Risk Reduction and Financial Reform: Ensuring the Measure of Popular Consent

The best way for a bank to maximize its margin is to be so big that it has virtually no risk. The risk is most fully reduced with an economy-of-scale efficiency so that it accumulates in the space of public policy (the gamma risk).

Within a public policy space, the-economy-of-scale efficiency is organizationally extended so that the risk can be managed in aggregate. The specific types of transactions that accure the gamma risk are largely lost in macro-reform measures, like raising capital requirements (increasing the economy of scale), to manage the "big" risk. The space is then defined as mitigating the damage of the accumulated risk, not preventing it. Government is then operatonalized into the economy-of-scale efficiency, effectively being organized to support the problem as it acts to resolve it, giving the accumulation of risk an element of presumption that can then be considered an assumed risk (an exculpatory ontology) of economic participation.

The reason aggregation of risk results in crisis is because the accumulation requires a distribution to be sustainable. Value becomes so accumulated that it collapses under its own weight. The solution is, obviously, to prevent gamma accumulation of risk deliberately aggregated into an economy-of-scale. The too-big-to-fail proportion results in public policy designed to alleviate crisis rather than prevent it. We then get the deliberative policy we need (the elitist model), within a defined policy space and time, rather than the policy we want (the pluralist model of popular consent).

This is not an ethical problem, per se, but an organizational problem. The firms are allowed to be so big they can rig the market to maximize income, and so they do by popular consent. Maximizing margin is what shareholders want. The crisis that always results from accumulation of gamma risk, however, tests the legitimacy of popular consent and the intelligence required to correct "the problem" independant of a moral capacity.

Either organizing firms to accumulate gamma risk is not considered to be wrong, as Lloyd Blankfein maintains, because it provides liquidity to markets by "making markets," or a deliberate fraud and deception operating with the legitimate consent of those that are harmed. The problem is then a function of ignorance and stupidity and not a moral deficiency.

Considering the operation of an economy-of-scale efficiency to maximize liquidity of markets resulted in liquidity crisis of monumental proportion, a considerable amount of intellectual deficiency is presumed by the "market makers" and now the "policy makers."

Since hypotheses have been clearly tested and disconfirmed, measures that resist the problem have gained an empirically generated moral imperative, however. The activity of policymakers within the policy space now squarely faces the legitimate consent of the governed, naturally endowed by inalienable right and Constitutionally protected by government authority. Its verification will be a categorical measure of both intellectual capacity and moral character that avoids catastrohic accumulation of risk.

It is possible to ensure a genuine consent of the governed in priority. It requires deconsolidating the risk rather than letting it accumulate to a gamma risk proportion.

Ensuring the measure of a popular consent is absolutely critical to risk reduction. That is why economy-of-scale organizations extend into the public space. It is necessary to gain this critical legitimacy of power and reduce the only remaining risk--the risk of liability determined by the consent of the governed, or the gamma risk.

All means to reduce the liability by raising the requirements to accumulate the risk supports the causal factor--consolidation of industry and markets. Resolving to such measures cultivates the problem.

An economy-of-scale cultivates to afford transfering the risk (maximizing the marginal efficiency). Capital then accumulates into the value that supports the risk (regulatory arbitrage). The value accumulates more capital seeking the value that affords more risk, accumulating the liability into a crisis proportion. Thus the need to avoid the risk of liability with an indivisible aggregation into a public space over time (accumulating the gamma risk). It instills the false belief (the policy) that avoiding the liability (the crisis) reduces the risk that causes it.

Avoiding liability, however, does not reduce gamma risk. It allows it to continue accumulating, recycling into a crisis proportion. The only way to actually reduce gamma risk is its disaggregation.

Practical Measures

Moral imperatives can lead to impractical measures that end up requiring forceful power structures to maintain. The moral differential between what is and what should be can become so complex and the solutions so at cross purposes, all that remains is to be left in the lap of the gods.

Uncontrollability of complex, self-directed variables has ontological legitimacy. On the one hand, the system can be so diffuse and pluralistic to be uncontrollable. On the other, the component parts can be so big and consolidated in order to control the uncontrollable (to avoid the alpha risk) that it is too big to fail, but with an accumulation of risk that is out of control and presents as crises (the gamma-risk ontology).

These are two different kinds of control with very different ontologies. These differences relate to ethical legitimacies of various sorts such as incentives that are described as "moral hazards" as in the pluralistic case, or a legitimacy that is merely deemed a lack of culpability due to unintended consequences as in the non-pluralistic case in which the risk is consolidated, accumulated into a crisis proportion to be managed, rather than actually being avoided.

The differential we have now is between free markets and consolidaton. The equilibrium of one is not the equilibrium, but the disequilibrium, of the other. Thus, the differential.

Conventional wisdom and practice tends to favor the consolidated model because an accumulation of risk provides for its well-defined management. The question is, of course, to what end?

A well-defined end is much more elusive, which has a practical effect. The end (the purpose, the intention) then becomes a part of the means, rendering a useful, practical complexity that can be shaped, or managed, to fit a legitimacy of the general case to any particular case at any particular time (the deductive method). The result is a false induction that will induce a public policy that conserves the model with the appearance of being based on the evidence. Instead, the evidence is based on (managed to fit) the conclusion.

Currently, for example, the too-big-to-fail model is in a state of questionable legitimacy. It certainly does fail the model of free-market pluralism, but that is the intended affect since the consolidation is intended to accumulate the otherwise pluralized risk.

The consolidation model did not fail, but it did fail the free-market model (the critical differential). The successful model must now be managed to fit, or reconcile, with the failed free-market model that, by definition of its failure, does not obtain.

Since reconciliation of the opposing models is not possible we observe the critical differential focused on the lack of failure (a moral hazard), which is the measurable success of the too-big-to-fail model (the intended consequence). The too-big part of this equation--the necessary condition (the determinant) of the model's success--is conserved as a function of practical efficiency.

Being too-big then becomes the functional coefficient so that, the bigger a firm is the more measurably successful--profitable--a firm is likely to be. Being too-big is then both the means and ends with a perfect (predictable) correlation coefficient. As we have seen, again and again, the coefficient is not the reduction, but avoidance, of risk, with crises being the functional coefficient.

Large, economies of scale are measureably more efficient than small firms because they can operate with more risk without failure which, of course, defines the problem, not the solution.

Within the body of analytical complexity to render failure the value of success, the analyst is to either ignore that accumulation of the too-big-to-fail risk causes crises, or admit that it is a fully intended practical efficiency with a value of success that exceeds the cost of failure.

We are expected to believe that being too-big is the best practice as long as it is allowed to-fail? All this means is that the too-big-to-fail model is a failure in any case.

Since our mostly Ivy-League technocratic elite must "validate" a "success" coefficient in the face of "verifiable" failure, it is necessary to shift (manage) the variables of the differnetial to suggest a functionally reconciled model with a positive, general value.

As a practical measure, there is more utility to forgive the negative effects of consolidation, including inflation and unemployment, than to prosecute and correct for a culpable cause because, according to the conservative evaluation, the organized benefit of minimizing the risk of innovation to the value of capital investment (the declining rate of profit) assures the probability of taking that risk, and everybody benefits (the general welfare).

Assuring the practical efficiency of accumulation (consolidation), proponents of economies of scale argue, requires an assured limited liability (ensuring a predictable certainty of the retributive value to the coefficient).

Without a durable limit to liability (assured risk reduction that supports the measurable value of the coefficient) supply (the expected value of GDP inverted to the interest rate) will not predictably expand if the people best suited to organize it are deprived of pursuing the goal of accumulation without risk in the fullest measure.

The reason (the need) for this base-line level of risk is teleological. It is not a descriptive ontology but a normative, teleological prescription that reflects the Aristotelian ethical model. The difference is not merely philosophical. It is a practical measure that affords effective legitimacy to the distributive value (the coefficiency) of the outcome: it gives syllogistic support to the aristocratic--Hamiltonian--model of power.

The model of consolidation has an ethical value of coefficiency syllogistically expressed as declarative knowledge: If the model of practical governance is not forgiving (if the liability and exposure to risk is not limited), the natural aristocracy will not expand the pie.

Conserving the value of accumulated wealth and power is a practical measure of functional coefficiency expressed as a descriptive ontology ("a" therefore "b" in every case). Leaders will be leaders and followers followers no matter what, and value will be distributed accordingly.
The distribution is measurably categorical, and a limited liability to the value accumulated imperative for provision of the general welfare as a practical measure.

The same argument can be made for a more pluralistic model, however.