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.