Economy-of-Scale Efficiency

We are so bent on accepting the "bigger-is-better" hypothesis that recent events are apparently not evidence enough to reject it.

"Too big to fail" builds great things until it fails, revealing how deficient it really is.

Defying Ivy-League logic is nearly anathema when it comes to an economy-of-scale efficiency. "Bigger is better" is a foregone conclusion, ironically described as a function of efficient-market theory.

Ironically, an established economy of scale effectively destroys market efficiency, and with all the conventional wisdom vested to advance the theory in practice, there should be ample evidence to support it.

Recent high-profile events like The Great Recession and, more recently, Fukushima, Daichi, however, provide ample evidence that the law of large is a false, theoretical efficiency. In both cases, being bigger is not proving to be better. Instead, size exacerbates the ability to control the extent of the detriment as these events continue to present an accumulated risk of equal proportion.

The accumulated risk proportion presents an over-sized detriment because the size itself is a determining variable. The size of a firm determines the extent of a crisis proportion, and since size determines the extent, errors endogenously accumulate and exacerbate until the defective model is thrown out. The Great Recession continues to be a persistent detriment because, as was discussed in a previous article, a binomial, political realignment occurred, and now the too-big-to-fail problem is to be resolved by means of deregulation rather than deconsolidation. Doing the same thing over an over again expecting different results is just insane!

This persistent insanity, this egocentric, philosophical psychosis of selfish utilitarianism, indicates an arrogance of absolute power that plagues every nation state. The vehement if not violent protests of late demand a more deconsolidated, pluralistic power structure that allows for a more direct accountability of leadership. The leadership, however, is so consumed with power, so self-satisfied with superior wisdom apart from the feral arousal of the rabble, they can only detect and interpret the signals for pluralism--for change we know will work rather than just believe in--to be a signal for more consolidation, which accumulates more error into a gamma-risk proportion.

When error is over-proportioned (the reward over-accumulated and at high risk, or in need of distribution) instead of error reduction (the needed distribution that pluralism ensures), repressive authority finds renewed vigor for even more consolidation to keep the peace, custody of the morals, and conserve the principles that form the basis for civil society in everyone's self-interest. Risk is resolved into subordination, and freedom the risk to challenge it (which is the retributive value of the risk that needs to be reduced).

Popular protest is the opportunity for the elite to demonstrate power and confirm its consolidation by exacting deprivation. The realignment, for example, that recently occurred in the wake of the Great Recession, and a Democratic Party majority bent on even more consolidation to mitigate its effects, presents Republicans with the opportunity to confirm the power to accumulate wealth with even more deprivation as we look to pay the debt caused by the accumulation. Thus, the errors accumulate, stressing the system (what we call systemic risk). The stress confirms the need to deconsolidate the risk, but is used instead as an opportunity to demonstrate power in the gamma proportion.

Without deconsolidation, errors accumulate and will present in a crisis proportion. Thus, for example, we see the Fed struggling with policy options that are speculatively inflationary or deflationary and analysts that are curiously uncertain about a double dip. Analysts know very well that the realignment will do nothing but support conflated trending of inflation and deflation, accumulating detriment into a predictable, crisis proportion.

While an economy of scale produces over-sized rewards, it also yields a detriment coefficient to the benefit (the bigger the risk, the bigger the reward), and the size of the potential detriment makes it a probable event. However, this probability is argued to be a highly improbable event based on our limited knowledge of exogenous (hidden) variables that latently accumulate endogenous errors (risk), much as Schumpeter describes it.

An improbable event that is a phenomenology of our ignorance--a kind of epistemological force majeure--is fancifully referred to as a "black swan" which falsely infers the risk is unanticipated because of its unfathomable, indivisible proportion by analysts and actors using a divisible, heuristic algorithm that models individual self-interest as the general will and welfare. We cannot see the forest for the trees. Economy-of-scale firms, then, position for the fully assumed risk of loss and invent risk-transfer technologies (like credit default swaps) to hedge (offset) the risk proportion into a more indivisible, collective dimension, assigning the risk to the least able to pay--the unassuming masses. The debt accumulation is a direct empirical measure of the accumulating proportion of error (i.e., it usefully detects the accumulative risk proportion with a predictive, heuristic utility, rather than just relying on a self-interested, heuristic utility).

If we continue to persist in error, as we are doing now in an economy-of-scale proportion despite the protests of a gaining critical mass, each crisis, rather than a heuristic, self-corrective algorithm (like a free market provides), is cumulatively self-destructive. Is not the human species smarter than that, or are we insanely self-determined to condemn ourselves to a self-interested philosophy of heuristic hedonic utility at any expense?

The "if I can't have it all then nobody can" philosophy cannot be, should not be, the moral imperative that determines our future.

While utopia may not be possible, preventing dystopia is, and the time is nigh.

Crisis Indicators: Organizational Size

Much of the Senate's investigation into the role investment banks had in causing The Great Recession is to understand why they were short on their long positions.

Why, for example, did financial firms not simply sell their long positions rather than buy CDO's on the RMBS's to reduce the risk?

Either way, selling long or short, indicates a high level of risk, but shorting the economy--providing a disconnect, a timing differential, between the risk and the realization of that risk--locks in a larger profit than the zero-sum on the long position alone. The large short position is not to just simply hedge the risk, but to cause it.

Large investment banks, then, deliberately caused economic crisis to benefit from timing the trend by causing it.

It is an illegal manipulation of markets (rigging the market) to effect an equally illegitimate gain in zero-sum. The big short transactions incurred a very high risk of liability (a conflict of interest) that the banks consider an economy-of-scale efficiency that facilitates economic growth by "making markets."

A firm that goes long gives support, going short gives resistance. Going both long and short, especially operating with capital on an economy of scale, manipulates the market to fit the determined level of proprietary risk--none! The "free market" is effectively not operational and all that is left is the gamma risk.

Senator Levin, Subcommittee Chairman on Governmental Ivestigations, examining the specific case of Goldman Sachs, is incorrect to say that the financial crisis was not the result of "big size, but the big short."

Long or short, it is the size of the firms and their economy-of-scale transactions that give them the power, the reward, of systemic risk with limited or no liability. Organizational size is the source of the big profits (without growth). It provides the magnifier effect that commands trends and their sudden reversal in the exculpatory guise of undirected, cyclical trending. Since that trending is falsely attributed to the dynamics of free-market economics, and thus the need to hedge the risk of fluctuation, there is always the opportunity to cause the direction of the trend (the risk) with a very limited liability, if you are big enough.

Firms like Goldman Sachs defend their conduct as playing the game of freedom according to the rules of the game. Freedom reduces to the utility of pursuing one's self-interest. No one should be surprised, and it is no crime, to win the game in zero-sum. In fact, it is the moral good because it is the strength, the motive, to expand the pie and provide for the general welfare.

Firms like Goldman Sachs are not providing capital, they are accumulating it to a detriment. That detriment not only empirically indicates a measure of liability, but the probability of crisis. If allowed to continue doing business with a model of organized consolidation, which includes a collusively complex counterparty interdependence, the detriment and the risk of liquidity crisis is conserved, not reduced.

Being able to manipulate on a scale that causes systemic risk (and the huge profits we see big banks reaping from it) is a function of organizational size, not how ethical they are. As far as they are concerned, making as much as you can as quick as you can is the right thing to do.

In a free and unconsolidated marketplace, the level of ethical intelligence is sufficient but not necessary. People are not likely to do business with firms that cannot be trusted, unless they have to.

A genuine free market does not rely on an abstract moral intelligence, but a practical intelligence in a systematic environment that "demands" trustworthiness to survive the market in one's self-interest.

A free market freely forgives transgression, maintaining productivity in the fullest capacity. Rather than doing dirty deeds, being grilled before a congressional committee, going home and doing it all over again the next day, the transgressor learns how to survive the marketplace and contributes the desire for profit and power in the form of productive capacity (the alpha-risk distribution of power and profit).

Deconsolidation operationalizes the reduction of freedom to an ethical utility of seeking power and profit into a systemic benefit rather than a constant risk of detriment and deprivation (liquidity crises).

Deconsolidation will cause economic growth quickly and efficiently in pursuit of self-interest. It will be guided by the strength, the virtue, ensured by a high level of alpha-risk distribution rather than insured by the securitized bundling (consolidation) of risk that clearly indicates crisis.

Large banks and investment firms argue, however, that deconsolidation will put America's financial sector at a competitive disadvantage worldwide. Deconsolidation as a measure of financial reform, big banks argue, will inhibit America's ability to grow in a global economy.

Being globally competitive, they argue, requires firms with a large, economy-of-scale efficiency to command the capital necessary for large capital projects.

The argument for consolidation to achieve a competitive advantage is false both nationally and internationally.

Consolidation does not increase competition by reducing risk, it reduces competition and increases systemic risk.

Deconsolidation will increase competition and reduce risk, giving a competitively trustworthy advantage to America's capital markets. Others will follow to gain that advantage as well.