if the market wants lots and lots of SBD with less and less backing, why not give it to them?
Simply put, because I don't trust the market's risk management skills. In the medium-to-long term, undercollateralization almost certainly leads to peg discounts when the price of STEEM falls.
Peg discounts are otherwise handled by the system and indeed if you look at the price history there have not been significant sustained discounts ever (apart from a short time 2016 when few people understood how it worked). Premiums are not otherwise handled by the system. The only way to resolve a premium (which do put a very high degree of risk onto SBD holders; someone buying/receiving SBD at $5 is at risk of easily losing 80% of their money, and indeed this has happened) is by issuing/selling more of it.
Furthermore there is no real 'risk' here, in the sense of risk to the overall system. SBD regardless of the amount issued is capped at 10% of STEEM's value period, which is so small it is actually less than many one-day price moves. Any additional issuance of SBD just means that SBD buyers are voluntarily accepting some of STEEM's price risk. I see no harm in that. It actually addresses one of the frequent criticisms of pegged assets, which is that they are making an unkeepable promise to always maintain a price. SBD doesn't do that. It promises to maintain a price as long as STEEM's price/marketcap is high enough.
Furthermore there is no real 'risk' here, in the sense of risk to the overall system. SBD regardless of the amount issued is capped at 10% of STEEM's value period
That's exactly right, and the missing piece I was forgetting about. It's not like SBD is at risk of a total collapse if too much is printed.