Economic Etiology: Crisis and Risk

Once upon a time, in the noble age of Camelot, the crown assumed all the risk and extended it to its subjects. As the wealth, and power, trickled down, the risk extended with a return on investment befitting a king who, as sovereign, assumed all the risk--meaning his subjects did not have to.

Safe within the walls of consolidated risk from the monsters that abide beyond the comprehension of the non-elite, fear and angst presents as speculative probability of the monsters conspiring from within (the task of the elite to manage popular sentiment with organized sophistication that today we call political-economy).

Managing the sentiment of the populace is to manage the perception of the risk. Disparity between the truth and the perception runs "the risk" of resolution, and managing that risk requires authority (gamma-risk consolidation requires a resolution authority).

There is a beneficial gestalt built into the macro-economic concept of elite authority, like the crown, that survives today. It survives in the form of the ruling class.

Since The People are the Sovereign, theoretically assuming the risk individually, there is now a supra-sovereign extension of the risk, and on a global economy of scale.

For example, when too-big-to-fail banks open every morning to unwind the derivative transactions (about $600 trillion in total value) of counter-parties the night before, not only has the risk been extended to an economy-of-scale crisis proportion, but on a global economic scale.

It is the size of too-big firms that makes them "too important" to fail. The measure of success is not by reducing the alpha risk ontology (the fundamentally diffused risk of free-market mechanics), but their size and the ability to extend the risk into a gamma proportion. It is a deliberate function of their size to "avoid" (not reduce) the alpha risk, allowing it to accumulate into systemic (extended) risk.

It used to be that a big banker, like J.P. Morgan, would bail out the economy to prevent the declining rate of profit (deflation)--preventing over-extension of the risk. It was not enough this time, requiring a government bailout (authoritative resolve) to manage risk that went exponentially gamma--consolidating the risk (making the market) into a ($600 trillion) crisis proportion.

Paradoxically, the so-called supply-side, laissez-faire economics of the Bush administration that lead to the Great Recession resulted in the need to regulate firms that are TOO BIG to fail. If we continue to ignore the obvious and do not deliberately resolve the paradox, nature deliberately will in the form of crises. Avoiding this constancy of risk just makes the valence of crises more intense.

A $1 trillion bailout for a $600 trillion extension of the problem is obviously a necessary-but-not-sufficient measure that, as the authors of financial reform pointed out, will not avoid crises. We are so busy making the tools to mitigate the extent of crises, we are not using the wisdom to prevent it. Our homo-habilis approach to the problem is "overpowering" our homo-sapien capacity to resolve it.

The so-called elite are overpowering our pluralistic capacity to resolve our problems without a divine intervention of catastrophic, supra-sovereign proportion. Rather than presenting the ultimate model of political-economic sophistication, they re-present a failed model of our feudalistic past (affording protection from risk, consolidated and re-presented as value extended). There are just a few overlords among us determined we all suffer the fate of conservancy in the face of needed change.

Conserving the source of crises is not only bad for the angry mob, it's also bad for conservatives who are too complacent to recognize the over-extended risk of supra-sovereign power.

Although we now live in a post-modern age of scientific inquiry, testing hypotheses to guide us into the good life, we fail nevertheless to recognize that "too big to fail" (consolidation of the risk) is a disconfirmed hypothesis. This organized, economic gestalt of "bigger is better" (the measure of success) is the source of tremendous, and unnecessary, angst and suffering.

The bi-partisan Financial Crisis Inquiry Commission (FCIC), for example, is merely there to legitimize a disconfirmed hypothesis with a public process substituting for free-market mechanics. The inquiry is there to conserve the problem and extend the risk, on a bi-partisan basis.

The Fed's general legal counsel testified before the FCIC that consolidation of the financial sector prior to the crisis under inquiry is generally beneficial despite the systemic risk. Both the inquirer and the cognizant agreed that global, economy-of-scale corporations want banks big enough to finance global (inorganic) growth.

The course of the crisis inquiry formulates this hypothesis: what is too big to fail requires financing that is too big to fail, therefore, it is a risk to be extended, and perhaps regulated, but not to be prevented or avoided. The organizational gestalt, syllogistically validated, is represented as the truth of a dis-confirmed hypothesis (the null hypothesis that bigger is NOT better) etiologically derived, which of course is supposed to prove that bigger is better (not a moral hazard and a prudential risk to be tolerated).

A feedback loop syllogistically derived indicates an ideological bias and a practical/analytical modeling of prudential risk that predicts the macro trend. The modeling assumes and accurately predicts the current value of the risk to be, paradoxically, maintained in a crisis proportion to prevent it.

What do you say we have a scientific inquiry that discovers the truth on a non-partisan basis for a change! It's either that or wait for nature's Divine intervention that retributes the truth, exacting the risk in a non-paradoxical proportion.

It is time to rely on the prudential value of hypotheses tested with the fundamental legitimacy of a free and unconsolidated marketplace. It is time we reduce the etiology of fear and anxiety to the modulated emotion of moral value based on the known, rather than the perceived value of the risk--the assumptions--directed by the self-fulfilled hypotheses of elite authority.