Risk Capital is a Lock; the American People Have the Key

Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The risk-reward calculus in Capital allocation decision making is something fool.com readers know a lot about. We see it as part of our challenge as individual investors: the all-important Alpha. "Normies" assume we're talking about Dog Whisperer training techniques, but we know it as the Holy Grail metric to size up any investment project.

Capitalism itself presupposes the deployment of capital in relatively risky enterprises to produce what we're taught to consider the "right" kind of economic growth (market-driven as opposed to government-led Keynesian).  

I remember Dave and Tom Gardner talking about risk in one of their very first PBS specials (which I enthusiastically recorded on my VHS). Risk-reward is supposed to be a fundamental tenet, indelibly infused into the neoclassical (Capitalist) economic model.

The story goes like this: Every good Capitalist dutifully accepts the risk-reward axiom as one of the ground rules of the game. If anyone accidentally (or deliberately) deviates from these rules, referee regulators step in to reestablish fair play.  

This game sounds great, and in fact we proved to be a (super) power, if not the best player of this game since WWII. Recently, however, there has been a gradual but steady shift by some players away from playing by the rules.   

Over the past two decades we have seen the players from Team Wall Street work against the risk-reward rule. The usual suspect banks and big private equity (their netherworld cousins) have deftly and systematically fought to dismantle the risk-reward substructure. "Socializing losses and privatizing gains" has become a trite CNN buzz phrase. In fact, we appear to be dangerously close to feeling desensitized to this blatant extortion and theft from taxpayers and corruption of the Capitalism system.

Whether or not a tendency to rig the game by its most successful players is inescapably immanent to the liberal system itself is a heated and worthwhile debate. The Great Recession has rekindled this intellectual argument so much that even Fukuyama was forced into a mea culpa.

I will leave this dialectic to the hardcore philosophers, but must warn proponents of the market system to start paying more attention to this topic before Marx catches up to the Carthinian bishops on the all-time bestseller list.

Instead, let's talk here about the ideological shift that has occurred inside our high-finance firms.

No well-bonused banker at Goldman Sachs (NYSE: GS) or analyst at SAC Capital Advisors talks about project NPV or IRR hurdle rates. Why should they consider such esoteric notions when they can borrow from the Fed at 0% and turn around and loan money right back to the government at >0% (with zero risk)? Or short underlying CDO assets knowing they are guaranteed to tank (again, zero risk)? Or front-run high frequency trades (risk: you guessed it - zero). Want proof? Here are 646 pages of meticulous details.

In fact, I contend that the last vestige of real Capitalist risk-takers today are people like you -- individual investors on fool.com who take the game seriously and want to learn the rules and win fairly. I would also include the old-school buy-side guys who fight like hell to generate Alpha at shops like T. Rowe Price (NASDAQ: TROW).

The problem comes as Team Wall Street snowballs its winnings (money) and hoards it, refusing to take any risk. While we still have all the promise of creativity and ingenuity that made America great, we are left with without a necessary ingredient in the liberal recipe: Capital.

In the Great Depression, when Capital refused to come out and play, Team Federal Government jumped in with the New Deal. Along with being the only side fielding a team after WWII, the Keynesian New Deal helped us get out of the Depression.

Today, Team Federal Government is broke.

We have to look for the risk Capital necessary for our economy to function from somewhere else. But, where? The TBTF banks and hedge funds refuse to take risk.  

Despite all the fear mongering, and setting aside for the moment the fairness of its distribution, the total net worth of U.S. Households and Nonprofit Organizations is still over $55 trillion.

<img src="/media/images/user_13237/total-net-worth-americans_large.png" />

All the risk Capital we need to get our economy growing again is in the hands and within the power of the American people.

We just need a vehicle to access it.

Crowdfunding, especially when part of a Conscious Capitalist approach to business like we use at whenyouwish.com, can be that vehicle to unlock the power of the American people. In fact, once that power and success is observed by Team Wall Street, systemic incentives will force them back in the game.

This democratizing financial power of the people will reestablish the risk-reward rule and bring back a fair playing field, and with it, a fair game for all.


DaveHarvilicz has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Goldman Sachs Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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