We hear a lot about systemic risk. Whether it is proper to operate in a TBTF proportion is why.
Building out an economy-of-scale efficiency (networking the externalities) is supposed to protect us from the risk of default. It does not do that, but we still maintain it.
The reason is because of unsystematic credit risk. Its management (ironically) associates with diversification (what Bernie Sanders says we need to do to prevent the risk of default in priority).
This is not hard to understand.
Diversification of the probable risk is axiomatic. It is only natural.
The first thing a financier learns is the value of The Law of Large Numbers. (If you don’t yield to it, “it” will come to you! You will very quickly know what Kant’s categorical imperative is, in the most practical way, but a lot of Objectivists simply refuse to yield to its “natural identity”–which is not at all the best and brightest thing to do! They do it anyway, and they can because the risk cannot really be reduced, but it can be operationalized into an unsystematic credit risk, managed in the futures, using RTVs–credit-risk derivatives. So, instead of it coming to you, you occupy its space in priority over time, booking the yield now, externalizing the real costs, exporting it to the futures where it seems so disconnected it can have all manner of misattribution. Austrian-School economists call this an accumulation of errors, which is to recognize that the risk really cannot be reduced.) Since the default risk actualizes (according to The Natural Law) on demand (showing us it cannot really be reduced), we actually know what the risk is but don’t avoid it because we improperly associate the causal identity. This is the “fraud as a legitimate business model” Sanders keeps telling us about on the campaign trail.
Sanders’ campaign naturally (yielding to the Law of Large Numbers) draws a crowd (whether you understand what a credit derivative is or not). There is an imperative value in operation that cannot be avoided, and like the Austrian School says (which is a school of thought conservatives are fond of), all avoiding it does is accumulate errors (the risk to be avoided).
The best and the brightest way to deregulate is to diversify (deconsolidate) the risk and avoid what risk managers in banking call “concentration risk,” which is a risk dimension associated with unsystematic credit risk.
They know what the risk is, but ignore it; and like Kant said, ignoring the obligation to it is a big mistake! When really bad things then happen, we will be sure to hear that the consequences are unintended–the product of a natural condition that tends to randomize the occurrence of knowing what the risk really is (the random walk) over time. That’s nothing but a big lie, the perpetrators know it, and the best way to regulate the nuisance (and reduce the externalities) is to deconsolidate the risk, like Sanders says, in priority, and we have every reason to believe that he really will!