Creating Risk Exposure

Creating risk exposure relates to accumulation of wealth, consolidation of risk for distribution, and limiting the risk of liability.

Let's say you are an investment bank, Soldem Craps. You are looking to benefit by causing a detriment without liability. You want to avoid the risk that will retribute the value back to the risk taker--the party that unassumingly assumed the risk by your risk-transfer devices, creating a zero-sum, high-yield gain without risk to you, defying the high-risk/high-return hypothesis. It is your job to turn private property (like savings) into capital for gain, and so you "make the market" to create the risk that causes the reward.

Pleased with your record profits, having sold 'em plenty of crap, everybody gets a bonus, having turned capital into your gain (private property). While you built a lot of houses, the accumulation of capital into private property (your savings account) has reduced demand and left millions of Americans with all the risk in the form of a deflationary trend. You now look to gain favorable tax policy in order to turn your private property back into capital, but it is really so the accumulated value will not be "confiscated" and retributed to the risk "takers" which will reverse the deflationary trend that gives the risk the current value you want to conserve.

You pollute popular media with supply-side propaganda, vehemently arguing tax cuts for the rich or the economy will get worse. There is no incentive to turn private property into working capital for economic growth (adding supply to disinflate rather than deflate prices) if government (the sovereign power) is going to tax away most of the return (the property) to be gained.

There is plenty of supply, however, just no demand. There are plenty of empty houses for sale, and homeless people to occupy them, but they are unaffordable at any price (because potential buyers were given all the risk, and thus they are considered "high risk" and not creditworthy).

The supply-side argument is absurd to even the most casual observer, but it is not clear why. If the "risk takers" know why (and keep in mind that "taking" implies consent if not intent), the risk goes dangerously gamma, and according to your elitist hypothesis, mob rule is to be avoided at all cost. So, it is necessary to consolidate the risk for redistribution, which is your "market-making" specialty, leaving the means of power (accumulation of value) intact for elite rule.

Considering your capital-marketing practices are a public menace (increasing "the risk" for mob rule and a possible Reign of Terror), you fully anticipate being regulated, but that's alright, you have plenty of lobbyists on retainer and only two parties to contend with full of politicians that aspire to be wealthy members of the ruling class, if they are not already. No problem!

Since you "made" the market, the only risk exposure left to you is gamma--the risk that cannot be avoided, only recycled and transformed into beta risk, which you use to magnify your profit (your private property) back into capital to arbitrage (recycle) the value of the risk you have created. Where does that added value come from?

While you have accumulated wealth, you have not created it in proportion to the profit that you "made." The disproportion causes a demand crisis--there is plenty of money, but not adequately distributed. As the economy cycles into a deflationary spiral, the capital you have recycled is being evermore exposed to the gamma-risk proportion. It becomes apparent that the profit (wealth) has been accumulated in a zero-sum proportion. Now you have to testify to the social benefit of your accumulated wealth in a public forum.

Since the accumulation of wealth is an honored profession, being called to justify the accumulation is a symbol of status, a mark of achievement to be entrepreneurially aspired. You do not fear the gamma exposure because you are protected by moral imperative--the accumulation of wealth. It is confirmation of an honorable achievement as much as it is a public scourge.

As long as the inquiry is focused on the accumulation and not the creation of wealth, the issue is debated in a safe mode--your private property is constitutionally protected and public policy is focused on turning your private property into capital. The value of the accumulated risk is conserved in a gamma proportion to be recycled, exposing everyone else to the gamma risk.

As long as the political apparatus is organized to protect your right to your private property--a redistribution being next to criminal, you are protected from the gamma risk. It is essential to correlate the accumulation of wealth with the creation of wealth in order to conserve the value of the risk you have "made" and will continue to make and consolidate in market form.

As long a you are the source of the risk (made possible by the accumulation of value and reduction of demand), your exposure (the risk of liability) is limited to anything and everything but a deconsolidation of the risk. You may pay huge civil and criminal penalties for all manner of abuse, but you can afford it. You are shielded from the risk of liability to the reward because you can and will be held accountable for damages on a divisible basis in a court of law. The systemic risk you create for an indivisible public consumption is a political, not a legal, matter to be sanctioned by popular vote, which is binomially determined and bureaucratically managed by highly technical means well beyond the understanding of the non-elite.

Good job!

Everybody is exposed to "the risk" but you!

You deserve a raise!

Anyone that has not achieved elite status is exposed to the liability of the risk. Non-elite investors, for example, must have a way to turn their savings into capital without being exposed to the risk created by consolidated capital.

The only way to do that is to deconsolidate the capital, accumulating wealth for the nation created by a more divisible distribution of the risk.

It is time to create and accumulate wealth, not risk!

Naked Shorts and Present Value

Naked shorts on German banks have been banned to stanch valuation of risk in derivative markets as the Euro undergoes devaluation.

Naked shorts, rather than making the market to provide liquidity, reduce the benefit of the Euro's devaluation (economic growth) and its present value.

The German economy stands to benefit significantly from a weak Euro, reducing the risk of default on loans to other EU members with a higher debt to GDP, increasing the prospect of higher economic growth for the Community.

The differential between the future and present value can be increased by naked shorts on bank equities and credit default swaps. Banks that are short, including European banks, gain capital, yielding a lower probability for economic growth which is, in turn, reflected in the current value, depreciating the positive value of its currency devaluation.

The spiraling depreciation results in the need for an even larger infusion of capital. Derivative markets (naked short interest and swaps) would then be providing liquidity to the marketplace, but by reducing present value.

Capital that operates with an economy of scale, buying insurance on the risk it commands, indicated through the "laws" (the measures) of supply and demand, taking a big short interest indicates a higher risk of default. The result is a capital gain without the growth that would reduce the probability of default.

Proponents of derivative markets posit they act to provide the liquidity for growth. The added liquidity to cover the lost presence of value will cause even more growth than would otherwise occur in the future. The argument fractionates the risk into a highly inscrutible liability with the outcome empirically verified by the debt amortized into equity value which is owned by, and visible to, the public, fully internalizing the risk and the reward.

Although the risk does undergo transference and accumulates in the public sector, derivative proponents argue, it distributes to the public with the reward derived from future fundamental value, present in the more accurate empiric of an oscillating current value representing changing market sentiment.

Rather than being externalized, and subject to regulatory authority, the risk is genuinely authored and internalized by the derivative value.

To the market observer, the argument for a useful derivatives market has a plausibly convincing, if not a forgiving quality.

Flush with liquidity, the lack of growth is then falsely attributed to a lack of economic austerity rather than the gross application of greed at the expense of growth, destabilizing markets and increasing risk to justify making the market for derivatives.

Rather than creating market stability, derivatives are being used to rig the market.

Market rigging is illegal because it is destabilizing. Instead of reducing risk, it increases it.

Being naked short on German Banks is being banned because it is market rigging, supporting speculative demand, resisting the economic growth needed to give real value to the debt. It is a zero-sum detriment that, at this point, has little-to-no risk of liability.

The tendency to short the Euro naked signals the will to deflate the global economy. Capital infusions to liquify markets after the Great Recession have been consolidated. Accumulation of the capital, rather than its benefical distribution, has a deflationary effect; and deflation of commodities, rather than inflation, will then signal a recovery.

The differential is in who controls the distribution of the value on the accumulated risk, which is what "making markets" with derivative, risk-transfer products is all about. (See recent articles about transfer and transformation of risk at griffithlighton.blogspot.com).

If the positive value of devaluation is denuded by a short interest in nothing but the value of the risk as determined by merely having that position, the market is being rigged to cause a loss in zero-sum. It is intended to liquidate the market, not liquify the market for economic growth.

Being naked short is being considered a financial obscenity because it produces a highly restricted value that distributes to too-big-to-fail economies of scale, which includes the banks being protected by the ban.

Ironically, banning naked shorts will do more to prevent nationalizing what is too big to fail than what being too big to fail is intended to prevent--socializing both the risk AND the reward into a present value.

Surplusing the Risk

Economies of scale surplus risk. The too-big-to-fail model avoids the risk of failure in the marketplace and thus limits liability. The risk is accumulated, surplused, for distribution.

The distribution of the surplused risk presents as crises.

A pluralistic model does not surplus risk. It diffuses it. The risk is fully applied rather than avoided. The risk is in full operation to prevent crises with little-or-no need for complex manipulations to avoid it with, as we observe, little success (unless, of course, you are too big to fail).

The liquidity crises that results is a functional, coefficient constant we call the business cycle. The system's failure is really its intended success, and gives an economy of scale its preferred, functional coefficiency.

Horizontal and vertical integration of the financial sector, for example, was argued to be an economy-of-scale efficiency that, along with a favorably progressive tax code, would produce the economic growth to sustain expansion of the mortgage market. While investment in economic growth was offshoring, the investment in sub-prime mortgages was booming. The two events are antithetical and accumulated risk.

The economy-of-scale functioned to "make" the risk (referred to as "making the market" to supply the demand for fixed-income investments) with a structured, hierarchy of incentives that does not allow the market makers to "take" the risk. The result is a huge budget deficit that according to the Hamiltonian model in operation (clearly confirmed with the progressive tax policy) is the responsibility of the non-elite to pay. Having the elite pay the tax bill is a moral hazard because it prevents the wealth from trickling down, which supports the value (the success) of the sub-prime market (risk) that was made.

The success of the Hamiltonian model is economic expansion, not the contraction that has occurred. Since its success is dependant on economic expansion (so that maintaining a class of wealthy elits is not a zero sum), the correlation coefficient is virtually "0."

The constant value of the coefficient is surplused in the form of risk. The accumulation of risk demands government authority to resolve it. Thus, it becomes the gamma risk with the latest example of its management being the current "demand" for financial regulatory reform.

The best way to manage the risk is to ensure a pluralistic coefficiency in priority. That is: recognize the economy-of-scale efficiency is a disconfirmed hypothesis. Instead of supplying the demand for an accumulation of risk, we will be supplying the demand for economic growth and distribution of the risk, otherwise known as "spreading the risk."

Whether it is the health-care sector, the financial sector, the energy sector..., ensuring pluralism, rather than organized consolidation of industry and markets, will provide the coefficiency of growth we are all looking for.

Economies of scale verifiably do not adequately spread the risk.

Limited Liability and Economies of Scale

Within the mechanics of structured ontologies, we look for culpability. To reduce errors (risk), there is a natural tendency to find fault with the actors that structure the system and work within it.

Continuous improvement is a coefficient in which errors are reduced over time to achieve the intended effect. There is a cause (the organized structure and its actors) and an effect (the intended result). Of course, the result may not be generally desireable or self-determinant (a differential equation that results in an arguable coefficiency). The coefficient is then reduced to the ability to organize and apply power to the intended outcome which includes responsibility for the outcome.

The argued economic efficiency of the "economy of scale" is a means of limiting liability to the benefit (the utility) of that efficiency. Whatever tendency there is to an abuse of the power accumulated--what a free-market system prevents by not allowing for this consolidation of power--is forgiveable because the actors are the elite that organize expansion the pie.

Economic growth is, then, the coefficiency of power. When it is not achieved, but results in contraction, like we have now, the argument is still maintained for a limited liability; and this limited liability is achieved through an economy-of-scale efficiency that presents as "too big to fail" (i.e., big enough to avoid the alpha risk and the process of continuous improvement that reduces error and achieves the fully intended consequences of a free-market ontology).

Forgiving the liability of a negative coefficient is considered to be a necessary correlative, falsely argued as the "paradox" of thrift. The negative coefficiency is best achieved, with as little sacrifice as possible, through organized economies of scale both micro and macro.

Nothing is more forgiving than a free-market pluralism, however. The real truth to be found in the paradox of thrift is the contradiction of the negative coefficient inherent to systematic consolidation of power.

Where consolidation results in expensive litigation and regulation, which presents a barrier to both entry into the marketplace and sanction within it by the consumer (the alpha risk), fraud and abuse is likely to fail a free-market in priority. Bad behavior must be modified in order to stay in business rather than encouraged with an organizational model that defeats free-market mechanics in order to be "competitive."

Consolidating industry and markets not only increases the probable risk of an abuse of power, but reduction of the "competitive," free-market effect causes the need for government authority.

Ensuring that the direct and facile accountability of a free-market mechanism is not defeated by economies of scale, the ethic of forgiveness is most fully exercised and the ethic of "government that governs least" realized.

There is an ethical coefficiency of markets that is not to be ignored with economy-of-scale efficiencies. Competition for power freely pursues a competitive advantage, and despite how we may try to consolidate to an advantage, it is ultimately a free market.

Striving for a competitive advantage is easily structured for provision, rather than deprivation, of the general welfare.

Progress does not render free-market mechanics passe'. Progress recognizes the problems we face are perennial. They are algorithmically recurrent, and if not so properly recognized and managed, we are condemned to a self-determined recurrency of crises in pursuit of a competitive advantage.

Progress is not linear, but recognizably dynamic. It moves forward with a differential dialectic that at times seems to be moving back, but is the momentum for change that propels us forward. It is the inexorable pursuit of liberty that is the truly progressive force that transforms competitive advantage into a process of continuous improvement and reduction of systemic risk.

Realization of an organized ontology that operationalizes pursuit of competitive advantage (the distribution of risk and liability) with the natural pursuit of the general welfare is an enlightenment we should continue to share with our founders.

Reorganizing the Risk

The first measure to be achieved is to disabuse the efficiency of avoiding the alpha risk and consolidating it, reorganizing it, into a gamma risk to be re-authored, reallocated, by elite, government authority.

Consolidation occurs to achieve an economy-of-scale efficiency to "minimize risk" and maximize capital for investment, but the real risk being avoided is the free market. The marketplace is then organized to support a bad intent, all manner of vice, that a free-market system would not otherwise tolerate.

At this point of the business cycle, for example, as the accumulation of wealth presents as a recessionary trend, the accumulated risk on that value (the gamma risk) also presents a retributive value.

Managing the retributive value is taking the form of limiting liability. The incentive to, for example, overleverage capital for a capital gain that receives favorable tax reduction while shorting economic growth at the same time fully indicates the deliberate, knowing intent to gain capital at the expense of growth. While the beneficiaries argue the gain is legitimately ontological (without mal-intent, but the product of systemic opportunity--incentives--and the legal right to pursue self-interest), the people whose debt now exceeds their assets (negative equity) and a depreciating prospect of adequate income (a lack of economic growth), the system is ostensibly organized to support a mal-intent.

Without a free-market mechanism ensured in priority, instead of minimizing it (minimizing the inherent, systemic risk to capital--the declining rate of profit), we spend a lot of time arguing about how to systematically re-organize for virtue instead of vice (minimizing the risk of moral hazards or perverse incentives). We spend most our time determining whether there is a criminal intent so that "doing the wrong thing" is a function of avoiding prosecution (whether you can get away with it or not)...something that a real free-market system prosecutes in priority by allowing for maximum exercise of taste and preferences (democracy).

Ponzi schemes, like the Madoff scandal, for example. The "good faith of a reasonable person" is not a persuasive defense of Madoff victims to the alpha risk. Returns were clearly "too good to be true." Investors, however, considered the return to be a function of wealth and privilege, not a moral hazard. The incentive to perpetrate the crime and participate in the return was not considered a moral hazard until Madoff was prosecuted; and instead of fully, and simply, considering the source of the incentive to engage in this "unreasonable" behavior, we are fully engaged in discovering the extent of the liability and the validity of the losses. The result will be legislative measures to strengthen regulatory authority that is limited to prosecuting the effect rather than minimizing the probability (the sanctity) of its occurrence (the perverse incentive). If it is not practically immoral until the perpetrator is caught and prosecuted, then getting caught and prosecuted is what is effectively immoral. A criminal intent (making a profit without producing real wealth...what we are experiencing on a macro scale) is encouraged in priority if we do not ensure a free-market mechanics before anything else.

A criminal intent is not likely to survive a free-market system in priority. What we have now, however, with right-wing support, are firms too big to fail operating to get away with all manner of fraud and abuse with the burden of proof, and the right thing to do, being on the consumer in posteriori.

Reorganizing the risk requires a transposition of philosophical priorities.

Political and economic discussion is always dominated with ethical measurements that are translated into public policy programs. These form a structured environment that provides incentives. The structure (a corporate body for example) becomes the culpable component with the measure of liability--who makes and takes the risk--being reduced to a discussion of practical philosophical values that describes and explains the cost and benefit of organizing risk in any particular way.

Technically, what is at the very fundament of reorganizing the risk is a practical philosophy that determines the way incentives are structured and the legitimate distribution of rewards and deprivations.

The question, of course, is how to measure the success of a practical philosophy imbued with normative values.

The solution posited is to ensure a pluralistic ontology that provides the highest probability for economic growth and the least possible need for teleological processes to determine the legitimacy of distributive value verified with empirically evaluative measures.

Ensuring a free-market transforms a large, complex organizational structure, like our economy, and a problem like providing health care, from being too big and complex to be solved to everyone's legitimate satisfaction into an easily verifiable hypothesis.

The market tests and retests hypotheses, micro and macro. The result is an empirical process of continuous improvement with a distributive verification of legitimate, non-retributive value that minimizes the need for government authority; compared to what we have now with an ostensibly strong demand for an authoritarian regime to manage the organization of risk.

The free market tests and retests valuations until it gets it right--until the retributive value is reduced to a level of risk tolerance that defines the peaceful and prosperous, legitimate limitations of power, which forms the substance at the philosophical fundament.

Foundation for Authenticating and Reorganizing the Risk

It is possible to re-author the risk into an organized ontology that authenticates the power of a constitutional self-determination.

Attention to a right to self-determination is not to be dismissed as a flimsy, idealistic sentiment of the Enlightenment that does not reflect the real world. It is a practical efficiency that tends to be supplanted by argued efficiencies of scale that consolidate wealth and power.

Seeing to a strong, constitutional self-determination allows markets to operate toward an effective equilibrium, not the disequilibrium we have now of a crisis proportion. The disequilibrium is not limited to an economic affect. It is also political.

Economic disequilibrium affects the political fabric in our social time and space. It creates a force that holds us where we are. It conserves the progress and fulfillment of the Enlightenment's vision of a peaceful and prosperous self-determination, pluralistically endowed with an authentic ontological means-to-ends legitimacy that is easily confirmed right down to the individual.

Conservation of a cyclically algorythmic disequilibrium (recurrent crises) is holding us back.

Organizing for Crisis

The previous discussion explored the President's proposal to "organize for America." So, then, what exactly has America been organized for?

America is organized for crisis. Specifically, liquidity crisis.

Managing crises is our working, practical, existential model. It is the means by which the elite gain the legitimacy of power. In the case of America, it is a legitimacy of power beyond the concept of who is legally sovereign. It is, however, inferred from the "natural law" argument that some are more fit to rule than others, and they will "naturally" take power and rule, especially as a result of crises. Thus, we have the ruling class operating with an organized ascendancy and conservation of the means of power--cyclical crises.

Without liquidity crises, the system fails the elitist model. In the current case, we see our administrative elite, both public and private, acting in concert to provide the liquidity (the trickle-down legitimacy) missing from the system. The result is a budget deficit that can only be described as "gymongous!"

Where did all that liquidity go? Was it ever there to begin with or is it just a phantom phenomenology of our minds, a Jungian apparition of existential gestalt, or a real angst of materialistic expression?

Why do we organize for liquidity crisis? If we did not want it, we would not be organized for it, right?

Liquidity crisis is a technical tool of an organizational technology...it is the hammer that hits the nail that builds the house, and so on.... It is what builds the systemic risk and the elusive liability of who "takes" the risk. Legitimately, it should be whoever "makes" it, but the corporate is organized, consolidated, to make, but not take, the risk.

The "reason" for liquidity crisis is purely technical. It is a technique for politically and economically managing risk-to-reward.

Liquidity is the tool that authors, or builds, the risk into the rewards of wealth and power.

In order to "organize for America" it is necessary to authenticate the risk.

Free Markets, Diffusion of Power, and Dissipation of Risk

What defines the limits of power? It is not just a matter of saying yes OR no, but having the power to say yes AND no. Does, for example, the proposed health care reform empower consumers with the discretion of both yes and no to deter abuse of power?

If, for example, consumers find the cost of health care to be too high, paying the insurance premium, directly or indirectly, always says yes to the cost. If insurance is mandatory, not only is saying no not an option by organized default, it is illegal.

Without being able to say yes and no (to bid the price up or down), consumers are not empowered to control the cost. Prices inflate because there is no resistance. There is no deterence value--a reciprocal value of self-determination--in determining prices. Consumers have to pay the cost that providers can claim is set by a demand ontology. The accumulation of wealth, and the concommittant power to self-determine (deter and terminate, or define the limit of power), is claimed to be ontologically determined by a free-market process (supply and demand) and, thus, exculpatory (not retributively valued and subject to gamma risk).

Regulating markets (gamma risk) is all about deterence value--providing incentives or disincentives (creating a predictable, manageable, ontology of purpose).

The best deterence is, of course, to prevent the accumulation of power. Within that structure of power is the discretion to control (deter) costs and "determine" income.

For example, the short selling of our economy through credit default swaps expanded (leveraged) the limit of power. The gamma risk that accumulates results in a well-defined, "prudential" regulatory authority. The swappers were self-determining; they knew that if the capital was not being leveraged to cause economic growth, the mortgages were bad (toxic) debt.

Self-determination is not by definition exculpatory. The determinants that shorted our economy and caused the Great Recession knew investing in CDS and CDO's would result in a recessionary trend, causing a loss for everyone else's wealth and income for their own self-determined capital gain. It is completely the opposite of a free-market ontology and the gain can not in any way be considered exculpatory, beyond a punitive tax authority to retribute the value and reverse the deflationary trend.

We see then that the limit of power is to determine income. If the ability to self-determine is limited either by the public or private sector, the power to determine, and responsibility, is alienated from the self. The process of determination is then in a constant state of regulatory reform, aimlessly searching for prudence and responsibility that has been alienated into an authoritarian regime with an affirmative power that is too big to fail.

Health care reform legislation, for example, is for consumers an alienation of power. The ability to "deter" or "terminate" the extent of power is limited to government authority based on the distribution of the risk-to-reward.

The dispropotion of low risk to high reward of a collusive consolidation makes the credible case for a public utility, like a national health insurance program.

Big profits, if not checked by price controls appropriate for something the consumer is commanded to have, can be reinvested to expand the supply and control the costs of the entire sector. With the immense consolidation of wealth and power, however, the probability it will not be corrupted is very low, something that a free-market economics prevents if ensured in priority.

Given the need to spread the risk, health insurance presents a good case for government providing what people cannot provide for themselves, (something free-market economics does very well, by the way, if income is adequately distributed to allow for it). However, solving the problem with organized consolidation (with the problem) is as irrational as consolidated organizations are likely to be, always acting with an affirmative too-big-to-fail economy of scale.

Whether the public or private sector, or in combination, the evaluation of a too-big-to-fail economy of scale is always affirmatively "yes" since its "subjects" do not, by design of the leviathan, have the power to deter, or limit, with the right to self-determination. That Constitutional right, rather than being empowered by government authority, is deterred.

A government healthcare program, for example, is by definition too big to fail. What defines its success or failure? Are the processes of power close enough to readily access the incentive to change its delivery for a facile fit to the wants and needs of individual consumers like a free-market system? The probability favors a power elite embellishing its progressively oversized sense of self, dictating consumer preferences right down to the fingernail.

Rather than encouraging the growth of consolidation, which maximizes the negative, non-productive effect of the zero-sum and the need for government, America can be credibly organized for economic growth without massive government spending and the massive tax liability to fund it. The liability, rather than accumulated and shifted to the public by large corporates into a crisis dimension, can be organized, and spread out, into a manageable ontology with a very close and easily verifiable accountability.

Without expansion of the pie, and a "disinflationary" tendency, the capital gained is not "verifiably" legitimate and needs "validation" of government authority. Using this illegitimate gain (gaining the profit without assuming the alpha risk, which is the product of the consolidated brand of growth), the investors, (by claiming an inherent, constitutional right to their property) induce a "deflationary" cyclical trend like we have now instead of economic growth with low inflation.

It should be clear, by even the most casual observation, the organizational legitimacy (the prescribed benefit) of allowing for an unobstructed "organic growth" of an ever-bigger corporate is critically flawed. The cost (massive unemployment and transfer of wealth to the investors) to benefit (big profits and salaries to the corporate) is overwhelmingly obvious but is being afforded constitutional protection. How, pray tell, can this possibly be regarded as the utilitarian ethic of promoting "the general welfare?"

This "general welfare" is supposed to "trickle down." The evidence, however, shows the welfare generally trickling up. The deficit between theory and practice literally, empirically, results in deficit spending which is explained as being the result of, as Ronald Reagan described it, government spending without the need.

If we are to rely on this kind of logic, it is not difficult to see why we face such a political-economic maelstrom. Stopping and reversing an extreme lack of good reason starts with properly identifying the problem, and the new admistration has, at this point, done that.

According to the president, it is time to "organize for America." So, then, what exactly has America been organized for?

It is no coincidence middle-class families face rebuilding their savings while too-big-to-fail corporates reap record profits. If your wealth was not plundered by this recession, it will the next one, or the next. Your wealth was not lost, it was consolidated. The value still exists, just not in your bank account. There is, however, considerable risk to this conversion and consolidation of value that is being busily managed by our two parties and our public/private corporate bureaucracy.

Where there is reward there is risk and the assigment of that risk/reward, its distribution, legitimately won or lost. We are politically organized to manage, and conserve, the risk our economy has organizationally evolved to accomplish--liquidity crisis.

Crises result from the accumulation of risk. It is, then, necessary to dissipate that risk.

Managing the Unavoidable Risk

In the quest to avoid, if not eliminate, risk, we tend to organize into risk-management ontologies.

Utopian socialists, for example, envision elimination of the risk ontology that plagues capitalism by consolidating the risk into state control. It is much like what we have done to bail out firms too big to fail, but with a more equitable distribution of the benefit, absorbing the risk in an economy of scale that is ontologically too big to fail.

Economy of scale is the best model for managing risk according to mainstream, conventional wisdom.

Organizing an economy of scale is the prefered model for managing risk because it creates a too-big-to-fail ontology. The risk is routinely shifted to the system and the result is managed as an unavoidable consequence with a divisible benefit and an indivisible liability. Since the liability is a shared component and the benefit is not, the result is general systemic crises.

Systemic crises suggests an ontology is in effect, and since the distributive result is so easily predictable, mainstream analysts apologize with the "who could have known" doctrine, to go alnog with the too-big-to-fail doctrine, to maintain the exculpatory effect of the organized ontology.

The free-market process, on the other hand, if we should so choose, is both highly ontological (a highly diffused and anonymous distribution of legitimate risk that is easily managed with little-to-no need for government authority) and highly empirical (with quick and reliable accountability).

Rather than being alienating, the free-market process is organized for quick and decisive liability--exactly what big corporates do not want and are organized to efficiently avoid (the alpha risk, and with the help of government authority, the gamma risk).

Ensuring an organized plurality rather than consolidation, free-market economics ensures the organic growth necessary to spread the systemic risk. Spreading the risk in (alpha) priority rather than avoiding it and letting it accumulate into a crisis (gamma risk) proportion maximizes the legitimacy of the zero-sum to a positive, distributive effect.

The health care sector is a good example. We see the tendency to consolidate the risk into an economy of scale rather than dissipate it with a pluralistic ontology. The tendency is to direct the risk and command the cost and benefit whether public or private, and avoiding the alpha risk accumulates gamma risk, demanding an authoritarian regime to manage it. An authority, rather than consumers, determine what is produced, how, when, at what quantity, at what price, and how, when, where and to whom it is to be distributed. The freedom of both consumers and producers is reduced to a gamma-risk ontology--if we do not like it, too bad, that is just the way it is.

Freedom is reduced to fiat and gaming for the means of absolute power with the legitimacy of a populist sentiment contained in the fear of an accumulated risk. Utopian dreams become dystopic nightmares accepted as the best practice, the natural condition, of an ontological fate.

The organized ontology not only determines the distribution of the liability, but who commands and controls it.

The False Efficiency-of-Scale Argument: The General Case

Being too big to fail provides optimal efficiencies of scale. It also provides accumulation of errors and distortions, costs and abuses, on a massive scale, that cannot fail.

It is critical to understand that an organizational model that is scaled too big for failure creates risk of equally large size. Since it cannot fail, it is immune to the risk. If you are not the beneficiary of that risk, then you are "at risk" to the reward. Your savings, your home, your income is at risk of being consolidated into capital that is supposed to finance your savings, your house, and your income. It is intended to sacrifice the benefit to you for "the general welfare" which is seeing to the welfare of the rich in priority. It is a zero sum.

Being organized "too big to fail" causes risk, it does not take the risk. No. The risk is caused to consolidate assets in the form of legitimate market risk that is not at all legitimately ontological. The risk, rather, is created by an organized teleology just for the purpose of failure. It is intended to effect a reward by causing a detriment through organized means.

Being "too big to fail" effectively creates a "detrimental reliance" which is considered by law to be an abusive relationship typically associated with theft by scheme and the product of a criminal intent. The organization is the cause, the failure is the effect. The result is a profit without risk, or an illegitimate zero-sum game.

On a macro-economic scale, instead of forming the capital necessary to create jobs, being too big to fail has formed massive systemic risk and created massive unemployment.

Massive capital has been formed. So, where are the jobs?

Unfortunately, if you need a job, unemployment is the capital amassed. It has been converted and consolidated into private property. The property will not again be capital until it is used to expand the pie (what currency derivatives and credit default swaps will not do). It is a massive failure of the system, managed to a consolidated, too-big-to-fail level of incompetence (to the gamma-risk limit of power).

While the system has failed, the parts that comprise the system failure are too big to fail, and the system stubbornly persists in error.

Organizing firms so big that they cannot fail is to organize for failure, not success. It allows for the system to persist in error by managing, rather than preventing, the systemic risk. The system is then driven to a level of managerial incompetence. It is dysfuntionally organized with the "peter principle."

A free-market pluralism technically avoids the organizational problem of the "peter principle." Instead of allowing the pursuit of power to support an accumulation of errors, pluralistic organizational technologies provide a self-corrective, empirical ontology that awards power based on the merits and not an accumulation and consolidation of power itself based solely on the ability to game the system. It will resist the pursuit of power without the qualification--the merits--for having it, like a practical moral intelligence.

A free-market pluralism ensures the means of gaining power is not an end in itself, so it must be ensured in priority. Managing markets after the dirty deeds have been done ensures markets fail and produce the success of consolidating power by defeating the meritorious mechanism of free-markets.

Regulated markets with firms too big to fail do not produce a free-market effect. They do, however, give dirty deeds the legitimacy of public process and the force of public authority.

Today's organizational techniques and financial instruments become the clever innovations of tomorrow that evades the letter of the law, or deliberately encounters the ignorance of a like-minded regulatory authority.

Rather than resisting the incentive for dirty deeds, a regulatory regime that does not ensure operation of a free-market mechanism in priority supports the incentive to produce outcomes that elicit a populist sentiment. The trick then, of course, is to give the outcome legitimacy despite the negative sentiment.

Allowing firms to "grow" too big to fail because it is economically efficient supports the probability the negative effects will occur. What is to be prevented by popular demand (like having to sell your assets at a loss because you lost your job while big bankers reap record profits and salaries by investing in derivatives rather than economic growth--i.e., consolidation of industry, markets, and the wealth) will innovatively occur as unintended, ontological crises.

The argument for needed change then takes this form: it does not matter what we do, the crises that continuously consolidates wealth and power will (ontologically) occur. It is a law of nature. It is the result of natural processes that cannot be avoided; and since crises cyclically occurs no matter what, the argument that it is futile to try (a la Ayn Rand and Friedrich Nietzsche) is empirical truth.

The ontological argument for the consolidation of wealth and power is a conservative argument that is generally accepted across the ideological spectrum. It is an argument of the general case: organized consolidation (an economy of scale) is a gamma risk that can only be managed, not ontologically avoided, or prevented.

We should be quick to test this hypothesis by ensuring a free-market pluralism in priority. It will be interesting to see who objects and why.

A pluralistic ontology prevents the accumulation of power into the pursuit of a criminal intent. It is a pursuit that has been described as "crony capitalism" or "robber-barronism" in which power is accumulated from the privation, rather than the provision, of others. (The current health care debate, for example, includes insurers admitting they are so non-free-market organized that they can deny access and raise prices all they want without, by definition, market sanction. The power to sanction is the exclusive domain of the firm too big to fail the marketplace.)

Capitalism is organized to prevent economic growth in the name of expanding it.

Through an efficiency of scale, the ever-larger "growth" of a consolidating corporate body intends to defeat free-market economics (the incentive for growth) for a tyrannical effect that commands the free-market measure of success--the profit margin (but without growth). The lack of economic growth is expressed as an efficiency of scale that prevents failure and ensures success by empirical proof of the profit margin.

The corporate body must include government, and its regulatory authority, so that it does not act to produce a free-market effect by popular demand. The tyrannical, non-free-market effect (the false free-market measure of success by being too big to fail) then has the force and legitimacy of democratic, government authority (state capitalism).

It is time to reject the organized model of a too-big-to-fail efficiency. It is time to reject the false ontology that legitimizes the consolidation of wealth and power and accept a true economic, ontological scale of efficiency.

We should reject the traditional, conceptual ontology that forms the elitist model of economic efficiency in which economies of scale are the statement of the general case.

Valuation of Assets

Asset valuation, critical for successful investing, requires identifying what determines "market" value.

What, then, is market value?

There is alpha, beta, and what I call "gamma" risk.

Political economists utilize analytical modeling to achieve predictive utility. If predictive accuracy is lacking, it is probably due to using the wrong analytical model. Error is likely reduced by changing the analytical model being applied. Actors in the marketplace are unlikely to switch practical models because modeling provides predictable results and also satisfies consistent philosophical considerations to achieve a normative legitimacy of the means and ends that also affects the outcome in some very unpredictable ways.

Actors in the marketplace are likely to have a consistent application of a practical model to reduce the probability of outcomes to what appear to be random variables that are usually a "gama" risk. The gama risk is reduced to a political gaming of economic variables to produce a predictable outcome that has a normative legitimacy. This does not mean that identifying the gama risk is not a technical function to be quantitatively ignored. That is a critical error. Rather, it is a technical function of properly applying an analytical model. Proper modeling renders what seems an inscrutable vectoring of willful actors and organized technologies into an easily predictable phenomenon at the micro or macro scale of analysis.

Much of the analysis at griffithlighton.blogspot.com, whether normative or technical, descriptive or prescriptive, proceeds from choosing an analytical model to not only accurately describe and explain valuations, whether moral or monetary, but to achieve a predictive utility.

It is a mistake to ignore moral valuations, for example. It is fundamental to practical modeling that is used to shape what "the market" determines to have value. The public and private sectors operate with different normative properties that largely determines organizational, size, shape and cultural attributes that if not accurately modeled, a predictive utility will be achieved only by accident (randomness).

Where the public and private sectors intersect is where the gama risk essentially resides, and where the appropriate analytical modeling describes, explains and predicts what are normatively called "market distortions" that effect the outcome--what the value really is at any time. Recognizing the normative aspect of the gama risk technically reduces the error endemic to quantitative analysis and punctuated events of predictive failure.

Utilizing the appropriate practical, analytical model, for example, renders the current economic "crisis" not a crisis at all, but a fully expected, "normal" (normative) outcome. If it is expected, it could have been prevented, but that would require abandonment of the working practical model that determines the outcome. Not abandoning the model, and the expected outcome, is a normative consideration--because it would be the "wrong," the aberrant, thing to do; it would be impractical, and the normative consideration (the value it represents) is to be fully, analytically, expected with a technical value of about $4 trillion to date. The magnitude of this technical value, and the effects, like a public-private solution (the gama-risk valuation of assets), is too easily predictable as long as the analyst is willing to empirically apply the appropriate analytical model.

If the analyst considers the plans of Geitner and Bernanke a "market distortion" of valuation, it is a normative invocation of the pluralist model that does not predict the real (expected) value of the assets, but may very well suggest an expectation of value in the future based on the normative valuation (a retrace of the value). This suggests a mixed model in operation: an elitist and pluralist model in combination, rendering a bureaucratic analytical model of political economy. The analyst may hedge the gama risk utilizing this model (see the article, "Restructuring the Elements of Power" at griffithlighton.blogspot.com).

Understanding Liquidity Crisis and the Measures to Correct for It

February 21, 2009

The current state of our economy is liquidity crisis. The capital has been allowed to become so accumulated, consolidated, that the economy can neither be sustained or expanded. The result is negative growth, massive unemployment and the declining rate of profit (falling prices following the stagflationary phase of the post-monetarist, Keynesian business cycle).

The profit (the pricing) that creates capital can no longer be sustained (the deflationary phase of the cycle) because that value has been accumulated and not pluralistically, systematically, redistributed by economic means of a free and unconsolidated marketplace. In order to return to profitability (for your 401k to gain rather than lose value to the accumulation of capital into the private property, the ownership, of a few plutocrats) the capital must be redistributed--recycled.

The lack of pluralism, the lack of a free-market economics, is the systemic economic risk, or instability, we are experiencing that comes with the accumulation of wealth and, therefore, power.

In order for the economy to move out of liquidity crisis (the deflationary phase of the business cycle), redistribution of the capital (the distribution phase of the business cycle) MUST occur. It is a necessary condition. Nothing else will suffice.

This description has been the "economics" of our current crisis.

The "political" description of the crisis is entirely a function of who owns, and therefore controls, the capital and the ability, the means and measures, to correct for liquidity crisis. For the plutocrats, this is a function of how much the non-elite are willing to suffer, or sacrifice, for the accumulation of the capital into the ownership, the controlling hands, the command, of the elite. The more the elite can make the non-elite suffer without retribution (loss of the value accumulated) measures the amount of political power and the amount of value that must be retributed in order to minimize the systemic risk-to-value obtained, or the retributive value.

The trick, the political process, is to go through the distribution phase of the business cycle without giving up ownership of the capital to the non-elite, or minimizing the retributive value. This is accomplished mainly by arguing that government--the means of retributing ownership of the capital--is the problem and not the solution so that the distribution phase of the cycle does not become an event of economic re-distribution that eliminates the reoccurrence of liquidity crisis.

Retributing the value at the distribution phase very simply minimizes the probability (the risk) of the massive liquidity crisis, the systemic risk, we are now experiencing. It forms the basis for pluralizing the economy so that it is not dependant on any one economic entity that holds us ransome to gargantuant bailout values (the amount of value to be retributed) like we have now.

Fully retributing the value obviates all the other complex political means and measures we are now engaging to preserve the current system, the ratio, of risk-to-reward.

Keynesian measures preserve the current risk/reward ratio. It is a political measure, not an economic one. That's why there is a general sense of dissatisfaction with the current mode of stimulus measures: it serves to redistribute value politically rather than retribute it economically for a fair-and-equitable exchange of value that makes for economic stability or low-to-no systemic risk.

Pricing the Risk

It looks like the bailout funds will be mostly used to consolidate rather than pluralize the financial sector. Easily predictabe.

The economic model of efficiency being used is "bigger is better" which translated means "bigger is too big to fail" and receives public funding to consolidate and cause more crisis for more funding.

The current price on this risk is greater than $700 billion with a perfect probability of failure at 100 percent. I guesse we can't accuse our elits of not striving for perfection.

The bigger the firm, the more likely, if not certain, it will leverage risk for a magnified return, which caused the crisis we are now in. Banks will not be in the business of risking capital to grow the economy--lending to The People and their businesses--but to leverage a pure profit by bidding up futures contracts, straddling rate spreads and securitizing the risk into inscrutible value with bogus marks to the market.

The bureaucratic managers to discharge the TARP are sector executives that are likely to price the risk based on returns for the private sector and the consolidation of market share, recycling crisis with the legitimacy of public authority.

Instead of better products, services and prices, the consumer is financing an organization inimical to its interests.

Instead of financing a competitive multiplicity of the marketplace in which risk is priced in terms of the best value for the customer (The People), the risk is priced to shift it all it to The People with the least possible benefit and the greatest gain for the private corporate entity, thereby securing exploitation of The People, the perfect probability for crisis, and the public funding that it causes, all with the legitimacy of public authority which is defined by the consent of the governed.

The risk is priced out of the market and into the public domain so that the accountability is all with a bogus consent of the governed. The risk is priced by dumpimg all the cost into the public domain. The result will be crisis and the need to service the inefficieny of "bigger is better" with public finance, always being supported as the confirmed model of efficiency with the empirical verification of the huge amount of public money spent to bail it out, and preserve it, by popular consent.

The People's capital needs to invest a deconsolidation of industry and markets, not pay for the organized means for The People's deprivation.

Obama/Biden 2008!

Taking the Risk

The $700 billion to bail out the financial system and prevent collapse of our economy not only measures the size of the risk taken, but what it costs not to ensure a free and unconsolidated marketplace.

If you recall, bigger was touted as better because, as large consolidated corporates argued, big economic organizations are able to take bigger risks and do not need to be regulated because the financials of these big economic entities are equally large, so they can afford the risk of loss. This was argued to be the benefit of allowing for consolidation of industries and markets by both Democrats and Republicans, and for a regressive tax policy to finance it by Republicans like Senator Bunning of Kentucky who now laments that the bail out is socialism.

Senator Bunning still maintains that bigger is better and, like McCain, maintains that making the tax cuts permanent and staying the economic course, which includes this failed organizational model of consolidation, is the solution. This is nothing but pure ideological idiocy!

The risk was taken and the size of the organizations taking the risk prevents the free market sanction of eliminating the bad risk and the bad risk takers because they are too big to allow to fail, and if they are allowed to fail, as Bunning would have it, the financial market will be even more consolidated and the dependance even deeper.

The market has been rigged so that the most corrupt is fittest to survive. It is entirely antithetical to a free market economics. It is the model of what a free market is not. It is what is wrong with it.

Change better be coming because with or without the $700 billion bail out, economic crisis is assured because it has been organized for it.

The knowledge, the technical understanding and expertise exists to entirely prevent this crisis. We need to stop ignoring it and stop rewarding the perpetrators of crisis politics and economics.

Organizing for a peaceful and prosperous pluralism is entirely possible by ensuring it in priority.

Rewarding the perversions of consolidated capital and markets, and its corrupt practitioners, should not be the priority, not now, not in the future. If we do, crisis is assured. The choice is ours to make. Ultimately it is a free market--we are self-determined.

What is it going to be? The collective wisdom of our Natural Rights in operation of pluralistic process, or the dictates of tyrannical conceits in operation of consolidated power?

Theory of Retributive Value

Retributive Value

Positing a theory of retributive value is crucial for understanding the physics of political-economic dynamics; of managing the natural relationships of cause and effect toward predictable, desireable consequences.

Two plus two equals four. Simple, universally understandable, logically positive. If somehow value is removed from the simple, natural equation without adding its value to the natural, necessary, balance of it, the universal balance of the eqation is unstable and naturally acts to correct itself, and will be corrected, without active intervention of the expropriator of the value.

Classical economists were well aware of retributive value. Adam Smith argued nature always equilibriates with the sanction of profit and loss toward continuous improvement much as Darwin observed in nature. Both thinkers posit the theory based on empirical, ontological observation. It was not to support any teleological belief or ideology, but just the pursuit of knowlege from the the particular to the general--the scientific method, a process of induction. It is an exercise in Logical Positivism.

Smith and Darwin are not devoid of moral value. Quite the contrary. They both observed the ontological result of natural forces was a continuous improvement to environmental conditions. It is naturally, teleologically, positive.

If someone removes value from the equation and declares that doing so has rendered the naturally stable and logically positive equation to now be 2+2=5, the eqation is now naturally unstable and illogical. The expropriator will constantly have to act to "conserve" the value removed from the equation to prevent it from returning to its natural condition.

While it is possible to expand the pie, transform nature into wealth, the physics--the logically positive attributes--are naturally conserved. Creating wealth does not create more matter or energy to be utilized: 2+2=5 can only be maintained by political proclamation and practice--by an abstraction of the sociological imagination.

There is a retributive value, a cost, that is accumulated over time as society suffers the unnatural equation of 2+2=3 and the political dissonance of a cognitively abstract 2+2=5 legitimacy. Conserving the removed value can be by brute force, legal proclamation, bureaucratic management. It can be theorized, systematized and monetized many times over, but still, something has got to give.

We are in a highly progressed phase of bureaucratic management. Without it, we regress to legal proclamation and then to brute force, much as our founding fathers observed and has characteristized much of the 20th Century, moving back and forth between the phases of managing the accumulated, surplused, retributive value.

The fundamental empirical measure of this surplused retributive value, always being mortgaged to the future, is the nominal value of the accumulating public debt. Progress will be the simple, fundamental function of a progressive tax code to surrender the retributive value to distributive justice. A simple calculus that is easily verified by the outcome, the evidence.

A simple, progressive tax code, with no exceptions, is clearly and verifiably fair and equitable. Rather than the subject of political parsing, fallacious rhetoric and pious frauds, the legitimacy of power is rendered simple, universally understandable, and scientifically unambiguous. The difference betweem belief and knowlege, validation and verification, is rendered an easy, naturally occuring operation of common life rather than the abstruse, safely impractical and accessibly limited domain of deliberate, scholarly pursuit.

Although the reactionary tendency to regress has been mitigated by improved organizational technologies, the natural tendency to correct the equation naturally, inexorably, persits and can be observed in persistent pluralistic tendencies that take the form of bureaucratic power and public authority as markets are allowed to consolidate and maintain an unstable equation.

The Federal Reserve argues its function is to organize, manage, chaos. It is not! What we see is the private sector preventing the organized efficiency of free markets to produce a stable social environment and a genuine, easily verifiable legitimacy. The result is inherent instability that requires management of a highly centralized authority with a false legitimacy of protecting us from what we would naturally have without it--a peacefully prosperous pluralism.

Assuring a peaceful and prosperous pluralisitic market environment always holds the possibility for choosing to live a collectively moral life that is individually motivated. In the mean time, the struggle for survival and the ambition to power can occur as a productive competition within a peaceful context. Until we find utopia, or utopia finds us, a free and unconsolidated marketplace will make that progression a peaceful and prosperous one.

We do not have to suffer the conceits of power to realize the good life if we do not choose to. Our Constitution provides the means if we choose to go the way of what we are all naturally endowed: freedom.

The next step is to build a broad based coalition from the rubble of the failed legitimacy of a collapsed neo-conservative coalitional regime. Build a coalition for Mr. Obama to solicit his leadership skill. The function of the moral ends will properly and legitimately follow the form of the moral means to power.

Very best wishes.