Prudential Regulation

Adopting consumer demand to value the marginal risk forces the value of labor to rely more on politics outside the economic marketplace.

Remember that the capacity to buy something or not--marginal, discretionary income--applies risk. While primarily considered an economic function, it is a political function, nevertheless. Buyers and sellers, depending on income, sanction in the marketplace, affecting the margin of profit and market behavior, or what is referred to as "alpha" (market) risk.

When we rely on analysis that primarily focuses on consumer demand to value the marginal risk, the value of labor (what is paid out to apply the risk inherent to prices--prudentially buying, or not buying, to regulate the behavior of producers in the alpha dimension) is diminished.

Keep in mind, as well, that capitalists do not want to admit that the free market has a political component. Politics is, rather, an unwelcome intrusion that causes all manner of inefficiency, increasing costs that pass to the consumer. They want to focus, instead, on economic efficiencies gained by consolidating, which diminishes the power of consumers to politically sanction in the marketplace. The diminished, political capacity creates demand for more government and increases the cost of doing business.

It is important to understand that the demand for government is not a zero-sum, leading conservatives to claim that government causes itself, but, of course, it does not. Reducing alpha risk (the ability to apply risk on demand without a collective, economy-of-scale) causes more than one unit of government.

Along with the political demand displaced from the alpha-risk dimension, which is added to the gamma-risk dimension, the need to regulate the regulator is also added. This is where we see self-determination (the alpha legitimacy of risk-reward) being reduced to the Iron Law. So the alpha ends up occupying space, for example, in Zuccotti Park, in a gamma-risk dimension. Self-interest and determination becomes "a risk to public health and safety" instead of safely occupying space in the alpha dimension. This is the point of inflection at which alpha risk goes gamma to control the effects of its accumulation.

When the alpha goes gamma is the opportunity to determine just exactly what space the risk will legitimately occupy at any particular time. It is the opportunity to control--prudentially regulate--the effective distribution of the risk with the force and legitimacy of elite, authoritative governance, both public and private. Risk is deliberately organized so that the will of higher authority is too big to fail--it is literally insurmountable--in the interest of "We The People" (in the republican and not the democratic form both politically and economically).

Once the risk goes gamma, its direction is critical because it has gained a catastrophic proportion. Risk accumulated into the gamma dimension demands certainty, and so we organize it to be too big to fail. The risk gains a full measure of certainty and, at the same time, transforms into beta-risk volatility (uncertainty), which gives the risk the appearance of an exculpatory, random ontology.

Not only is government a pre-existing condition for doing business (the gamma risk that is fully assumed in priority), but when industry and markets consolidate, demand for government is added. It is at this point that advocates of consolidation argue, post hoc, for reducing government. Its success, however, adds more demand for government and more than one unit to prudentially regulate the market.

The added demand for prudential regulation is mistaken for added risk, but risk has not been added, it has been transformed. What is added is elite, regulatory authority modeled to manage this phantom, added risk, and because the risk is modeled as added rather than transformed, the error propagates within the system.

The added error propagates the regulatory authority to manage the accumulation of error as added risk. The risk assessment then becomes so complex that a highly technical cadre develops to technically model the probable outcome of, and the necessary reaction to, the certainty of an accumulating risk proportion.

Remember, again, the accumulating risk proportion is a zero-sum--it accumulates from the alpha dimension and transforms into regulatory (gamma) risk. When, however, the risk goes gamma, the need to govern it propagates. So we have, for example, expansion of the SEC to now include the Risk, Strategy and Financial Innovation Division promulgated to technically model and manage risk that is arbitraged to cause systemic (consolidated) risk rather than applied to prudentially regulate it in the alpha dimension where government is needed (demanded) least.

If we want to have government that governs least, as Jefferson described it, it is necessary to deconsolidate the risk.

Resorting to a "super committee" and a balanced budget by constitutional mandate to exact detriment (and accumulate more risk) in the name of the general welfare is far from the Jeffersonian ideal.