Synthetic Risk

No such thing, and a model constructed to simulate synthetic risk will technically fail because it does not model objective reality. It models a psychotic delusion of the self--that you are so powerful you can create something out of nothing.

Risk cannot be synthesized (but it can be mispriced). It exists in priority and presents on demand (being undervalued to create an overvalued effect). Creating CDS's with the self-delusional concept of creating risk is to demand it with the technical objective of not consuming it yourself but timing it to transfer to others in the form of detriment. The value, in the aggregate, despite the delusion of grandeur (of being too big to fail), is self-retributive and not too bright.

What Jamie Dimon and JP Morgan's risk modelers didn't know, despite being the smartest people in the room, is that fractal, risk modeling does not create risk (nor does it spread the risk, which is what they say they are doing to everyone's benefit), it accumulates risk. What is created is a too-big-to-fail, economy-of-scale proportion that is more likely to fail the larger it gets.

We have to keep in mind that avoiding the too-big-to-fail dimension with a discussion about firms that are "too complex and interconnected to fail" is really the same thing. The risk that catastrophically accumulates, which is why Dimon is under scrutiny, is the result of over-consolidation, which undervalues the risk and means the solution is deconsolidation--exactly what controlling authorities both public and private fail to talk about because it is the risk that is really being avoided.

As I keep pointing out, again and again, trying to avoid the fully assumed risk by synthesizing it for someone else is self-retributive. Hedging risk for profit in the name of protecting your firm from the risk of loss is pure nonsense. The hedge is then the risk to be avoided--stupid!

The problem here is that the so-called best and the brightest are not the smartest people in the room...they are the dumbest! The reality of their superiority is completely synthetic and results in real risk to be consumed on demand by both "us" and "them."

Deconsolidation will keep risk properly valued--it will keep it from being arbitraged and mistakenly considered to be added, or created, by avoiding it.

Deregulation, which is the substitute for deconsolidation, is what led to the Great Recession. It is also the policy program posited by Romney, along with the austerity program of Ryan, to price the risk, and the price will be essentially set by manipulating the tax code in the name of much-needed reform to "reduce" the risk of job "creators."

Remember, however, risk cannot be "reduced" and jobs are not "created" but produced on demand--proprietary value that Romney and Ryan want to tax and cut with a broader burden and a flatter rate.