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.