Where the Buck Stops

According to the Federal Reserve's Open Market Committee, the best way to regulate too-big-to-fail is for "too-big" financial firms to be even bigger.

The theory is that the economy-of-scale reduces the risk of lending--it will circulate capital--so that markets will be free and open. By ensuring the low risk (what is too big to fail), the marketplace is fully liquid. However, what happens is that big financial firms use the capital to deflate the economy by causing headline inflation. Instead of ensuring the marketplace is fully liquid, too-big-to-fail firms act to ensure the marketplace is fully liquidated.

The easiest way to make a profit without risk is to NOT invest the capital, like we have now with cash balances on corporate balance sheets at record levels. As long as the capital is not being invested in growth (employment and added supply) in an economy-of-scale proportion, the risk is too high and the reward too low to invest for growth. It is much more profitable to not invest in growth unless, of course, the profit is taxed away--but that is a moral hazard (i.e., it does not fit the Hamiltonian model).

As consumer confidence declines, the higher risk of investing growth accumulates into a crisis proportion. The risk (the crisis) is a self-fulfilled prophecy of an economy-of-scale proportion that liquidates the marketplace. Equity is deliberately (knowing and willingly) turned into debt with the highest degree of efficiency (which entails an inherent liability that manifests as growing budget deficits and the need to tax). Instead of economic growth, what grows is the public debt.

Too-big-to-fail is an empirical failure. Look at the numbers--as the capital has moved into commodities to produce massive, economy-of-scale profits without risk, the public debt has increased to a gamma-risk proportion (with the political threat of sovereign default, which does not, by the way, fit the Hamiltonian model and where the risk fully converges with the reward).

The buck stops here. Instead of circulating, providing liquidity as the Fed postulates, the buck stops producing GDP. Equity becomes negative, efficiently produced in a too-big-to-fail proportion.

According to Dodd-Frank, the buck stops with the Fed. It is the Fed's charge to command and control the too-big-to-fail, economy-of-scale proportion through a committee that ensures open markets (i.e, so that the market system fits the Hamiltonian model of rigging it to ensure the wealth always consolidates into the upper class in a crisis, command-and-control proportion).

Reversing a political-economic model that is 200 hundred years old appears to be dauntingly complex and administratively impossible. All we need to do, however, is to recognize too-big-to-fail being the empirical failure it is, but according to the Fed, our economic woes are not due to the size of firms.

According to the Fed, the persistent risk of SIFI's can be attributed to specific risk-management practices. It is not generally a function of size.

This piece of fundamental attribution error--declared to be "empirical truth" from the highest level of administrative, state authority--means that Systemically Influential Financial Institutions will continue to be systemically influential...and the buck stops there.

Where value consolidates is where the buck stops. It stops circulating (it causes a liquidity crisis). It is where the error of fundamental attribution accumulates into a political, crisis proportion as value accumulates, and churns, at the top. It is the Fed's job to manage the churning, inflated, crisis proportion and conserve the value of the accumulative error, which is why we often hear high-level technocrats remind us that crises will occur no matter what we do, formulating a hypothesis that needs to be empirically tested by deconsolidating the risk proportion.

Gaining empirical value, rather than validation, from the administrative state is entirely possible and, given the high proportion of gamma risk, likely.

The buck stops with the upper class, and risk consolidates into a persistent crisis proportion, until we decide it is better to ensure a more consensual, pluralistic, free-market model.

Until we decide to ensure a working, free-market model from the bottom up, instead of command and control trickled from the top down, value will persistently accumulate into a crisis, too-big-to-fail proportion. Risk, as we have seen again and again, that grows outside of its legitimate proportion to the reward (remember that being "too big" yields high reward at virtually no risk of failure) requires an ever-larger economy of scale to manage it, but with less and less direct accountability. If we want a true, free-market legitimacy, it is then the legitimate charge of the administrative state to ensure a free-and-unconsolidated marketplace, not firms so consolidated they are too big to fail in priority.

Being even more too-big-to-fail is not the cure for being too-big-to-fail.

Firms that are "too big" to fail are, simply, too big! Not admitting it is to knowingly harbor the tyranny we are told we so exceptionally abhor.

Firms allowed to get too big are firms that are not empirically verified by a popular consent of the governed. They become firms you have to do business with, not because you want to. Too-big-to-fail then tyrannically governs the marketplace by virtue (the strength) of size alone; and when rulers are not empirically ruled (verified) by the governed, but validated by default, there is a crisis of legitimacy that the rulers can no longer avoid. The risk reaches its fullest, political proportion and inexorably moves toward a more practical, consensual, pluralistic model, a' priori (with the risk of loss always having been fully assumed, which will inexorably verify).

We are free...free to choose at any time, a' priori, whether we allow the risk to verify, by consensus, or not, catastrophic.

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.