WEBVTT - How AI Could Freeze Progress with Hilary Allen 0:00:00.040 --> 0:00:11.840 Bloomberg Audio Studios, Podcasts, radio News. This is Masters in 0:00:11.920 --> 0:00:15.440 Business with Barry Ritholts on Bloomberg Radio. 0:00:16.600 --> 0:00:20.160 I'm Barry Ridholts. You're listening to Masters in Business on 0:00:20.239 --> 0:00:24.600 Bloomberg Radio. My extra special guest this week is Hillary Allen. 0:00:25.000 --> 0:00:29.479 She is a professor at the American University Washington College 0:00:29.480 --> 0:00:34.320 of Law in DC, where she specializes in financial regulation, 0:00:35.080 --> 0:00:40.960 banking law, securities regulation, and technology law. She published a book, 0:00:41.320 --> 0:00:46.760 Fintech Dystopia, a Summer Beach Read about how Silicon Valley 0:00:46.840 --> 0:00:52.760 is ruining things, covering the intersection of finance, technology, law, regulation, 0:00:53.320 --> 0:00:56.920 and politics. It's a perfect subject for us to talk about. 0:00:57.040 --> 0:00:59.240 Hillary Allen, Welcome to Bloomberg. 0:00:59.480 --> 0:01:00.800 Thank you so much for having me. 0:01:00.960 --> 0:01:06.920 So fascinating conversation, fascinating topic that you write about. Before 0:01:06.959 --> 0:01:09.880 we jump into that, let's spend a few minutes going 0:01:09.920 --> 0:01:13.520 over your background. You get a bachelor's in Laws from 0:01:13.560 --> 0:01:18.080 the University of Sydney in Australia, a Master of Laws 0:01:18.160 --> 0:01:22.840 in Securities and Financial Regulation law from Georgetown here in 0:01:22.840 --> 0:01:26.160 the States, and you graduated first in your class there. 0:01:26.800 --> 0:01:29.360 What was the original career plan? Was it simply I'm 0:01:29.360 --> 0:01:31.479 going to go be a lawyer. What were you thinking. 0:01:32.000 --> 0:01:34.080 The original career plan was I'm just going to be 0:01:34.120 --> 0:01:37.600 a lawyer. And then I loved law school and I 0:01:37.680 --> 0:01:41.160 practiced for seven years and discovered there wasn't so much 0:01:41.280 --> 0:01:44.399 law always in the practice of law, and I'm a 0:01:44.440 --> 0:01:47.800 nerd and I missed it. And so the drive was 0:01:47.920 --> 0:01:50.240 to go back to Georgetown and get my master's, do 0:01:50.320 --> 0:01:53.280 some academic writing, and then launch a career as a 0:01:53.280 --> 0:01:54.440 professor where I could. 0:01:54.320 --> 0:01:56.400 Really sort of think slowly about the law. 0:01:56.840 --> 0:01:59.600 And you practiced, you were in London, you were in Sydney, 0:02:00.160 --> 0:02:02.120 Shaman and Sterling here in New York. Tell us a 0:02:02.160 --> 0:02:04.040 little bit about the sort of legal work you were 0:02:04.080 --> 0:02:06.120 doing when you were practicing attorney. 0:02:06.760 --> 0:02:08.960 So basically there's sort of two broad categories of the 0:02:09.000 --> 0:02:12.960 work I did. I did transactional work banking transactional, typically 0:02:13.040 --> 0:02:15.040 acting for banks in leverage buyouts. 0:02:16.840 --> 0:02:17.760 But the work I. 0:02:17.600 --> 0:02:22.000 Think I enjoyed more was the regulatory compliance advisory. So 0:02:22.040 --> 0:02:25.120 there was more law in that, especially when you had 0:02:25.200 --> 0:02:29.200 new financial laws being handed down in Australia and changes 0:02:29.200 --> 0:02:31.519 in the US with Dot Frank and sort of trying 0:02:31.520 --> 0:02:33.680 to figure out how to comply with those new rules. 0:02:34.200 --> 0:02:38.840 So how do you go from practicing bank transactions and 0:02:38.880 --> 0:02:43.000 some regulatory law to ultimately working with the Financial Crisis 0:02:43.040 --> 0:02:45.240 in Greek Commission. Tell us a little bit about your 0:02:45.240 --> 0:02:46.560 experiences there. 0:02:47.080 --> 0:02:50.560 So that was a serious of a series of fortunate events. 0:02:51.320 --> 0:02:54.360 While I was doing my master's at Georgetown, I had 0:02:54.400 --> 0:02:59.120 a professor who was tapped to be on the staff 0:02:59.160 --> 0:03:01.919 of the financialis Inquired Commission, and he pulled me into 0:03:01.960 --> 0:03:03.480 work with them two days a week and we were 0:03:03.520 --> 0:03:06.680 investigating the causes of the two thousand and eight financial 0:03:06.680 --> 0:03:10.000 crisis to put together the report that came out, which 0:03:10.000 --> 0:03:10.440 really was. 0:03:10.400 --> 0:03:12.200 Sort of a nice thick book that they published. 0:03:12.240 --> 0:03:15.239 It's a really thick book with a really thick index even, 0:03:15.600 --> 0:03:18.280 and the idea was to tell the story. And that's 0:03:18.320 --> 0:03:21.040 really sort of stuck with me throughout my career, the 0:03:21.040 --> 0:03:24.240 importance of being able to explain complex things and how 0:03:24.280 --> 0:03:26.120 they knit together to cause things. 0:03:26.680 --> 0:03:30.919 So working with the FCIC, how did that affect how 0:03:30.960 --> 0:03:36.200 you looked at regulation in general, but more specifically the 0:03:36.240 --> 0:03:42.560 government's responds to technology, new financial products, the regulatory world 0:03:43.040 --> 0:03:43.680 in general. 0:03:44.520 --> 0:03:47.320 So the gift that I got from working with the 0:03:47.320 --> 0:03:51.240 Financial Crisis in quir Commission is sort of understanding that 0:03:51.360 --> 0:03:53.640 there are a lot of things that come together and 0:03:53.680 --> 0:03:57.160 you need to really look very broadly to understand systemic changes. 0:03:58.960 --> 0:04:01.040 Another gift that it gave me was I think a 0:04:01.040 --> 0:04:04.320 healthy skepticism of innovation rhetoric, right, because if you think 0:04:04.360 --> 0:04:07.040 back to two thousand and eight and what caused it, 0:04:07.160 --> 0:04:09.680 you know there were all these stories about well, these 0:04:09.680 --> 0:04:13.040 new financial products, these complex new derivatives, we don't need 0:04:13.080 --> 0:04:17.000 to regulate them, their innovation, sophisticated parties involved, We don't 0:04:17.000 --> 0:04:20.160 want to tamp down on innovative potential. And so that 0:04:20.160 --> 0:04:23.320 that skepticism has been a helpful skill set as I've 0:04:23.320 --> 0:04:26.039 been navigating the sort of post two thousand and eight 0:04:26.480 --> 0:04:30.080 financial world where you have the innovation rhetoric from Silicon 0:04:30.160 --> 0:04:33.440 Valley infiltrating into financial services. 0:04:34.680 --> 0:04:38.240 You raise a really interesting issue that I have to 0:04:38.320 --> 0:04:43.320 ask about. So, how much of what we see as 0:04:43.640 --> 0:04:51.200 regulation is either an adherence to an ideology that sometimes 0:04:51.240 --> 0:04:55.839 says regulation is good and our guardrails and capitalism and 0:04:55.960 --> 0:05:02.039 other ideology says regulation is expens and anti innovative and 0:05:02.120 --> 0:05:06.760 reduces job creation. It seems like, regardless of the facts 0:05:06.800 --> 0:05:10.920 on the ground, each side has their belief system. How 0:05:10.920 --> 0:05:12.120 do you contextualize that. 0:05:13.000 --> 0:05:16.000 Well, I mean, I think I don't think there were 0:05:16.040 --> 0:05:19.080 too many people in the depths of the two thousand 0:05:19.080 --> 0:05:21.200 and eight crisis who were saying there's too much regulation. 0:05:22.160 --> 0:05:25.200 I think it's a function of where you are in 0:05:25.240 --> 0:05:28.720 a particular time. I think people's memories fade really quickly, 0:05:29.560 --> 0:05:33.640 and as soon as regulation has solved the problems it 0:05:33.760 --> 0:05:37.120 was intended to solve, or the crisis that spurred the 0:05:37.160 --> 0:05:43.000 regulation has dissipated, people quickly forget why that regulation is 0:05:43.040 --> 0:05:45.600 there in place, and then it becomes much easier to 0:05:45.680 --> 0:05:48.320 see it as something that is just a hindrance, something 0:05:48.320 --> 0:05:50.880 that is just expensive, that doesn't have a role to play. 0:05:51.640 --> 0:05:54.640 But I think what we're actually seeing right at this 0:05:54.800 --> 0:05:59.320 moment is the erosion of the securities laws that really 0:05:59.360 --> 0:06:03.080 have stood investors in goodstead since the nineteen thirties. Not 0:06:03.160 --> 0:06:06.839 to say they're perfect, but the general sort of investor 0:06:06.880 --> 0:06:09.880 protection regime that the Securities and Exchange Commission is always 0:06:09.880 --> 0:06:15.719 implemented has really encouraged trust in the US stock market, 0:06:15.760 --> 0:06:17.440 and it sort of made it the endvy of the world, 0:06:17.520 --> 0:06:21.400 and people wanted to list here. That's really getting peeled 0:06:21.400 --> 0:06:25.000 back right now, and so I think, you know, it'll be. 0:06:26.480 --> 0:06:27.839 Pretty soon a moment. 0:06:27.640 --> 0:06:30.640 Where we realize why we had all that regulation, and 0:06:30.640 --> 0:06:31.159 we'll miss it. 0:06:31.920 --> 0:06:37.760 So heading into the financial crisis, I recall looking at 0:06:37.839 --> 0:06:42.279 some of what I called radical deregulation prior. And this 0:06:42.360 --> 0:06:46.279 isn't by no means the sole cause of the financial crisis. 0:06:46.360 --> 0:06:50.000 Lots of factors led to this. But you had the 0:06:50.000 --> 0:06:54.800 Commodity's Futures Modernization Act, which allowed what was essentially an 0:06:54.880 --> 0:07:00.040 insurance product to be issued without any insurance reserves and 0:07:00.120 --> 0:07:02.880 a risky and then you had the repeal of glass 0:07:02.880 --> 0:07:09.000 steel that kept depository banks separate from speculative Wall Street banks. 0:07:09.160 --> 0:07:12.880 It probably didn't cause the crisis, but certainly allowed it 0:07:12.960 --> 0:07:17.840 to get much bigger at the very least. And yet 0:07:18.600 --> 0:07:22.880 there didn't seem to be any desire after the crisis. Hey, 0:07:22.920 --> 0:07:25.440 maybe we should put these things back into place. Maybe 0:07:25.480 --> 0:07:29.800 we should repeal what was added and restore what was repealed. 0:07:30.600 --> 0:07:32.840 Nobody wanted. They want to go a totally different direction. 0:07:33.400 --> 0:07:35.920 Well, I think again, this is a story of political economy, 0:07:36.040 --> 0:07:37.600 and there are still a lot of people who are 0:07:37.680 --> 0:07:40.840 mad at the Obama administration for prioritizing health care over 0:07:40.920 --> 0:07:44.880 financial reform. Because basically they had one shot at doing 0:07:44.880 --> 0:07:50.440 something big and if they had, and I'm not weighing 0:07:50.480 --> 0:07:51.960 in to say that this was the right or the 0:07:52.000 --> 0:07:56.040 wrong move, but if they had gone right out of 0:07:56.040 --> 0:07:58.640 the gates with financial reform, I think we would have 0:07:58.680 --> 0:08:02.560 seen more of the bigger structural things that you're talking about. So, 0:08:03.160 --> 0:08:05.800 you know, in that immediate aftermath of the two thousand 0:08:05.840 --> 0:08:09.000 and eight crisis, you had Sandy will who had been 0:08:09.240 --> 0:08:12.240 the head of City Group and had sort of engineered 0:08:12.280 --> 0:08:12.680 the end. 0:08:12.600 --> 0:08:14.920 Of the glass Stegel legislation. 0:08:15.520 --> 0:08:19.680 And from this maybe apocryphal, but apparently he had a 0:08:19.680 --> 0:08:23.440 deal toy that said shatterer of glass Stegel that he 0:08:24.080 --> 0:08:26.720 kept on his desk. And again this may be apocryphal, 0:08:26.720 --> 0:08:28.600 but I heard that he basically sort of had a 0:08:28.640 --> 0:08:31.640 conversion after two thousand and eight said oh, yeah, probably 0:08:31.640 --> 0:08:32.600 shouldn't have done that. 0:08:32.800 --> 0:08:36.400 Well, well, a lot of people did. Alan Greenspin famously said, 0:08:37.000 --> 0:08:41.760 I incorrectly assumed people's concern over their own reputation would 0:08:41.760 --> 0:08:44.880 have prevented some of the excesses we've seen. I'm paraphrasing, 0:08:45.160 --> 0:08:46.760 but that was pretty close to what he said. 0:08:46.800 --> 0:08:48.560 Yeah, he said, the world sort of didn't work the 0:08:48.600 --> 0:08:50.400 way I thought it did, and I think, you know, 0:08:50.559 --> 0:08:53.360 had they gone straight out of the gates with financial reform, 0:08:53.400 --> 0:08:55.920 you might have seen some of that structural reform. But 0:08:56.000 --> 0:08:57.840 by the time they got around to it, you know, 0:08:57.880 --> 0:09:01.480 DoD Frank wesn't passed two twenty ten. You know, then 0:09:01.559 --> 0:09:06.560 the political economy calculus had shifted. The industry was in 0:09:06.600 --> 0:09:09.199 more of a position to sort of argue for weaker 0:09:09.280 --> 0:09:11.240 rules and fewer structural changes. 0:09:11.480 --> 0:09:17.120 It's amazing how rapidly memories fade and people just quickly, Oh, no, 0:09:17.240 --> 0:09:20.840 that was then, Now it's new. You've worked inside the 0:09:20.840 --> 0:09:24.760 global financial system as well as studying it from the outside. 0:09:25.360 --> 0:09:28.280 How did being part of the FCICE affect how you 0:09:28.360 --> 0:09:35.880 perceive technology, new financial products, regulation, and deregulation. How did 0:09:35.880 --> 0:09:37.480 that affect your perspective? 0:09:38.120 --> 0:09:40.360 You know, I didn't think a ton about technology at 0:09:40.360 --> 0:09:42.320 that time. That's sort of been a later addition to 0:09:42.360 --> 0:09:44.720 the work that I do. But the broader themes of 0:09:44.880 --> 0:09:52.360 financial innovation, regulation, deregulation, you know, I see the value 0:09:52.720 --> 0:09:56.840 in financial stability regulation in particular. So financial stability regulation 0:09:56.880 --> 0:09:59.320 are the rules that are supposed to prevent financial crises, 0:09:59.360 --> 0:10:01.560 and they work often sort of hand in hand with 0:10:01.640 --> 0:10:05.440 investor protection regulations, but they also aim to do something differently. 0:10:06.080 --> 0:10:10.559 And part of the challenge when you're trying to prevent 0:10:10.559 --> 0:10:15.000 a financial crisis is this silo mentality where people just 0:10:15.040 --> 0:10:17.839 think about their own little piece of the world, and Okay, 0:10:17.840 --> 0:10:20.280 we can deregulate our little piece and we don't won't 0:10:20.320 --> 0:10:23.800 think about the flow on consequences and what incentives it'll create, 0:10:23.840 --> 0:10:27.840 et cetera. And so you know, my real takeaway was 0:10:27.960 --> 0:10:33.319 always to have the most holistic perspective possible to break 0:10:33.360 --> 0:10:36.440 down that silo mentality, and later in my career that 0:10:36.559 --> 0:10:40.559 meant learning about the new technologies that are sort of 0:10:40.640 --> 0:10:42.520 infiltrating the financial system. 0:10:42.520 --> 0:10:44.559 So I want to talk about technology and I want 0:10:44.600 --> 0:10:48.760 to talk about fintech dystopia. But there is a quote 0:10:48.840 --> 0:10:52.959 from within that that applies directly to what you're describing 0:10:52.960 --> 0:10:59.280 with stability, which was, it's the economic precarity. Stupid paraphrasing 0:10:59.360 --> 0:11:03.679 James Carville'll tell us a little bit about the economic precarity. 0:11:03.960 --> 0:11:09.240 Yeah, So, I think a mistake that we have made 0:11:09.520 --> 0:11:12.440 collectively in recent years is to say, well, look, the 0:11:12.480 --> 0:11:18.840 economy's doing well, everything's fine, and that really doesn't mesh 0:11:18.960 --> 0:11:22.720 with many people's experience of the economy. So it used 0:11:22.760 --> 0:11:25.600 to be, well, probably not always the case, but closer 0:11:25.640 --> 0:11:28.440 to the case in the Clinton years, where there was 0:11:29.120 --> 0:11:32.080 less economic inequality than there is now, that you could 0:11:32.080 --> 0:11:34.720 sort of say, a rising tide lifts ale boats. But 0:11:34.880 --> 0:11:37.720 now what we're seeing is over half of Americans live 0:11:38.120 --> 0:11:41.400 from paycheck to paycheck, even in a good economy, right, 0:11:41.520 --> 0:11:46.079 And so in that kind of circumstance, the financial systems, 0:11:46.160 --> 0:11:49.640 not the economy, aren't working for everybody. And so I 0:11:49.640 --> 0:11:53.480 think when we think about what we're trying to achieve 0:11:54.120 --> 0:11:59.200 with our financial system, it should be that we are 0:11:59.200 --> 0:12:02.559 trying to find a solution to this economic precarity. And 0:12:02.840 --> 0:12:05.920 also that begs the question of whether the financial system 0:12:06.120 --> 0:12:08.480 and investing is in actually the way to get there. 0:12:08.880 --> 0:12:12.080 And maybe we need broader public policies to address that 0:12:12.200 --> 0:12:15.280 economic precarity so that no one or at least not 0:12:15.360 --> 0:12:18.440 half of the population are just scraping by. 0:12:18.720 --> 0:12:21.520 So we just passed a new set of laws that 0:12:21.640 --> 0:12:27.319 include thousand dollars accounts for newborns is not going to 0:12:27.400 --> 0:12:31.600 solve financial inequality, or these kids, by the time they're thirty, 0:12:31.840 --> 0:12:33.800 they'll be worth millions. 0:12:35.200 --> 0:12:37.480 I think you might need to offset against the people 0:12:37.520 --> 0:12:40.480 losing their health insurance subsidies. I don't think that one 0:12:40.520 --> 0:12:42.360 thousand dollars is going to go very far right. 0:12:42.400 --> 0:12:47.040 And what's fascinating is watching just a parade of billionaires 0:12:47.080 --> 0:12:50.079 come out and no, no, we need to supplement that 0:12:50.200 --> 0:12:53.320 thousand dollars. So first it was Michael Dell, and then 0:12:53.360 --> 0:12:55.199 it was Ray Dalio. I don't know who else is 0:12:55.240 --> 0:12:58.880 going to step forward, but it appears, hey, we're not 0:12:58.920 --> 0:13:00.840 really paying a whole lot in axes, we might as 0:13:00.880 --> 0:13:03.920 well throw some money at some babies. That seems to 0:13:03.960 --> 0:13:04.960 be the philosophy. 0:13:05.280 --> 0:13:10.320 Yeah, I mean, I don't love philanthropy in that sense. 0:13:10.559 --> 0:13:16.160 Supplementing democratically sort of elected policies. You know, it gives 0:13:16.200 --> 0:13:18.240 a lot of sort of discretion and power to people 0:13:18.360 --> 0:13:20.319 as to how they want to distribute their large ss. 0:13:20.320 --> 0:13:22.199 And to some degree that's fine. 0:13:22.360 --> 0:13:24.480 But again, when we have a society where half of 0:13:24.520 --> 0:13:29.160 the population is barely scraping by, I don't think their 0:13:29.200 --> 0:13:33.880 liveability should be predicated on the whims of billionaire large s. 0:13:34.360 --> 0:13:40.600 Fair enough, You talked about technological innovation in your book. 0:13:40.679 --> 0:13:46.480 You argue that that is financial technology innovation is driven 0:13:46.840 --> 0:13:52.400 largely by legal design rather than technical brilliance. Explain that 0:13:52.480 --> 0:13:55.800 a little bit. What is it about fintech that seems 0:13:55.840 --> 0:13:59.920 to be working the perspective from an attorney rather than 0:14:00.120 --> 0:14:00.760 an engineer. 0:14:01.280 --> 0:14:03.599 Yeah, so this was something that, as I said, I 0:14:03.640 --> 0:14:05.680 came to a little later in my career. I think 0:14:05.720 --> 0:14:08.199 earlier in my career when I first started looking at fintech, 0:14:08.240 --> 0:14:13.320 I generally accepted the party line, this technology is revolutionary, 0:14:13.360 --> 0:14:16.760 this technology is making things more efficient, this technology is 0:14:16.800 --> 0:14:20.880 fixing things. And then I realized that the people who 0:14:20.920 --> 0:14:22.960 were saying that had something to sell, and I probably 0:14:23.000 --> 0:14:25.720 should learn a little more about the technology, because if 0:14:25.760 --> 0:14:28.560 you want to work on financial regulatory policy now, you 0:14:28.640 --> 0:14:31.920 need to understand the extent to which the technology actually 0:14:32.000 --> 0:14:35.520 lives up to what it's claimed it can do. 0:14:36.280 --> 0:14:38.240 And so sort of my first sort of. 0:14:38.160 --> 0:14:41.560 Foray into this was I've looked really in detail at blockchain, 0:14:41.600 --> 0:14:45.280 which is truly, frankly a terrible technology. It's a clunky 0:14:45.360 --> 0:14:50.680 database and it's not something you would ever choose for 0:14:51.000 --> 0:14:54.520 any kind of financial market infrastructure, but for the fact 0:14:54.880 --> 0:14:57.520 that it's been very easy to convince regulators not to 0:14:57.520 --> 0:15:00.880 regulate it, and so the value add comes from crypto 0:15:00.920 --> 0:15:05.000 has never been blockchain technology as a technology. It's been 0:15:05.320 --> 0:15:09.920 whipping up stories about that technology that have justified avoiding regulation. 0:15:10.600 --> 0:15:12.760 And we see it in other instances as well. 0:15:12.800 --> 0:15:18.640 You know, there are fintech lending that is replicating some 0:15:18.800 --> 0:15:21.880 of the predatory payday lending that we've seen before. 0:15:22.680 --> 0:15:25.360 So buy now, pay later sort of financing or. 0:15:25.400 --> 0:15:29.080 Well, payday loans have been around a lot longer than that. 0:15:29.680 --> 0:15:31.360 This is sort of a sort of it's like a 0:15:31.440 --> 0:15:34.240 four hundred dollar loan that you get to bridge you 0:15:34.280 --> 0:15:38.760 over till your next payday. And you know, there's been 0:15:38.800 --> 0:15:40.920 a lot of predation in that market in some states 0:15:41.000 --> 0:15:43.680 had banned those products essentially. 0:15:43.720 --> 0:15:46.520 Do you think twenty nine percent interest is not fair? 0:15:46.840 --> 0:15:48.960 You have a problem with that. We're just trying to 0:15:49.000 --> 0:15:50.080 make a profit here. 0:15:50.240 --> 0:15:52.360 Some of these interest rates are three hundred percent? 0:15:52.440 --> 0:15:55.840 Get out. Yeah, that's insane. And what is New York 0:15:55.880 --> 0:15:57.960 turned out? It like nineteen something. 0:15:58.280 --> 0:16:00.920 I don't know about New York. Yeah, but but. 0:16:00.720 --> 0:16:04.960 But normally, anything you know, mid double digits is thought 0:16:05.000 --> 0:16:08.440 of as usurious. Three hundred percent is just next level. 0:16:08.560 --> 0:16:10.640 Yeah, I mean it's not set as an interest rate 0:16:10.720 --> 0:16:13.120 per se their fees, but once you actually convert that 0:16:13.200 --> 0:16:16.200 into a paranum that can be in the hundreds of percentages. 0:16:16.240 --> 0:16:19.720 And so that has always been a problem, and we've 0:16:19.720 --> 0:16:23.240 had states act and then we've had new fintech lenders saying, well, actually, 0:16:23.240 --> 0:16:25.880 we're different from payday lenders because we use AI to 0:16:25.920 --> 0:16:27.000 screen our borrowers and. 0:16:26.960 --> 0:16:28.400 So you should treat us differently. 0:16:29.520 --> 0:16:32.760 And yet they're charging interest rates that are equivalent to 0:16:32.800 --> 0:16:35.280 what payday lenders do. And then you mentioned by now 0:16:35.400 --> 0:16:38.840 pay later. Again they say, well, we're not even extending loans. 0:16:39.120 --> 0:16:40.840 This isn't a loan at all, so we shouldn't have 0:16:40.880 --> 0:16:45.440 to comply with the laws around lending, around disclosure, around 0:16:45.480 --> 0:16:46.240 that kind of thing. 0:16:46.280 --> 0:16:49.160 How is that not alone? You're buying a product that 0:16:49.200 --> 0:16:53.240 you don't have money for someone is paying for that. 0:16:53.520 --> 0:16:54.520 Isn't that alone? 0:16:54.800 --> 0:16:55.360 I would say? 0:16:55.400 --> 0:16:59.280 So okay, but but what what's the counter to This 0:16:59.360 --> 0:17:03.880 isn't a loan, This is a free layaway essentially? 0:17:03.960 --> 0:17:06.639 Yeah, no, you know, we don't charge interest. 0:17:06.840 --> 0:17:08.920 There are late fees if you don't pay, but that's 0:17:08.960 --> 0:17:10.240 not the same as interest. 0:17:10.480 --> 0:17:14.479 You know, that's there like we bought a couch no 0:17:14.600 --> 0:17:17.320 interest for six months, so as long as you pay 0:17:17.359 --> 0:17:20.320 it off within six months. That sort of thing seems 0:17:20.359 --> 0:17:21.960 to be interest free. 0:17:22.320 --> 0:17:23.960 But then when you look at the business model and 0:17:24.000 --> 0:17:26.159 you see that a significant chunk of the people are 0:17:26.400 --> 0:17:28.080 incurring these late fees. 0:17:28.040 --> 0:17:32.159 Well, that's their fault, isn't it. That's human nature. You 0:17:32.240 --> 0:17:36.199 can't blame us if we take advantage of people procrastinating 0:17:36.200 --> 0:17:38.640 and not paying off their fees in time. 0:17:38.720 --> 0:17:40.960 Well, it's not that they're procrastinating, it's that they're choosing 0:17:41.040 --> 0:17:43.200 between paying rent or paying this off. 0:17:43.240 --> 0:17:45.760 So this is yeah, medicine exactly. 0:17:45.880 --> 0:17:49.040 So this is coming back to it's the economic procarity 0:17:49.080 --> 0:17:52.439 stupid right. If people are in these dire straits, we 0:17:52.480 --> 0:17:55.199 should not be surprised that fintech firms are trying to 0:17:55.200 --> 0:17:58.400 capitalize on that and profit from it, which is why 0:17:58.440 --> 0:18:03.240 I think, you know, what we need are some kind 0:18:03.320 --> 0:18:07.480 of public safety nets to sort of make and to 0:18:07.520 --> 0:18:10.480 hire minimum wage and hire social security benefits. 0:18:10.640 --> 0:18:14.040 Coming up, we continue our conversation with Professor Hillary Allen 0:18:14.640 --> 0:18:19.960 discussing her new book, Fintech Dystopia, a summer beat read 0:18:20.160 --> 0:18:25.000 about Silicon Valley and how it's ruining things. I'm Barry Ridults. 0:18:25.040 --> 0:18:42.560 You're listening to Masters in Business on Bloomberg Radio. I'm 0:18:42.600 --> 0:18:46.720 Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. 0:18:47.000 --> 0:18:50.159 My extra special guest this week is Hillary Allen. She 0:18:50.320 --> 0:18:55.320 teaches at the American University Washington College of Law in Washington, 0:18:55.400 --> 0:19:00.159 d C. Where she specializes in regulation of financial and 0:19:00.240 --> 0:19:06.520 technology laws. So let's talk about the Digital Only book 0:19:06.840 --> 0:19:15.040 Ironic Right, Fintech Dystopia, where you describe modern financial technology 0:19:15.760 --> 0:19:21.399 simply as Silicon Valley ruining things. Explain that seems like 0:19:21.440 --> 0:19:25.240 an extreme example, and give us some examples of how 0:19:25.320 --> 0:19:26.879 Silicon Valley is ruining things. 0:19:27.080 --> 0:19:29.760 So, just to be clear, not all modern technology is 0:19:29.880 --> 0:19:33.840 ruining things. There's a particular business model approach that I 0:19:33.920 --> 0:19:37.440 think is ruining things, and that is derivative in many 0:19:37.440 --> 0:19:40.840 ways of the venture capital model in Silicon adventure capital 0:19:41.280 --> 0:19:44.840 just venture, Okay, yeah, venture capital model in Silicon Valley. 0:19:44.880 --> 0:19:49.320 So it's sort of got thischene around it that's iconoclastic, 0:19:49.400 --> 0:19:54.000 and they make bets on these moonshots that'll save all 0:19:54.040 --> 0:19:57.119 of humanity and YadA, YadA YadA. But in fact it's 0:19:57.280 --> 0:20:02.400 pretty well established as a play at this point. You know, 0:20:02.920 --> 0:20:05.360 there's a lot of subsidies that go to venture capital 0:20:05.800 --> 0:20:10.679 by virtue of their having access to pension funds by 0:20:10.760 --> 0:20:13.560 virtue of sort of capital gains taxation, and so they've 0:20:13.560 --> 0:20:16.400 got sort of and especially in low interest rate environments, 0:20:16.400 --> 0:20:18.200 they attract a lot of money, so they have pretty 0:20:18.280 --> 0:20:21.360 cheap money available to them. And then they go shopping. 0:20:22.160 --> 0:20:25.520 And what they go shopping for is not the iconoclastic 0:20:25.680 --> 0:20:28.720 sort of outlier that we think of, but what we've 0:20:28.760 --> 0:20:31.360 seen and what the evidence shows is that they tend 0:20:31.359 --> 0:20:32.880 to go shopping for the same things that their friends 0:20:32.880 --> 0:20:35.320 are going shopping for, and they go shopping for the 0:20:35.359 --> 0:20:37.720 businesses that their friends have developed. And so there's this 0:20:37.800 --> 0:20:41.840 sort of very sort of insular mentality in what they're 0:20:41.840 --> 0:20:44.280 looking for. And they're also looking for something that they 0:20:44.359 --> 0:20:48.159 can cash out of very quickly, because you know, the 0:20:48.200 --> 0:20:51.639 average venture capital fund has a ten year, sometimes twelve, 0:20:51.640 --> 0:20:53.080 but usually ten year duration. 0:20:54.040 --> 0:20:55.440 That's really not that much. 0:20:55.240 --> 0:20:58.480 Time to find something to invest in, have it grow, 0:20:58.560 --> 0:21:01.400 and then cash out, and so they're not looking for 0:21:01.480 --> 0:21:05.000 things that are going to take decades to develop. They're 0:21:05.040 --> 0:21:07.360 looking for things that they can grow quickly and get 0:21:07.400 --> 0:21:09.200 out of in about five or six years. 0:21:09.240 --> 0:21:11.080 So give us a few examples. What do you think 0:21:11.160 --> 0:21:15.640 is the sort of you know, not adding a whole 0:21:15.680 --> 0:21:18.439 lot of value venture backed businesses. 0:21:19.080 --> 0:21:23.160 So not intentionally, but it just turned out that way. 0:21:23.160 --> 0:21:26.679 As I wrote this book, almost every fintech business I 0:21:26.760 --> 0:21:29.359 looked at had been funded by Andresen Horowitz. 0:21:29.920 --> 0:21:31.560 They had been sort of the lead. So you know, 0:21:31.600 --> 0:21:34.920 they they're. 0:21:33.600 --> 0:21:38.960 The hot VC these days. I've full disclosure, I've interviewed Andresen, 0:21:39.040 --> 0:21:42.720 I've interviewed Kapor, I've interviewed Horowitz. So I've sat with 0:21:42.800 --> 0:21:45.919 them and talked about a lot of their businesses. But 0:21:46.280 --> 0:21:49.800 the past few years they've been very front and center, 0:21:50.000 --> 0:21:50.640 very active. 0:21:50.800 --> 0:21:54.240 Yeah, no, and they sort of they have their as 0:21:54.240 --> 0:21:56.320 a markete name. As you said, they're the hot vcs. 0:21:56.720 --> 0:21:59.679 Once they say they like something, they can basically attract 0:21:59.760 --> 0:22:03.760 other venture capital to those businesses. And so they're essentially 0:22:03.800 --> 0:22:04.919 taste makers. 0:22:05.359 --> 0:22:08.639 Which which is fascinating you say that, because before that 0:22:08.680 --> 0:22:11.760 it was Sequoia, Before that it was Kleina Perkins, Like 0:22:11.840 --> 0:22:15.440 you work your way, there's a hot firm for a decade. 0:22:15.480 --> 0:22:17.600 The nineties had it, the two thousands out at the 0:22:17.640 --> 0:22:21.480 twenty ten's had it. They tend not to maintain that 0:22:21.560 --> 0:22:26.200 position forever. Although to Andres and Horwitz's credit, they've been 0:22:26.240 --> 0:22:28.640 the it girl for a good good run so far. 0:22:29.520 --> 0:22:32.640 Yeah, I mean I wouldn't say that that's a good thing, 0:22:32.840 --> 0:22:36.920 but yeah, so you know, they they basically built the 0:22:36.960 --> 0:22:40.679 crypto industry. So you know, the narrative around crypto is 0:22:40.680 --> 0:22:45.879 that is this organic sort of community of cyberpunks and libertarians, 0:22:45.880 --> 0:22:50.679 but they really built that industry. They were early investors 0:22:50.680 --> 0:22:53.560 in coinbase, that was their first crypto investment, and then 0:22:53.640 --> 0:22:55.720 they have plowed a lot of money into the industry 0:22:55.720 --> 0:22:57.680 and it's sort of their seal of approval has been 0:22:58.040 --> 0:23:01.119 what's attracted people to it. And you know, part of 0:23:01.119 --> 0:23:03.920 what Andreeson Horowitz does is it doesn't just invest, it's 0:23:04.680 --> 0:23:08.520 does aggressive marketing campaigns for the things that they've invested in, 0:23:08.600 --> 0:23:12.040 aggressive lobbying. So they've really been at the forefront for 0:23:12.440 --> 0:23:18.960 trying to get the laws changed to accommodate their business models. So, yeah, 0:23:18.960 --> 0:23:23.200