gamma proportion) is a function of risk-transfer product marketing--the derivatives market that is the target of regulatory reform. It is a market that no one, of course, properly understands but the elite insiders.

Risk transfer (transformation of risk) is an esoteric domain of the market that requires, of course, the special, secret knowledge of the power elite. It cannot be empirically evaluated or, therefore, controlled by crude, unsophisticated, non-elite measures, like an alpha-risk ontology that is confirmed by the margin of profit...not without putting the general welfare at risk, of course.

When crisis does occur, as financial reformers say it surely will, the reform will be to blame. It will be important to then identify the insufficiency of reform, which will be not having disaggregated the risk into an alpha dimension.

Effective financial reform will allow the profit margin to be an accurate measure of reduced systemic risk rather than a crisis (gamma-risk) indicator.

Use Value and Financial Reform

Everything we do can be reduced to its use value. Such a utilitarian aspect has moral import. It can provide a legitimacy of power. It can also justify activities that produce a detriment.

Liability for negative consequences can be relieved or mitigated based on use value, and the successful argument of that value can then become the measure (both the means and ends) of power, legitimately accomplished.

Congressman Yarmuth (D-Ky), for example, has proposed cutting the capital gains tax on commercial property from 15 to 5 percent. The property is not producing useful value because of the Great Recession.

According to Yarmuth, apparently, the tax expenditure will cause growth that outweighs the cost to the treasury as speculators churn property to produce a capital gain. Thus, the property gains useful value with more revenue being collected at 5 than at 15 percent.

Yarmuth's proposal is the trickle-down tax theory used to promote the value of the Bush tax cut program, which did not produce growth, it produced the Great Recession. Supporting a recessionary trend apparently has use value... in zero-sum.

Yarmuth identifies value not being used needed to reduce the value of the budget deficit. If the value is not used to produce growth, however, the value is being used in zero-sum with an accumulation of power in zero-sum. The accumulation commands the value of capital used at the lower tax rate or it will not be used with a deflationary effect.

The result of the useful value commanded, of course, however, then presents as the problem--a budget deficit and the need to tax at the higher rate. This "problem" is not a paradoxical trade off--an unsolvable puzzle that presents for philosophical amusement. It is a deliberate accumulation of value that commands the power to define its use and produce the value in zero-sum.

It is a linear accumulation. It is not a paradox of thrift, but a means of producing the power to sustain the zero-sum accumulation over time, to be applied at any time in the form of use value. (It produces the gamma risk which occurs at high frequency with a short wave length; kind of like high frequency trading in financial markets, indicating a critical concentration of power with an explosive tendency--a useful value-- that requires regulatory authority, or the need for government.)

In post-hoc temporal sequence, the anticipated benefit of the value defined as useful "ironically" transforms into the antecedent cost that is supposed to produce the general, distributive benefit. Thus, the constant accumulation in zero-sum (and the accumulative frequency of gamma risk over time).

Anticipating the proposed full-value of the useful benefit that follows and mitigates the cost is why, for example, we spent eight years trying to confirm the Bush tax-cut hypothesis into a miserable disconfirmation.

Now that the trickle-down tax cut hypothesis has been disconfirmed, where is the liability for the consequences?

There is virtually no risk of liability to the benefit accured at such a high cost. Rather, the hypothetical utility of the cost-to-benefit is being reposited as declarative knowledge, and is characteristic of especially bad politics, lacking empirical value.

Goldman Sachs executives provide another example. They claim their activities "liquify" the marketplace. Despite the damaging effect it had to "liquidate" the marketplace (hence the risk of liability), they argue to mitigate the liability, and the damage, with useful value.

While the cost of big-banking activity is huge (encouraged by tax policy Yarmuth is proposing), the benefit is also huge. Goldman Sachs now has more capital than anyone to liquify the marketplace. It literally has the power to pick the winners and losers. It is in command and control, with only the gamma risk.

In order to maximize its margin, a big bank will invest the highest return with the lowest alpha risk, liquifying economies of scale and liquidating anything else into a cyclical crisis.

Thus we have the arguable use value of "making markets" with particular types of trades and business practices that directly correlate with regressive tax policy and consolidation of industry and markets.

Financial reform needs to utilize empirical value: recognizing correlations, identifying causal relationships, formulating hypthotheses, and testing hypotheses with a new policy and program that disaggregates risk instead of recycling the old program, and the risk, post hoc.

The empirical measure of value will not be limited to public policy if financial reform ensures proliferation of alpha risk.

Instead of accumulating gamma risk, alpha distribution of risk extends empirical value into the private sector. The valuation of risk (and reward) can then be usefully measured with a confirmed accountability indicated by the margin of profit (the limited liability of risk) and less need for government.

Instead of relying on the eristic reasoning of use value, forever encumbered with the implication of every possible moral hazard, the financial reform we both want and need will rely on simple, verifiable hypotheses as the primary measure of value in use.

Financial reform that maximizes alpha-risk accountability coefficiently reduces systemic risk and the need for government. It is an easily verifiable hypothesis, for example, that could prove to be of highly useful value.

Reduction of the budget deficit and the public debt can be a veritable, positive measure of efficiency, rather than the absolute value of an accumulating deficiency.

Massive Oscillations and Risk

The massive oscillations we see in financial markets suggests a high level of risk, but notice that the risk is measureably short-term beta.

Short-term beta risk volatility indicates market manipulation. Narrative of the latest financial panic as an elevated risk of a sovereign-debt crisis is not especially convincing. It describes and explains, rather, what is wrong with financial markets--outright beta manipulation of the risk that pushes the gamma-risk indicator higher. The descriptive narrative, and the technical indicators that support the valuation then, are post hoc.

Rather than lower, the gamma-risk indicator is at peak level with the Fed confirming that currency swaps are fully enabled to reduce the probability of liquidity crisis ("making" markets and manufacturing the risk post hoc).

The massive profits from the trage on the latest beta-risk volatility will now massively move into swaps (fractile bets on the risk) that increases the risk of defaults as capital is absorbed into hedging risk and not increasing growth to GDP. The financial system is set up to support the risk and the beta-risk arbitrage, "making" the market for "taking" the risk in an economy-of-scale, too-big-to-fail dimension (taking "the big risk" that small firms cannot take, providing an innovative benefit to society, producing economic growth that, advocates argue, would not otherwise occur).

It is an extremely high indicator of crisis with a financial system that, instead of discovering market prices, is set to massively oscillate with the mass economy-of-scale movement of capital to keep discovery of value a manipulation of risk-perception. Risk, and valuations, change by narrative of the risk accompanied by the mass movement of the consolidated capital.

Discovering a bubble has been reduced to a "flash" of buyers remorse, and the legitimacy of the outcome reduced to a post-hoc narrative, technically descriptive of the valuation but without indicating the gamma accumulation of the risk.

Ignoring the gamma-risk accumulation, emphasizing the avoidance of alpha risk with the benefit of pursuing economies of scale, is causing a problem of crisis in a high-frequency proportion.

Fixing this problem (lowering the gamma-risk indicator) requires a deconsolidation of financial markets and disaggregation of the capital (disaggregation of the risk).

Electronic trading and volatility in a flash (an effective counter-measure to mass movement and momentum indicating--discovering the price for--a market position), now up to about 70 percent of volume, is not well understood because it is a dark-market operationalized with the risk-narrative and the consolidated movement of the capital. Deconsolidate the market, disaggregate the capital, and the insidious effect of dark-markets reduces with the gamma risk.

Massive oscillations indicate massive induction of risk into a crisis proportion. The crisis (the risk) is then explained as an unavoidable ontology in which the costs and benefits legitimately accrue in zero-sum. It is a false ontology (a false induction of risk) in which the risk is tested post hoc in narrative form (after having been formed, or caused, the hypothetical risk is transformed into declarative knowledge). What would otherwise be the test of an alpha-risk ontology (laissez-faire economics) is deliberately transformed into gamma risk (command and control).

Retail investors need to understand that financials are operating in zero-sum. Economy-of-scale firms will act to consolidate capital even if it results in a short-term denominative loss. The enumerative consolidation (the crisis) is what is critically important. It is an absolute value that increases the economy-of-scale efficiency, reducing alpha-risk distribution and pluralistic accountability.

A descriptively "fair and orderly" market is determined by whoever has the greatest economy of scale, hands-on.

Technical Glitch or Indicator?

Despite whether it was really a technical "glitch" or not, the spike on today's chart (6 May 2010) is a technical indicator.

It is a crisis indicator that we have been following by tracking the gamma-risk indicators. The indicator gained verification with this quick test of market resistance and support.

Financial markets are too consolidated for stability. The aggregation of risk (the gamma) is so high, it takes very little to cue a panic that scores huge profits for economies of scale that have the assets to gain the fractile, overleveraging of risk to a destabilizing crisis proportion.

It is too easy for too-big-to-fail financials to position themselves to profit from risk-without-growth which provides the accumulative, algorythmic program of crises, now accomplished at high frequency.

The global economy is not disaggregating risk. Risk continues to aggregate, indicated not only with spikes on technical charts, but easily predicted and verified with rioting in the streets that is easily prevented by deconsolidating the risk, ensuring a peaceful and prosperous pluralism in priority.

Disaggregation of Risk

An economy of scale not only consolidates industry and markets, it consolidates risk.

Aggregation of risk affords the ability to bundle risk into market and asset bubbles. The aggregation of value, and risk, consolidates value by trapping it into the risk (like a too-big-to-fail organizational ontology that trapped us into a multi-trillion dollar bailout of the financial sector).

Being trapped into doing something is hardly the model of popular consent. Creating liquidity traps through the false efficiency of economies of scale, causing a zero-sum consolidation of wealth and power, is the problem. According to big-bank executives, however, it is the solution. The bigger the better to effect a free-trade global economy.

Free-trade, laissez-faire globalists disguise their economy-of-scale means to ends as free-market economics because they know it provides the legitimacy of a popular consent. The solution is to remove the diguise and disaggregate the risk.

If financial reform measures do not disaggregate the risk, liquidity will continue to be trapped into inflationary-deflationary cyclical trends that appear to be force-majeur ontologies that result in unavoidable crises.

While Senate Democrats appear to recognize that economies of scale provide a flawed if not false coefficiency since it clearly results in crisis, much of the suggested reform, like higher capital requirements and incentives to discourage overleveraging, would continue to aggregate risk.

Overleveraging, for example, occurs coefficiently with organizational size, and that size is coefficient with the ability to cause, and control, crises. It does not appear, then, that financial reform will adequately support disaggregation of risk by deconsolidation of industry and markets.

Reform will be dominated with highly specific language that suggests a complexity beyond the comprehension of the average citizen. (Popular consent has no utility if we do not know what we are consenting to...kind of like health care reform.) The problem, and the solution, is not so complex, however.

Language will have a highly utilitarian aspect to lend a sense of legitimacy to specific practices that have a low value of empirical confirmation, which is the simple essence of what is to be understood for a popular consent.

Risk Reduction and Financial Reform: Ensuring the Measure of Popular Consent

The best way for a bank to maximize its margin is to be so big that it has virtually no risk. The risk is most fully reduced with an economy-of-scale efficiency so that it accumulates in the space of public policy (the gamma risk).

Within a public policy space, the-economy-of-scale efficiency is organizationally extended so that the risk can be managed in aggregate. The specific types of transactions that accure the gamma risk are largely lost in macro-reform measures, like raising capital requirements (increasing the economy of scale), to manage the "big" risk. The space is then defined as mitigating the damage of the accumulated risk, not preventing it. Government is then operatonalized into the economy-of-scale efficiency, effectively being organized to support the problem as it acts to resolve it, giving the accumulation of risk an element of presumption that can then be considered an assumed risk (an exculpatory ontology) of economic participation.

The reason aggregation of risk results in crisis is because the accumulation requires a distribution to be sustainable. Value becomes so accumulated that it collapses under its own weight. The solution is, obviously, to prevent gamma accumulation of risk deliberately aggregated into an economy-of-scale. The too-big-to-fail proportion results in public policy designed to alleviate crisis rather than prevent it. We then get the deliberative policy we need (the elitist model), within a defined policy space and time, rather than the policy we want (the pluralist model of popular consent).

This is not an ethical problem, per se, but an organizational problem. The firms are allowed to be so big they can rig the market to maximize income, and so they do by popular consent. Maximizing margin is what shareholders want. The crisis that always results from accumulation of gamma risk, however, tests the legitimacy of popular consent and the intelligence required to correct "the problem" independant of a moral capacity.

Either organizing firms to accumulate gamma risk is not considered to be wrong, as Lloyd Blankfein maintains, because it provides liquidity to markets by "making markets," or a deliberate fraud and deception operating with the legitimate consent of those that are harmed. The problem is then a function of ignorance and stupidity and not a moral deficiency.

Considering the operation of an economy-of-scale efficiency to maximize liquidity of markets resulted in liquidity crisis of monumental proportion, a considerable amount of intellectual deficiency is presumed by the "market makers" and now the "policy makers."

Since hypotheses have been clearly tested and disconfirmed, measures that resist the problem have gained an empirically generated moral imperative, however. The activity of policymakers within the policy space now squarely faces the legitimate consent of the governed, naturally endowed by inalienable right and Constitutionally protected by government authority. Its verification will be a categorical measure of both intellectual capacity and moral character that avoids catastrohic accumulation of risk.

It is possible to ensure a genuine consent of the governed in priority. It requires deconsolidating the risk rather than letting it accumulate to a gamma risk proportion.

Ensuring the measure of a popular consent is absolutely critical to risk reduction. That is why economy-of-scale organizations extend into the public space. It is necessary to gain this critical legitimacy of power and reduce the only remaining risk--the risk of liability determined by the consent of the governed, or the gamma risk.

All means to reduce the liability by raising the requirements to accumulate the risk supports the causal factor--consolidation of industry and markets. Resolving to such measures cultivates the problem.

An economy-of-scale cultivates to afford transfering the risk (maximizing the marginal efficiency). Capital then accumulates into the value that supports the risk (regulatory arbitrage). The value accumulates more capital seeking the value that affords more risk, accumulating the liability into a crisis proportion. Thus the need to avoid the risk of liability with an indivisible aggregation into a public space over time (accumulating the gamma risk). It instills the false belief (the policy) that avoiding the liability (the crisis) reduces the risk that causes it.

Avoiding liability, however, does not reduce gamma risk. It allows it to continue accumulating, recycling into a crisis proportion. The only way to actually reduce gamma risk is its disaggregation.

Defining the Policy Space for Economic Expansion

Addressing a ground swell of populist sentiment, public policy is focused on the causes of The Great Recession.

Policymakers and analysts are busy confirming a policy space that will essentially define the problem in which the solution is to be logically deduced.

If it is true that government is largely captive to big business interests, definition of the policy space should confirm that hypothesis. With very little to suggest that policy will
eliminate management of risk that does not effect economic expansion but accumulates wealth, for example, it appears the hypothesis will be confirmed.

While deliberation of the financial system appears to be looking for new definition, the space is actually occupied by a pre-defined policy now being temporized to fit that space over time. Big business interests and populist sentiment will be forged to fit the defined policy space. The result will be policy that does not compromise the distributional properties--the means to ends--of the organizational structure while giving the appearance of change. Much of that appearance comes in the form of public-policy process both in the formation of policy and later in its administration.

Sufficient time passes within that space for a distribution to occur on the accumulation. Enough revenue can then be generated to pay on the public debt and secure its value without having to source the cause of the recession (the overaccumulation of capital into liquidity crisis--the benefit of accumulated wealth).

The debt needs enough support to make it worth buying. Securing that value is essentially accomplished by minimizing the amount the buyers are taxed to support it (essentially those that are too rich to fail the recession--the beneficiaries of the accumulation). The more you are taxed to pay the debt, the less value the debt returns to you and the less likely you are to buy it.

It is necessary to regress the tax system to give value to the debt for the people that have the money accumulated (the cause of the debt) to buy it. A VAT tax is being proposed to fill the policy space. It will give the appearance of change and regress the system to support the value of the debt without sourcing the accumulated benefit.

Through means of apparent change, the accumulated benefit, and the Hamiltonian model of finance that causes the problem, is conserved within the defined policy space over time.

Defining the policy space refers to a highly deliberative process that lends legitimacy to the dictates of legislative authority. That deliberative process functions to define a problem which will deliberately limit the probable outcome of the law, or provide large loopholes to ensure a probable behavior as result of those limitations.

It is important for legal consequences, like the legal act of a bank to sell securities long and proprietarily short at the same time, to have the appearance of a highly deliberative process that is intended to produce the public good.

In the absence of a directly effective democratic process, especially diminished by economies of scale, it is essential for the legal process to have the appearance of intentionally approximating the legitimately popular consent of the governed.

Defining the policy space is a game to be played out in the theatre of politics. Controlling this space is a defining characteristic of power and the ability to exercise control with the appearance of democratic process (without appearing to be dictatorial) is to exercise power with elegance.

While health care reform did little to provide a policy program that the public generally perceived to be the product of a popular consent, there was a social satisfaction of having successfully exercised power (the measure of popular consent: the less popular, the more power demonstrated).

We should not allow financial reform to seek the same measure of success as health care reform. It is critical the policy space be redefined for economic expansion instead of conserving the means of accumulating wealth in zero-sum and the pro-cyclical liquidity crises it causes, enabling a political-economic process to legitimately function without a popular consent.