Risk Aversion and Financial Regulatory Reform

Democrats argue Republicans stand opposed to a resolution fund financed by big banks because Republicans are allied with the banks.

Republicans argue the resolution fund is essentially a bailout fund that backstops bad behavior (the risk) the specific measure is supposed to avert.

Both arguments are essentially true and indicate a congress allied with big banks, supporting a bigger-is-better corporate model.

While the theory of the specific measure is that big banks will behave like small banks, or maybe even divest into smaller entities to avoid the cost being imposed on the risk, the measure resists proliferation of small business entities nevertheless.

Both Democrat and Republican policymakers know that firms want to grow big in order to avoid small-firm risk (the alpha risk). The specific measure makes it appear lawmakers are trying to ensure a legitimate level of alpha risk in priority without sacrificing the dubious benefit of firms big enough to take the "big risk."

Sacrificing the "big risk" would be undubiously beneficial, but since the big risk takers can afford to innovate better than small firms, our Hamiltonian legislature seems to think, regulatory measures can support big firms to enhance innovation without increasing systemic risk. Regulation will supposedly increase market efficiency by reducing the risk (the risk of failure) the alpha risk provides.

While there is no better incentive to innovate than survival, reducing costs to increase profit without sacrificing employment, it makes more sense to support proliferation over consolidation, reducing the risk of both inflation and unemployment.

The specific measure for resolving and averting the risk of systemic crisis is, however, not risk averse at all. It is risk prone.

The large profits generated will provide a huge margin to be taxed, transforming capital into public goods to be distributed by government authority. The goal is to stabilize the market.

Transforming alpha risk into gamma risk does not, however, reduce beta risk at the micro or macro level. With the financial market, for example, evermore reliant on government administration, the proposed resolution measure will pro-cyclically increase beta volatility.

Who and what is too big to fail? Will big firms really be allowed to fail despite the systemic risk? Will small firms organized into a large counter-party network of externalized risk be allowed to fail?

Capital markets will be a constant traders' market, more interested in plundering than economic growth.

As government transfers payments in support of demand to resist deflation (the declining rate of profit), prices will inflate supported by a supply in plunder. Plenty of profit will be available to tax and spend on supporting the fundamental supply-demand differential. Of course, all the plundering accumulates risk to a systemic, crisis proportion, fractionalized into securitized debt until the only counter-parties left solvent to pay the debt are, pro-cyclically, the creditors.

Supposedly, redemption of the risk will be bought and paid for by the risk takers as per the specific legislative measure for funded resolution. Valuation of the risk in excess of the funding requirement will result in failure of the firm.

Rather than being averted, the risk will have been perverted with an ill-fated Democrat/Republican gaming of the system, leading to an accumulation of gamma risk that will rival The Great Recession.

The risk aversion game conserves the present value of accumulated risk (the gamma risk).

Increasing capital requirements and requiring contributions to an expensive bonding authority in order to take "the big risk" will encourage rather than prevent market abuse via structured (risk transfer) products.

Engaging in risk transfer requires a big ante up. In effect, it codifies the activity of externalizing risk into a gamma proportion, applying an empirical, categorical, measure that limits the liability of the firm to the available ante (the categorical imperative of the Hamiltonian model). It is hardly a measure to encourage internalization of the risk. The value of the risk will be monetized in crisis mode just as it was before.

It is not a random walk. Big financial entities deliberately invest the market for consolidation. The effect is not a random ontology that presents as unpredictable, uncontrollable, cyclical trending.

The value of the risk accumulated is highly retributive, not exculpatory, and regulation that does not resist the accumulation supports the probability of the crisis to be averted.