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.
Showing posts with label financial reform 2010. Show all posts
Showing posts with label financial reform 2010. Show all posts
Wednesday, April 28, 2010
Thursday, April 15, 2010
Risk Coefficients and Crisis Indicators: Organizing Risk With Liability
Financial reform proponents argue for an early warning mechanism.
Since crises cannot be prevented, being the result of an organized ontology and the business cycle, warning signals, according to Democratic lawmakers, need to be incorporated into the practical model that indicate a probable-risk coefficiency. When the risk is high, measures will be taken to reduce that risk, conserving the model that accumulates it. Its efficiency is then maximized with minimal risk.
The coefficiency is descriptively a command and control, organizational teleology. However, it will be disguised as a measure for controlling the exculpatory ontology of an unfettered free-market economics. It will be sold as the means for saving the free market when it is actually minimizing it to favor an economy-of-scale coefficiency that consolidates political and economic power (accumulating risk) into a crisis proportion.
The reform is not designed to diffuse risk, but to keep it consolidated. All the accrued benefits and detriments (the Hamiltonian hierarchy of incentives) are fully conserved and operational, but with a brand new wardrobe.
The intent of reform is to disassociate risk, like systemic risk, with liability. The risk coefficient is designed to limit the liability associated with accumulation of a benefit that, if not the result of a free-market ontology, has a highly probable retributive value.
An accumulated value at very high risk is likely to be retributed if not passed through a legitimacy of due process which the reform is to provide. The process effectively organizes the risk with the liability (a coefficiency) that scores the distribution of rewards and deprivations as legitimately true and final.
The risk, however, accumulates rather than dissipates, and allowing firms to consolidate into organizatins that are too big to fail is prima facie evidence of the crisis to be avoided.
If we really want to organize the risk with liability in order to disincentivize the accumulation of risk because there is no liability, we should ensure a free-market mechanism in priority. That is the change, the reform, we need.
The free market directly sanctions the risk with liability. It is a coefficiency to be supported, not resisted with the current reform being proposed which is to allow for failure without a free-market coefficiency.
Without plurality of industry and markets, allowing for failure is catastrophic because the risk accumulates into an economy of scale, or into a crisis proportion.
Risk is limited to the liability in a free marketplace. If the risk is being accumulated and shifted to the system in the guise of an unavoidable and exculpatory ontology, like we have now, the excess of risk to liability has a crisis coefficiency of 100 percent and indicates the lack of a true and legitimate free-market ontology.
Since crises cannot be prevented, being the result of an organized ontology and the business cycle, warning signals, according to Democratic lawmakers, need to be incorporated into the practical model that indicate a probable-risk coefficiency. When the risk is high, measures will be taken to reduce that risk, conserving the model that accumulates it. Its efficiency is then maximized with minimal risk.
The coefficiency is descriptively a command and control, organizational teleology. However, it will be disguised as a measure for controlling the exculpatory ontology of an unfettered free-market economics. It will be sold as the means for saving the free market when it is actually minimizing it to favor an economy-of-scale coefficiency that consolidates political and economic power (accumulating risk) into a crisis proportion.
The reform is not designed to diffuse risk, but to keep it consolidated. All the accrued benefits and detriments (the Hamiltonian hierarchy of incentives) are fully conserved and operational, but with a brand new wardrobe.
The intent of reform is to disassociate risk, like systemic risk, with liability. The risk coefficient is designed to limit the liability associated with accumulation of a benefit that, if not the result of a free-market ontology, has a highly probable retributive value.
An accumulated value at very high risk is likely to be retributed if not passed through a legitimacy of due process which the reform is to provide. The process effectively organizes the risk with the liability (a coefficiency) that scores the distribution of rewards and deprivations as legitimately true and final.
The risk, however, accumulates rather than dissipates, and allowing firms to consolidate into organizatins that are too big to fail is prima facie evidence of the crisis to be avoided.
If we really want to organize the risk with liability in order to disincentivize the accumulation of risk because there is no liability, we should ensure a free-market mechanism in priority. That is the change, the reform, we need.
The free market directly sanctions the risk with liability. It is a coefficiency to be supported, not resisted with the current reform being proposed which is to allow for failure without a free-market coefficiency.
Without plurality of industry and markets, allowing for failure is catastrophic because the risk accumulates into an economy of scale, or into a crisis proportion.
Risk is limited to the liability in a free marketplace. If the risk is being accumulated and shifted to the system in the guise of an unavoidable and exculpatory ontology, like we have now, the excess of risk to liability has a crisis coefficiency of 100 percent and indicates the lack of a true and legitimate free-market ontology.
Financial Reform: Support and Resistance Indicators
Analysts discern the practical model being used for the development of public policy by identifying patterns and relative levels of support and resistance.
As the congressional debate proceeds on financial reform following the crisis in 2008, both parties are predictably poised to define the problem as the solution.
Democrats argue their reforms will end the too-big-to-fail organizational ontology that commands government bailouts. The Republican party, in faux opposition, contends proposed reform will "institutionalize government bailouts."
Equity valuations for large banks are getting support because the probability that any reform will end the too-big-to-fail model is virtually none.
While the Republican critique is correct, the party's solution to the problem is to stand in opposition to reform. The overall effect is to support the problem (and the associated equity valuations).
The entire reform process is in a prima facie state of regulatory capture to conserve the economy-of-scale modeling that consolidates wealth and power.
It is no coincidence that Wal Mart, in the midst of the recessionary trend, has now surpassed Exxon-Mobil at the top of the Fortune 500 list of largest companies. Consolidation into economy-of-scale "efficiencies" both precipitates the recessionary trend and validates the value of the efficiency.
As long as the means of consolidation is conserved, subsequent measures to counter its negative effects and support an economic recovery, like a more progressive tax code by letting the Bush tax cuts expire, for example, are rendered ineffective. The recessionary trend (unemployment) and equity values get support while a less accomodative monetary policy is resisted. Cheap money is available to the too-big-to-fail banks through the discount window to finance mergers and acquisitions (the economy of scale efficiency). The problem is supported, the solution is resisted.
A persistent recessionary trend will then be blamed on a progressive code and a value-added tax will be installed to finance the deficit in Hamiltonian fashion (with a regressive tax burden).
Since the tax on the value added is included in the consumer price, the tax increase will be regressive and deflationary (reducing demand), supporting the recessionary trend and the budget deficit while resisting higher interest rates.
The type and strength of support and resistance strongly indicates a persistent stagflationary trend that supports an arbitrage economy with high volatility, expertly engineered to favor firms that are too big to fail and a system of finance designed to generate profits without employment or economic growth.
While the reform debate correctly identifies the problem to be solved as organizational, it critically fails to identify that being "too big" is the determining variable. The practical model in operation is decidely, then, not pluralistic.
If analysts and policymakers rely on the pluralistic model for a predictive utility, the model will predictably fail.
Being organized "too big" will predictably fail the model of pluralism.
Government bailouts are necessary to avoid the catastrophic consequences of conserving the Hamiltonian model in a post industrial society.
The solution is to finance a more pluralistic model, not a more consolidated one.
As the congressional debate proceeds on financial reform following the crisis in 2008, both parties are predictably poised to define the problem as the solution.
Democrats argue their reforms will end the too-big-to-fail organizational ontology that commands government bailouts. The Republican party, in faux opposition, contends proposed reform will "institutionalize government bailouts."
Equity valuations for large banks are getting support because the probability that any reform will end the too-big-to-fail model is virtually none.
While the Republican critique is correct, the party's solution to the problem is to stand in opposition to reform. The overall effect is to support the problem (and the associated equity valuations).
The entire reform process is in a prima facie state of regulatory capture to conserve the economy-of-scale modeling that consolidates wealth and power.
It is no coincidence that Wal Mart, in the midst of the recessionary trend, has now surpassed Exxon-Mobil at the top of the Fortune 500 list of largest companies. Consolidation into economy-of-scale "efficiencies" both precipitates the recessionary trend and validates the value of the efficiency.
As long as the means of consolidation is conserved, subsequent measures to counter its negative effects and support an economic recovery, like a more progressive tax code by letting the Bush tax cuts expire, for example, are rendered ineffective. The recessionary trend (unemployment) and equity values get support while a less accomodative monetary policy is resisted. Cheap money is available to the too-big-to-fail banks through the discount window to finance mergers and acquisitions (the economy of scale efficiency). The problem is supported, the solution is resisted.
A persistent recessionary trend will then be blamed on a progressive code and a value-added tax will be installed to finance the deficit in Hamiltonian fashion (with a regressive tax burden).
Since the tax on the value added is included in the consumer price, the tax increase will be regressive and deflationary (reducing demand), supporting the recessionary trend and the budget deficit while resisting higher interest rates.
The type and strength of support and resistance strongly indicates a persistent stagflationary trend that supports an arbitrage economy with high volatility, expertly engineered to favor firms that are too big to fail and a system of finance designed to generate profits without employment or economic growth.
While the reform debate correctly identifies the problem to be solved as organizational, it critically fails to identify that being "too big" is the determining variable. The practical model in operation is decidely, then, not pluralistic.
If analysts and policymakers rely on the pluralistic model for a predictive utility, the model will predictably fail.
Being organized "too big" will predictably fail the model of pluralism.
Government bailouts are necessary to avoid the catastrophic consequences of conserving the Hamiltonian model in a post industrial society.
The solution is to finance a more pluralistic model, not a more consolidated one.
Thursday, April 8, 2010
Spreading the Risk: Managing the Risk Coefficiency
Much of the current discussion for financial reform that precipitates from the current liquidity crisis is about measuring risk.
Since managing risk requires a measurement of it, much of what is risk management is managing the risk coefficiency, or what is the perceived risk and the liability associated with it.
First, it is necessary to identify the source of risk in order to measure the coefficiency of probable reward and possible liability (assets less liabilities, or a fair-market-value-to-book-value differential based on the value of the risk).
For example, if the risk can be identified as "systemic," the liability associated with it can be considered ontologically exculpatory (it is a shared liability). It is possible, then, to share in the reward of the risk without any liability, or not share in the reward but share the liability.
Limiting liability is largley a function of managing the risk coefficiency, or identifying the source of the risk, which determines the divisibility or indivisibility of the liability for the risk taken.
Avoiding the risk does not necessarily avoid liability in the same measure because it is possible to forsee consequential liabilities associated with the risk being avoided. If avoiding risk causes harm, it can then be considered tortious, if not criminal, behavior depending on the source of the risk being avoided.
So, what makes for "the risk?"
The inception of capitalism is marked by the reduction of risk (risk avoidance). So, the implication is that economic activity assumes (takes) risk (the doctrine of "assumed risk"). The liability is equivalent to the risk assumed (the action taken) in the marketplace.
Separating the risk from the liability requires a court of law and a jurisdiction in which to sue. "No taxation without representation" essentially speaks to an assessment of risk based on the expected, probable liability of the king being the source of the risk that determines the value of "taking" the risk, which eventually evolves into "making" the risk (managing the risk coefficiency) as capitalism evolved from feudalism to post-industrial society.
While the corporation was originally a means of spreading the assumed risk, it later developed as an organized means of limiting liability (reponsibility) for the risk along with its probable reduction. (You can't be held liable for the risk if you can blame it on royal fiat, or an uncontrollable--unavoidable--gamma risk.)
Just because you take the risk and fail, or avoid it, does not mean you are not liable for the consequences, especially if you knowingly and willingly assume risk despite the probable consequences. Supposedly it is "necessary," then, to consolidate into large corporate bodies that can afford to assume (to take) the risk (the economy-of-scale ontology).
The best way to reduce risk was, as it is now, to "network the externalities" (to control the probable risk factors). The gamma risk, like the value of your goods or services being determined by royal fiat, was a risk that accumulated into a revolutionary proportion; and the revolution, as Thomas Jefferson surmised, continues long after The Revolutionary War.
Supposedly, economies of scale reduce market risk. If we want a free-market mechanics, it is necessary to not allow for this control of the risk because it requires firms be "too big to fail." It defeats the structural incentive of free-market economics which is, "the risk of failure."
Defeating the free-market model is not the product of an exculpatory ontology. It is a deliberate act of design to knowingly and willingly avoid the alpha risk. While the action deliberately increases beta-risk valuations, it also increases the value of the gamma risk--it increases the need, the demand, for government authority.
If we want to reduce the need for government (the gamma form of the risk), look no further than reducing the deliberate act (increasing the liability) of reducing alpha risk by organizational means of economies of scale.
Instead, however, current financial reform is looking to regulate, rather than eliminate, what empowers the model of consolidated risk and its elite regulators. The action "taken" will empower the too-big-to-fail model with "fail safe" measures because being "too big" is for the purpose of avoiding failure without risk of liability.
Failing safe means that the too-big model is safe from failure, not that the marketplace will be empowered with the risk, and the liability, of failure.
Financial reform being offered will not empower the alpha risk because it will not reduce the purposeful size of organized economic scale to avoid, and accumulate, the risk into a crisis proportion that protects the model from empirical failure (the coefficiency of organizational size to economic success based on an otherwise probable of failure).
So, instead of progressing into an ontological model for managing risk without crises, we regress back to reliance on the gamma-risk ontology of government fiat. (Would Obama and the legislative realignment transform our economy into a model less prone to catastrophic risk? Your "guess" was as good as mine, and the answer is, no!)
The gamma risk is getting support where it needs resistance, and the alpha risk is getting resistance where it needs support. It is the formula for continued cyclical crises that is clearly considered to be a social benefit to be conserved.
As long as the means of surplusing risk and the means of managing it is considered to be a function of managing the risk coefficiency by deliberately (reliably, predictably) causing it, the pent-up demand for an equitable distribution of risk, and power, will eventually propel us forward.
Destiny is no slave to a hard determinism. We can choose to completely progress out of feudalism and the tendency to consolidate power (the risk) with a deliberate, genuine self-determination that spreads the risk with a measurably self-evident coefficiency.
Since managing risk requires a measurement of it, much of what is risk management is managing the risk coefficiency, or what is the perceived risk and the liability associated with it.
First, it is necessary to identify the source of risk in order to measure the coefficiency of probable reward and possible liability (assets less liabilities, or a fair-market-value-to-book-value differential based on the value of the risk).
For example, if the risk can be identified as "systemic," the liability associated with it can be considered ontologically exculpatory (it is a shared liability). It is possible, then, to share in the reward of the risk without any liability, or not share in the reward but share the liability.
Limiting liability is largley a function of managing the risk coefficiency, or identifying the source of the risk, which determines the divisibility or indivisibility of the liability for the risk taken.
Avoiding the risk does not necessarily avoid liability in the same measure because it is possible to forsee consequential liabilities associated with the risk being avoided. If avoiding risk causes harm, it can then be considered tortious, if not criminal, behavior depending on the source of the risk being avoided.
So, what makes for "the risk?"
The inception of capitalism is marked by the reduction of risk (risk avoidance). So, the implication is that economic activity assumes (takes) risk (the doctrine of "assumed risk"). The liability is equivalent to the risk assumed (the action taken) in the marketplace.
Separating the risk from the liability requires a court of law and a jurisdiction in which to sue. "No taxation without representation" essentially speaks to an assessment of risk based on the expected, probable liability of the king being the source of the risk that determines the value of "taking" the risk, which eventually evolves into "making" the risk (managing the risk coefficiency) as capitalism evolved from feudalism to post-industrial society.
While the corporation was originally a means of spreading the assumed risk, it later developed as an organized means of limiting liability (reponsibility) for the risk along with its probable reduction. (You can't be held liable for the risk if you can blame it on royal fiat, or an uncontrollable--unavoidable--gamma risk.)
Just because you take the risk and fail, or avoid it, does not mean you are not liable for the consequences, especially if you knowingly and willingly assume risk despite the probable consequences. Supposedly it is "necessary," then, to consolidate into large corporate bodies that can afford to assume (to take) the risk (the economy-of-scale ontology).
The best way to reduce risk was, as it is now, to "network the externalities" (to control the probable risk factors). The gamma risk, like the value of your goods or services being determined by royal fiat, was a risk that accumulated into a revolutionary proportion; and the revolution, as Thomas Jefferson surmised, continues long after The Revolutionary War.
Supposedly, economies of scale reduce market risk. If we want a free-market mechanics, it is necessary to not allow for this control of the risk because it requires firms be "too big to fail." It defeats the structural incentive of free-market economics which is, "the risk of failure."
Defeating the free-market model is not the product of an exculpatory ontology. It is a deliberate act of design to knowingly and willingly avoid the alpha risk. While the action deliberately increases beta-risk valuations, it also increases the value of the gamma risk--it increases the need, the demand, for government authority.
If we want to reduce the need for government (the gamma form of the risk), look no further than reducing the deliberate act (increasing the liability) of reducing alpha risk by organizational means of economies of scale.
Instead, however, current financial reform is looking to regulate, rather than eliminate, what empowers the model of consolidated risk and its elite regulators. The action "taken" will empower the too-big-to-fail model with "fail safe" measures because being "too big" is for the purpose of avoiding failure without risk of liability.
Failing safe means that the too-big model is safe from failure, not that the marketplace will be empowered with the risk, and the liability, of failure.
Financial reform being offered will not empower the alpha risk because it will not reduce the purposeful size of organized economic scale to avoid, and accumulate, the risk into a crisis proportion that protects the model from empirical failure (the coefficiency of organizational size to economic success based on an otherwise probable of failure).
So, instead of progressing into an ontological model for managing risk without crises, we regress back to reliance on the gamma-risk ontology of government fiat. (Would Obama and the legislative realignment transform our economy into a model less prone to catastrophic risk? Your "guess" was as good as mine, and the answer is, no!)
The gamma risk is getting support where it needs resistance, and the alpha risk is getting resistance where it needs support. It is the formula for continued cyclical crises that is clearly considered to be a social benefit to be conserved.
As long as the means of surplusing risk and the means of managing it is considered to be a function of managing the risk coefficiency by deliberately (reliably, predictably) causing it, the pent-up demand for an equitable distribution of risk, and power, will eventually propel us forward.
Destiny is no slave to a hard determinism. We can choose to completely progress out of feudalism and the tendency to consolidate power (the risk) with a deliberate, genuine self-determination that spreads the risk with a measurably self-evident coefficiency.
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