Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Masters in
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
Speaker 2: I'm Barry Ridholts. You're listening to Masters in Business on
Speaker 2: Bloomberg Radio. My extra special guest this week is Hillary Allen.
Speaker 2: She is a professor at the American University Washington College
Speaker 2: of Law in DC, where she specializes in financial regulation,
Speaker 2: banking law, securities regulation, and technology law. She published a book,
Speaker 2: Fintech Dystopia, a Summer Beach Read about how Silicon Valley
Speaker 2: is ruining things, covering the intersection of finance, technology, law, regulation,
Speaker 2: and politics. It's a perfect subject for us to talk about.
Speaker 2: Hillary Allen, Welcome to Bloomberg.
Speaker 3: Thank you so much for having me.
Speaker 2: So fascinating conversation, fascinating topic that you write about. Before
Speaker 2: we jump into that, let's spend a few minutes going
Speaker 2: over your background. You get a bachelor's in Laws from
Speaker 2: the University of Sydney in Australia, a Master of Laws
Speaker 2: in Securities and Financial Regulation law from Georgetown here in
Speaker 2: the States, and you graduated first in your class there.
Speaker 2: What was the original career plan? Was it simply I'm
Speaker 2: going to go be a lawyer. What were you thinking.
Speaker 4: The original career plan was I'm just going to be
Speaker 4: a lawyer. And then I loved law school and I
Speaker 4: practiced for seven years and discovered there wasn't so much
Speaker 4: law always in the practice of law, and I'm a
Speaker 4: nerd and I missed it. And so the drive was
Speaker 4: to go back to Georgetown and get my master's, do
Speaker 4: some academic writing, and then launch a career as a
Speaker 4: professor where I could.
Speaker 3: Really sort of think slowly about the law.
Speaker 2: And you practiced, you were in London, you were in Sydney,
Speaker 2: Shaman and Sterling here in New York. Tell us a
Speaker 2: little bit about the sort of legal work you were
Speaker 2: doing when you were practicing attorney.
Speaker 4: So basically there's sort of two broad categories of the
Speaker 4: work I did. I did transactional work banking transactional, typically
Speaker 4: acting for banks in leverage buyouts.
Speaker 3: But the work I.
Speaker 4: Think I enjoyed more was the regulatory compliance advisory. So
Speaker 4: there was more law in that, especially when you had
Speaker 4: new financial laws being handed down in Australia and changes
Speaker 4: in the US with Dot Frank and sort of trying
Speaker 4: to figure out how to comply with those new rules.
Speaker 2: So how do you go from practicing bank transactions and
Speaker 2: some regulatory law to ultimately working with the Financial Crisis
Speaker 2: in Greek Commission. Tell us a little bit about your
Speaker 2: experiences there.
Speaker 4: So that was a serious of a series of fortunate events.
Speaker 4: While I was doing my master's at Georgetown, I had
Speaker 4: a professor who was tapped to be on the staff
Speaker 4: of the financialis Inquired Commission, and he pulled me into
Speaker 4: work with them two days a week and we were
Speaker 4: investigating the causes of the two thousand and eight financial
Speaker 4: crisis to put together the report that came out, which
Speaker 4: really was.
Speaker 2: Sort of a nice thick book that they published.
Speaker 4: It's a really thick book with a really thick index even,
Speaker 4: and the idea was to tell the story. And that's
Speaker 4: really sort of stuck with me throughout my career, the
Speaker 4: importance of being able to explain complex things and how
Speaker 4: they knit together to cause things.
Speaker 2: So working with the FCIC, how did that affect how
Speaker 2: you looked at regulation in general, but more specifically the
Speaker 2: government's responds to technology, new financial products, the regulatory world
Speaker 2: in general.
Speaker 4: So the gift that I got from working with the
Speaker 4: Financial Crisis in quir Commission is sort of understanding that
Speaker 4: there are a lot of things that come together and
Speaker 4: you need to really look very broadly to understand systemic changes.
Speaker 4: Another gift that it gave me was I think a
Speaker 4: healthy skepticism of innovation rhetoric, right, because if you think
Speaker 4: back to two thousand and eight and what caused it,
Speaker 4: you know there were all these stories about well, these
Speaker 4: new financial products, these complex new derivatives, we don't need
Speaker 4: to regulate them, their innovation, sophisticated parties involved, We don't
Speaker 4: want to tamp down on innovative potential. And so that
Speaker 4: that skepticism has been a helpful skill set as I've
Speaker 4: been navigating the sort of post two thousand and eight
Speaker 4: financial world where you have the innovation rhetoric from Silicon
Speaker 4: Valley infiltrating into financial services.
Speaker 2: You raise a really interesting issue that I have to
Speaker 2: ask about. So, how much of what we see as
Speaker 2: regulation is either an adherence to an ideology that sometimes
Speaker 2: says regulation is good and our guardrails and capitalism and
Speaker 2: other ideology says regulation is expens and anti innovative and
Speaker 2: reduces job creation. It seems like, regardless of the facts
Speaker 2: on the ground, each side has their belief system. How
Speaker 2: do you contextualize that.
Speaker 4: Well, I mean, I think I don't think there were
Speaker 4: too many people in the depths of the two thousand
Speaker 4: and eight crisis who were saying there's too much regulation.
Speaker 4: I think it's a function of where you are in
Speaker 4: a particular time. I think people's memories fade really quickly,
Speaker 4: and as soon as regulation has solved the problems it
Speaker 4: was intended to solve, or the crisis that spurred the
Speaker 4: regulation has dissipated, people quickly forget why that regulation is
Speaker 4: there in place, and then it becomes much easier to
Speaker 4: see it as something that is just a hindrance, something
Speaker 4: that is just expensive, that doesn't have a role to play.
Speaker 4: But I think what we're actually seeing right at this
Speaker 4: moment is the erosion of the securities laws that really
Speaker 4: have stood investors in goodstead since the nineteen thirties. Not
Speaker 4: to say they're perfect, but the general sort of investor
Speaker 4: protection regime that the Securities and Exchange Commission is always
Speaker 4: implemented has really encouraged trust in the US stock market,
Speaker 4: and it sort of made it the endvy of the world,
Speaker 4: and people wanted to list here. That's really getting peeled
Speaker 4: back right now, and so I think, you know, it'll be.
Speaker 3: Pretty soon a moment.
Speaker 4: Where we realize why we had all that regulation, and
Speaker 4: we'll miss it.
Speaker 2: So heading into the financial crisis, I recall looking at
Speaker 2: some of what I called radical deregulation prior. And this
Speaker 2: isn't by no means the sole cause of the financial crisis.
Speaker 2: Lots of factors led to this. But you had the
Speaker 2: Commodity's Futures Modernization Act, which allowed what was essentially an
Speaker 2: insurance product to be issued without any insurance reserves and
Speaker 2: a risky and then you had the repeal of glass
Speaker 2: steel that kept depository banks separate from speculative Wall Street banks.
Speaker 2: It probably didn't cause the crisis, but certainly allowed it
Speaker 2: to get much bigger at the very least. And yet
Speaker 2: there didn't seem to be any desire after the crisis. Hey,
Speaker 2: maybe we should put these things back into place. Maybe
Speaker 2: we should repeal what was added and restore what was repealed.
Speaker 2: Nobody wanted. They want to go a totally different direction.
Speaker 4: Well, I think again, this is a story of political economy,
Speaker 4: and there are still a lot of people who are
Speaker 4: mad at the Obama administration for prioritizing health care over
Speaker 4: financial reform. Because basically they had one shot at doing
Speaker 4: something big and if they had, and I'm not weighing
Speaker 4: in to say that this was the right or the
Speaker 4: wrong move, but if they had gone right out of
Speaker 4: the gates with financial reform, I think we would have
Speaker 4: seen more of the bigger structural things that you're talking about. So,
Speaker 4: you know, in that immediate aftermath of the two thousand
Speaker 4: and eight crisis, you had Sandy will who had been
Speaker 4: the head of City Group and had sort of engineered
Speaker 4: the end.
Speaker 3: Of the glass Stegel legislation.
Speaker 4: And from this maybe apocryphal, but apparently he had a
Speaker 4: deal toy that said shatterer of glass Stegel that he
Speaker 4: kept on his desk. And again this may be apocryphal,
Speaker 4: but I heard that he basically sort of had a
Speaker 4: conversion after two thousand and eight said oh, yeah, probably
Speaker 4: shouldn't have done that.
Speaker 2: Well, well, a lot of people did. Alan Greenspin famously said,
Speaker 2: I incorrectly assumed people's concern over their own reputation would
Speaker 2: have prevented some of the excesses we've seen. I'm paraphrasing,
Speaker 2: but that was pretty close to what he said.
Speaker 4: Yeah, he said, the world sort of didn't work the
Speaker 4: way I thought it did, and I think, you know,
Speaker 4: had they gone straight out of the gates with financial reform,
Speaker 4: you might have seen some of that structural reform. But
Speaker 4: by the time they got around to it, you know,
Speaker 4: DoD Frank wesn't passed two twenty ten. You know, then
Speaker 4: the political economy calculus had shifted. The industry was in
Speaker 4: more of a position to sort of argue for weaker
Speaker 4: rules and fewer structural changes.
Speaker 2: It's amazing how rapidly memories fade and people just quickly, Oh, no,
Speaker 2: that was then, Now it's new. You've worked inside the
Speaker 2: global financial system as well as studying it from the outside.
Speaker 2: How did being part of the FCICE affect how you
Speaker 2: perceive technology, new financial products, regulation, and deregulation. How did
Speaker 2: that affect your perspective?
Speaker 4: You know, I didn't think a ton about technology at
Speaker 4: that time. That's sort of been a later addition to
Speaker 4: the work that I do. But the broader themes of
Speaker 4: financial innovation, regulation, deregulation, you know, I see the value
Speaker 4: in financial stability regulation in particular. So financial stability regulation
Speaker 4: are the rules that are supposed to prevent financial crises,
Speaker 4: and they work often sort of hand in hand with
Speaker 4: investor protection regulations, but they also aim to do something differently.
Speaker 4: And part of the challenge when you're trying to prevent
Speaker 4: a financial crisis is this silo mentality where people just
Speaker 4: think about their own little piece of the world, and Okay,
Speaker 4: we can deregulate our little piece and we don't won't
Speaker 4: think about the flow on consequences and what incentives it'll create,
Speaker 4: et cetera. And so you know, my real takeaway was
Speaker 4: always to have the most holistic perspective possible to break
Speaker 4: down that silo mentality, and later in my career that
Speaker 4: meant learning about the new technologies that are sort of
Speaker 4: infiltrating the financial system.
Speaker 2: So I want to talk about technology and I want
Speaker 2: to talk about fintech dystopia. But there is a quote
Speaker 2: from within that that applies directly to what you're describing
Speaker 2: with stability, which was, it's the economic precarity. Stupid paraphrasing
Speaker 2: James Carville'll tell us a little bit about the economic precarity.
Speaker 4: Yeah, So, I think a mistake that we have made
Speaker 4: collectively in recent years is to say, well, look, the
Speaker 4: economy's doing well, everything's fine, and that really doesn't mesh
Speaker 4: with many people's experience of the economy. So it used
Speaker 4: to be, well, probably not always the case, but closer
Speaker 4: to the case in the Clinton years, where there was
Speaker 4: less economic inequality than there is now, that you could
Speaker 4: sort of say, a rising tide lifts ale boats. But
Speaker 4: now what we're seeing is over half of Americans live
Speaker 4: from paycheck to paycheck, even in a good economy, right,
Speaker 4: And so in that kind of circumstance, the financial systems,
Speaker 4: not the economy, aren't working for everybody. And so I
Speaker 4: think when we think about what we're trying to achieve
Speaker 4: with our financial system, it should be that we are
Speaker 4: trying to find a solution to this economic precarity. And
Speaker 4: also that begs the question of whether the financial system
Speaker 4: and investing is in actually the way to get there.
Speaker 4: And maybe we need broader public policies to address that
Speaker 4: economic precarity so that no one or at least not
Speaker 4: half of the population are just scraping by.
Speaker 2: So we just passed a new set of laws that
Speaker 2: include thousand dollars accounts for newborns is not going to
Speaker 2: solve financial inequality, or these kids, by the time they're thirty,
Speaker 2: they'll be worth millions.
Speaker 4: I think you might need to offset against the people
Speaker 4: losing their health insurance subsidies. I don't think that one
Speaker 4: thousand dollars is going to go very far right.
Speaker 2: And what's fascinating is watching just a parade of billionaires
Speaker 2: come out and no, no, we need to supplement that
Speaker 2: thousand dollars. So first it was Michael Dell, and then
Speaker 2: it was Ray Dalio. I don't know who else is
Speaker 2: going to step forward, but it appears, hey, we're not
Speaker 2: really paying a whole lot in axes, we might as
Speaker 2: well throw some money at some babies. That seems to
Speaker 2: be the philosophy.
Speaker 4: Yeah, I mean, I don't love philanthropy in that sense.
Speaker 4: Supplementing democratically sort of elected policies. You know, it gives
Speaker 4: a lot of sort of discretion and power to people
Speaker 4: as to how they want to distribute their large ss.
Speaker 3: And to some degree that's fine.
Speaker 4: But again, when we have a society where half of
Speaker 4: the population is barely scraping by, I don't think their
Speaker 4: liveability should be predicated on the whims of billionaire large s.
Speaker 2: Fair enough, You talked about technological innovation in your book.
Speaker 2: You argue that that is financial technology innovation is driven
Speaker 2: largely by legal design rather than technical brilliance. Explain that
Speaker 2: a little bit. What is it about fintech that seems
Speaker 2: to be working the perspective from an attorney rather than
Speaker 2: an engineer.
Speaker 4: Yeah, so this was something that, as I said, I
Speaker 4: came to a little later in my career. I think
Speaker 4: earlier in my career when I first started looking at fintech,
Speaker 4: I generally accepted the party line, this technology is revolutionary,
Speaker 4: this technology is making things more efficient, this technology is
Speaker 4: fixing things. And then I realized that the people who
Speaker 4: were saying that had something to sell, and I probably
Speaker 4: should learn a little more about the technology, because if
Speaker 4: you want to work on financial regulatory policy now, you
Speaker 4: need to understand the extent to which the technology actually
Speaker 4: lives up to what it's claimed it can do.
Speaker 3: And so sort of my first sort of.
Speaker 4: Foray into this was I've looked really in detail at blockchain,
Speaker 4: which is truly, frankly a terrible technology. It's a clunky
Speaker 4: database and it's not something you would ever choose for
Speaker 4: any kind of financial market infrastructure, but for the fact
Speaker 4: that it's been very easy to convince regulators not to
Speaker 4: regulate it, and so the value add comes from crypto
Speaker 4: has never been blockchain technology as a technology. It's been
Speaker 4: whipping up stories about that technology that have justified avoiding regulation.
Speaker 3: And we see it in other instances as well.
Speaker 4: You know, there are fintech lending that is replicating some
Speaker 4: of the predatory payday lending that we've seen before.
Speaker 2: So buy now, pay later sort of financing or.
Speaker 4: Well, payday loans have been around a lot longer than that.
Speaker 4: This is sort of a sort of it's like a
Speaker 4: four hundred dollar loan that you get to bridge you
Speaker 4: over till your next payday. And you know, there's been
Speaker 4: a lot of predation in that market in some states
Speaker 4: had banned those products essentially.
Speaker 2: Do you think twenty nine percent interest is not fair?
Speaker 2: You have a problem with that. We're just trying to
Speaker 2: make a profit here.
Speaker 3: Some of these interest rates are three hundred percent?
Speaker 2: Get out. Yeah, that's insane. And what is New York
Speaker 2: turned out? It like nineteen something.
Speaker 3: I don't know about New York. Yeah, but but.
Speaker 2: But normally, anything you know, mid double digits is thought
Speaker 2: of as usurious. Three hundred percent is just next level.
Speaker 4: Yeah, I mean it's not set as an interest rate
Speaker 4: per se their fees, but once you actually convert that
Speaker 4: into a paranum that can be in the hundreds of percentages.
Speaker 4: And so that has always been a problem, and we've
Speaker 4: had states act and then we've had new fintech lenders saying, well, actually,
Speaker 4: we're different from payday lenders because we use AI to
Speaker 4: screen our borrowers and.
Speaker 3: So you should treat us differently.
Speaker 4: And yet they're charging interest rates that are equivalent to
Speaker 4: what payday lenders do. And then you mentioned by now
Speaker 4: pay later. Again they say, well, we're not even extending loans.
Speaker 4: This isn't a loan at all, so we shouldn't have
Speaker 4: to comply with the laws around lending, around disclosure, around
Speaker 4: that kind of thing.
Speaker 2: How is that not alone? You're buying a product that
Speaker 2: you don't have money for someone is paying for that.
Speaker 2: Isn't that alone?
Speaker 3: I would say?
Speaker 2: So okay, but but what what's the counter to This
Speaker 2: isn't a loan, This is a free layaway essentially?
Speaker 3: Yeah, no, you know, we don't charge interest.
Speaker 4: There are late fees if you don't pay, but that's
Speaker 4: not the same as interest.
Speaker 2: You know, that's there like we bought a couch no
Speaker 2: interest for six months, so as long as you pay
Speaker 2: it off within six months. That sort of thing seems
Speaker 2: to be interest free.
Speaker 4: But then when you look at the business model and
Speaker 4: you see that a significant chunk of the people are
Speaker 4: incurring these late fees.
Speaker 2: Well, that's their fault, isn't it. That's human nature. You
Speaker 2: can't blame us if we take advantage of people procrastinating
Speaker 2: and not paying off their fees in time.
Speaker 4: Well, it's not that they're procrastinating, it's that they're choosing
Speaker 4: between paying rent or paying this off.
Speaker 2: So this is yeah, medicine exactly.
Speaker 4: So this is coming back to it's the economic procarity
Speaker 4: stupid right. If people are in these dire straits, we
Speaker 4: should not be surprised that fintech firms are trying to
Speaker 4: capitalize on that and profit from it, which is why
Speaker 4: I think, you know, what we need are some kind
Speaker 4: of public safety nets to sort of make and to
Speaker 4: hire minimum wage and hire social security benefits.
Speaker 2: Coming up, we continue our conversation with Professor Hillary Allen
Speaker 2: discussing her new book, Fintech Dystopia, a summer beat read
Speaker 2: about Silicon Valley and how it's ruining things. I'm Barry Ridults.
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
Speaker 2: Barry Ridults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 2: My extra special guest this week is Hillary Allen. She
Speaker 2: teaches at the American University Washington College of Law in Washington,
Speaker 2: d C. Where she specializes in regulation of financial and
Speaker 2: technology laws. So let's talk about the Digital Only book
Speaker 2: Ironic Right, Fintech Dystopia, where you describe modern financial technology
Speaker 2: simply as Silicon Valley ruining things. Explain that seems like
Speaker 2: an extreme example, and give us some examples of how
Speaker 2: Silicon Valley is ruining things.
Speaker 4: So, just to be clear, not all modern technology is
Speaker 4: ruining things. There's a particular business model approach that I
Speaker 4: think is ruining things, and that is derivative in many
Speaker 4: ways of the venture capital model in Silicon adventure capital
Speaker 4: just venture, Okay, yeah, venture capital model in Silicon Valley.
Speaker 4: So it's sort of got thischene around it that's iconoclastic,
Speaker 4: and they make bets on these moonshots that'll save all
Speaker 4: of humanity and YadA, YadA YadA. But in fact it's
Speaker 4: pretty well established as a play at this point. You know,
Speaker 4: there's a lot of subsidies that go to venture capital
Speaker 4: by virtue of their having access to pension funds by
Speaker 4: virtue of sort of capital gains taxation, and so they've
Speaker 4: got sort of and especially in low interest rate environments,
Speaker 4: they attract a lot of money, so they have pretty
Speaker 4: cheap money available to them. And then they go shopping.
Speaker 4: And what they go shopping for is not the iconoclastic
Speaker 4: sort of outlier that we think of, but what we've
Speaker 4: seen and what the evidence shows is that they tend
Speaker 4: to go shopping for the same things that their friends
Speaker 4: are going shopping for, and they go shopping for the
Speaker 4: businesses that their friends have developed. And so there's this
Speaker 4: sort of very sort of insular mentality in what they're
Speaker 4: looking for. And they're also looking for something that they
Speaker 4: can cash out of very quickly, because you know, the
Speaker 4: average venture capital fund has a ten year, sometimes twelve,
Speaker 4: but usually ten year duration.
Speaker 3: That's really not that much.
Speaker 4: Time to find something to invest in, have it grow,
Speaker 4: and then cash out, and so they're not looking for
Speaker 4: things that are going to take decades to develop. They're
Speaker 4: looking for things that they can grow quickly and get
Speaker 4: out of in about five or six years.
Speaker 2: So give us a few examples. What do you think
Speaker 2: is the sort of you know, not adding a whole
Speaker 2: lot of value venture backed businesses.
Speaker 4: So not intentionally, but it just turned out that way.
Speaker 4: As I wrote this book, almost every fintech business I
Speaker 4: looked at had been funded by Andresen Horowitz.
Speaker 3: They had been sort of the lead. So you know,
Speaker 3: they they're.
Speaker 2: The hot VC these days. I've full disclosure, I've interviewed Andresen,
Speaker 2: I've interviewed Kapor, I've interviewed Horowitz. So I've sat with
Speaker 2: them and talked about a lot of their businesses. But
Speaker 2: the past few years they've been very front and center,
Speaker 2: very active.
Speaker 4: Yeah, no, and they sort of they have their as
Speaker 4: a markete name. As you said, they're the hot vcs.
Speaker 4: Once they say they like something, they can basically attract
Speaker 4: other venture capital to those businesses. And so they're essentially
Speaker 4: taste makers.
Speaker 2: Which which is fascinating you say that, because before that
Speaker 2: it was Sequoia, Before that it was Kleina Perkins, Like
Speaker 2: you work your way, there's a hot firm for a decade.
Speaker 2: The nineties had it, the two thousands out at the
Speaker 2: twenty ten's had it. They tend not to maintain that
Speaker 2: position forever. Although to Andres and Horwitz's credit, they've been
Speaker 2: the it girl for a good good run so far.
Speaker 4: Yeah, I mean I wouldn't say that that's a good thing,
Speaker 4: but yeah, so you know, they they basically built the
Speaker 4: crypto industry. So you know, the narrative around crypto is
Speaker 4: that is this organic sort of community of cyberpunks and libertarians,
Speaker 4: but they really built that industry. They were early investors
Speaker 4: in coinbase, that was their first crypto investment, and then
Speaker 4: they have plowed a lot of money into the industry
Speaker 4: and it's sort of their seal of approval has been
Speaker 4: what's attracted people to it. And you know, part of
Speaker 4: what Andreeson Horowitz does is it doesn't just invest, it's
Speaker 4: does aggressive marketing campaigns for the things that they've invested in,
Speaker 4: aggressive lobbying. So they've really been at the forefront for
Speaker 4: trying to get the laws changed to accommodate their business models. So, yeah,
Speaker 4: there's there's crypto, but they've also been at the sort
Speaker 4: of the forefront of.
Speaker 3: I always there's one of the do not pace. I
Speaker 3: think it's a firm that's theirs. I always get get
Speaker 3: mixed up.
Speaker 4: They they were very early investors in Robin Hood, the
Speaker 4: fintech trading stock app.
Speaker 2: Which originally started out as a stock app and then
Speaker 2: it became eventually a crypto app, and now it's a
Speaker 2: been on anything app.
Speaker 4: Yeah, and again that is a company that, by the
Speaker 4: time at iPod, had wracked up all kinds of fines
Speaker 4: from the SEC and FINRA because it was violating laws
Speaker 4: left right and center.
Speaker 3: You know, it's.
Speaker 4: It was one of the first to offer commission for brokerage.
Speaker 4: But as the chestnut goes, if you're not paying for
Speaker 4: the product, you are the product. And it makes most
Speaker 4: of its money from payment for order flow and was
Speaker 4: not clear with its customers in the early years about
Speaker 4: that how that was going on, and how that they
Speaker 4: get paid a lot more for your options trades than
Speaker 4: your regular stock trades because more profitable, Yeah, more profitable
Speaker 4: for the citadel securities of this world to take those
Speaker 4: Yeah huh.
Speaker 2: Really kind of interesting. And yet at the same time,
Speaker 2: you have a chapter in your book Silicon Valley Welfare
Speaker 2: Queen explain. I thought that these are you know, Ain
Speaker 2: Randian libertarians that don't want to suckle off the teat
Speaker 2: of big government, and these are people that are builders
Speaker 2: and self made people. You're arguing not so much.
Speaker 4: Well, they don't want us suckling on the teat of
Speaker 4: the state because they might have to fund that with taxes.
Speaker 3: But they're okay suckling themselves, right, So.
Speaker 2: Give us a few examples what companies started out as
Speaker 2: welfare queens.
Speaker 4: Well, I mean, again, the whole story of tech, the
Speaker 4: Internet and smartphone boom is very much based on technologies
Speaker 4: developed by.
Speaker 3: The government, DARPA and the whole Internet exactly.
Speaker 4: And you know, and I think if you look at
Speaker 4: the iPhone, a lot of the individual technologies that went
Speaker 4: into that again.
Speaker 2: Came everything with microwaves comes out of NASA, right.
Speaker 4: So you know, first of all, this entirely self made
Speaker 4: story falls apart right there, because, as I mentioned earlier,
Speaker 4: if you've only got six years to turn around to technology,
Speaker 4: you're not really investing in prototypes, in thinking really hard
Speaker 4: about physical hardware and how that works. You're really looking
Speaker 4: for a software thing that you can gin up pretty quickly.
Speaker 4: And so the really low long term investment comes from
Speaker 4: the state and has always done, and then it's commercialized,
Speaker 4: you know, And I think that that sort of has
Speaker 4: worked well, except that you get to the point where
Speaker 4: the venture capitalists who are commercializing are saying, well, we
Speaker 4: shouldn't have to pay any taxes to fund the state
Speaker 4: that develops these technologies. They also benefit, as they said,
Speaker 4: enormously from laws that they lobbied for in the late seventies.
Speaker 4: I believe changes to ARISA, which allowed pension funds to
Speaker 4: venture to invest in venture capital, basically didn't exist before.
Speaker 4: And at that same period they were lobbying for changes
Speaker 4: to the capital gains taxes.
Speaker 2: Well, you have the carried interest loophole exact continues to persist.
Speaker 2: I'm drawing a blank on the author's name. There's a
Speaker 2: book Americana four hundred Years of Technological Innovation that makes
Speaker 2: the argument you're making. Go back to the telegraph funded
Speaker 2: by Congress, go to railroad. Like every major technological innovation
Speaker 2: or most major innovations got seeded with the government, and
Speaker 2: then eventually the private sector takes over. And what has
Speaker 2: changed in recent years is that public private partnership seems
Speaker 2: to have broken.
Speaker 3: Yeah.
Speaker 4: Actually so, the book I really like on this is
Speaker 4: Margaret O'Mara's book, The Code Who Does?
Speaker 3: She does a great history of Silicon Valley, and yeah.
Speaker 4: I think the the understanding that there was a quidber
Speaker 4: quo has sort of fallen away. So always the private
Speaker 4: sector has commercialized this technology. But if we have an
Speaker 4: unwillingness to sort of pay any taxes, if we have
Speaker 4: an unwillingness to invest in government capacity to invest in
Speaker 4: universities where so much of this stuff is developed, you know,
Speaker 4: you take Mark Andresen. He he got his start because
Speaker 4: he was happy or sorry, lucky enough to be a
Speaker 4: student at the University of Illinois at the time where
Speaker 4: they had a special grant to look at the beginnings
Speaker 4: of the internet. He worked on a team there that
Speaker 4: developed a prototype internet browser, and then he went into
Speaker 4: the private sector and they let him build one from
Speaker 4: the private sector, and that was Netscape, and that's how
Speaker 4: he made his fortune. So he was sort of in
Speaker 4: the right place at the right time to take advantage
Speaker 4: of public investment in this kind of thing. And yet
Speaker 4: this is the kind of thing that we're seeing that
Speaker 4: these leading venture capitalists want to shut down.
Speaker 2: Really interesting, since we've been talking about books, you've criticized Abundance,
Speaker 2: which is by Derek Thompson and as recline as the
Speaker 2: whole concept of abundance is sort of a sexy way
Speaker 2: to make excuses for techno solutions to tell us a
Speaker 2: little bit about that.
Speaker 4: Yeah, so this is something I get into a lot
Speaker 4: of conversations with people these days because I think there
Speaker 4: are some elements of the original sort of abundance agenda
Speaker 4: that are very appealing to people in terms of, for example,
Speaker 4: increasing housing capacity. And I do think that that is
Speaker 4: something that needs to happen and has to be done
Speaker 4: in the right way. But if you look at who
Speaker 4: is funding the abundance movement, they have conferences, et cetera.
Speaker 4: It is Andreesan Horowitz and other people from Silicon Valley,
Speaker 4: and it seems to be this attempt to essentially put
Speaker 4: a happier face on the deregulatory project that Silicon Valley
Speaker 4: is looking for, to sort of make it seem kinder, gentler,
Speaker 4: and more progressive, because the abundance movement is sort of
Speaker 4: in a nutshell, is supposed to be, well, we shouldn't
Speaker 4: have artificial scarcity, we should build more of what we
Speaker 4: want to do, that we should take away some of
Speaker 4: the roadblocks that are getting in our own way. And
Speaker 4: when you say it like that, it's sort of hard
Speaker 4: to disagree with, Well.
Speaker 2: That works for housing, you have nimbiism with housing, but
Speaker 2: when you take that away, it also means you're going
Speaker 2: to end up with perhaps high rises or multi family
Speaker 2: units in a suburban area that some people don't want
Speaker 2: in their neighborhood. There's always a series of trade offs
Speaker 2: with people who are already there versus people want to
Speaker 2: get there. What is the specific problem with abundance as
Speaker 2: a philosophy towards building more of what we want as
Speaker 2: a society.
Speaker 4: Because it's who gets to decide what more of what
Speaker 4: we want is. And if you look at who's funding
Speaker 4: the abundance agenda, it is the billionaires and the tech elite.
Speaker 4: And these are people who have really shown that they
Speaker 4: are quite willing to run roughshod over regulations that are
Speaker 4: there to protect the public from harm if that enables
Speaker 4: them to profit. And so I am just skeptical that
Speaker 4: a movement that is funded by these people is really
Speaker 4: going to be prioritizing the kinds of projects that would
Speaker 4: benefit the economically precarious. I think it's more likely that
Speaker 4: there'll be benefiting themselves and will lose protections for people
Speaker 4: with less voice that are currently in place.
Speaker 2: So what sort of overhyped products do you think best
Speaker 2: explain the problems with this approach, like what are these
Speaker 2: companies putting out that either is a result of regulatory
Speaker 2: capture or just don't do what they promise, Because you
Speaker 2: would think that in the world of venture either your
Speaker 2: product finds an audience, it finds a customer base, or
Speaker 2: it doesn't and fails and that goes out of business.
Speaker 4: Yeah, so that's sort of the perverted part of this
Speaker 4: is that that market logic, like you know, survival of
Speaker 4: the fittest, because of all the subsidies that benefit venture capital,
Speaker 4: that doesn't really apply that logic anymore.
Speaker 3: So, you know, give us an example Crypto.
Speaker 4: Crypto should have died many times already, particularly it should
Speaker 4: have died in twenty twenty two when we had the
Speaker 4: crypto winter. At that time, particularly Andresen Horowitz. Crypto had
Speaker 4: this huge war chest of funds that they had raised,
Speaker 4: and they stopped investing in crypto startups at that point
Speaker 4: because you know, everything was maribund. But what they started
Speaker 4: using that money for was lobbying, political spending, and they
Speaker 4: really worked very hard on members of Congress to essentially
Speaker 4: create laws that would allow the crypto industry to keep
Speaker 4: doing what they're doing, which was not allowed under the
Speaker 4: securities laws as they were, so the whole business model
Speaker 4: was regulatory arbitrage. They wanted laws that would sort of
Speaker 4: give a patina of legitimacy and hopefully encourage institutional investment,
Speaker 4: attract more money to the space, but not actually make
Speaker 4: them have to. For example, like coinbase combines the functions
Speaker 4: of a broker dealer and in exchange, that's not allowed
Speaker 4: in securities.
Speaker 3: You can see why. Therese all kinds of conflicts of
Speaker 3: interests that coright.
Speaker 2: Either you're in exchange or a brokerage firm, not both.
Speaker 4: But in crypto you're both, right, And so if you
Speaker 4: applied the securities laws to crypto, they would have to
Speaker 4: disaggregate and basically would probably destroy their business model. So
Speaker 4: what they wanted was a law that said, no, it's
Speaker 4: fine crypto special you do both.
Speaker 3: And so that really.
Speaker 4: An industry that should have failed, is you know, again
Speaker 4: rising being propped up all through this sort of aggressive
Speaker 4: political spending. And I mean I've talked to people in
Speaker 4: Congress off the record who have said that they've only
Speaker 4: voted for these laws because they're afraid that if they
Speaker 4: don't that crypto industries will target them.
Speaker 2: What other products do you think are overhyped and fail
Speaker 2: to satisfy their markets?
Speaker 4: Well, right now, the obvious answer is a lot of
Speaker 4: the AI products, the anything sort of. It's hard when
Speaker 4: you talk about AI because it's such an umbrella term
Speaker 4: for so many different things.
Speaker 2: Right, I have perplexity on my phone. It does a
Speaker 2: better job with search than Google. Does I get better
Speaker 2: more comprehensive answers? What's wrong with AI?
Speaker 4: Well, let me disaggregate it first, because there's plenty of
Speaker 4: AI that there's nothing wrong with. Right, So, AI is
Speaker 4: not intelligent in any way, shape or form. It's a
Speaker 4: market that's a marketing term. What is it is is
Speaker 4: it's an applied statistical engine. You have an algorithm that
Speaker 4: looks for patterns in data and then acts accordingly. And
Speaker 4: that kind of technology has been around for a long time.
Speaker 4: It does like, for example, it's great for fraud detection
Speaker 4: in a bank, for credit card transactions for example. So
Speaker 4: that that's you know, that's that's an a plus use
Speaker 4: of AI. But the last few years, everybody has been
Speaker 4: pouring everything they've got into these LLM based tools, these
Speaker 4: large language made model based tools.
Speaker 3: So these are tools that can.
Speaker 4: You know, old AI tools would just sort of classify something,
Speaker 4: put something in a group, or predict something. But now
Speaker 4: we have these tools that generate content, particularly text.
Speaker 3: But also you know, video, music, et cetera.
Speaker 4: And there are so many problems with this technology because
Speaker 4: it's being sold as technology that can replace humans, right,
Speaker 4: that can Basically it's worth throwing trillions of dollars into
Speaker 4: this because of the productivity gains that we'll get by
Speaker 4: firing all the humans. Essentially is the story they're telling.
Speaker 4: First of all, that would be great.
Speaker 2: Right, that's a problem in and of itself. The way
Speaker 2: I have heard it described that's a little less catastrophic,
Speaker 2: is this is going to make everybody more efficient, more productive.
Speaker 2: It'll make companies more profitable, and we'll all be able
Speaker 2: to do more with our existing stayoff than having to
Speaker 2: go out and hire hundreds of more people.
Speaker 3: But that is not true, sadly, that's the pitch line.
Speaker 4: Right, So, these these tools make a lot of mistakes,
Speaker 4: you know, even the very best ones make mistakes.
Speaker 2: We've seen a lot of attorneys. You and I are
Speaker 2: both attorneys. A lot of judges have been calling out
Speaker 2: attorneys who theoretically are supposed to be doing this on
Speaker 2: their own and instead are outsourcing it to AI and
Speaker 2: all of its hallucinations and citing cases that don't exist.
Speaker 2: The assumption is that's going to get better eventually, but
Speaker 2: it won't.
Speaker 3: So this is this is the problem, but it won't.
Speaker 3: But it won't.
Speaker 4: So these things are statistical engines, right, They they can't
Speaker 4: check for accuracy because they don't understand accuracy as a concept. Right,
Speaker 4: there's no reasoning it's it's literally the most statistically most
Speaker 4: likely word after the last word I gave you is
Speaker 4: this word. There is no way to make that care
Speaker 4: about accuracy because it's it's not a it's not a
Speaker 4: thinking machine. And I think there's increasing acceptance that these
Speaker 4: models have hit a wall and they are as accurate
Speaker 4: as they are going to get.
Speaker 2: Really, yeah, that's kind of fascinating. My concern was, at
Speaker 2: least on the legal side, Hey, you have this existing
Speaker 2: body of work and all this research and brief writing
Speaker 2: and arguments that exist as of now. If you're going
Speaker 2: to replace people from doing that, are you're going to
Speaker 2: freeze the state of legal knowledge at twenty twenty six
Speaker 2: and five or ten years from now. If you don't
Speaker 2: have people writing these briefs. You don't have people writing
Speaker 2: these decisions. How can AI respond to what's taking place
Speaker 2: over the past ten years if we don't have the
Speaker 2: humans actually doing the grunt work.
Speaker 4: Yeah, I mean there's a there's I mean, I think
Speaker 4: those kinds of concerns have been expressed very much in
Speaker 4: the cultural context.
Speaker 3: You know, if we disincentivize.
Speaker 4: Creators from making new music and new aret or is
Speaker 4: this it?
Speaker 3: Are we stuck with with what we've got with something
Speaker 3: like the law.
Speaker 4: One of the challenges is that you know, these large
Speaker 4: language models, they don't get updated on a day to
Speaker 4: day basis. You know, there's there's sort of a stop point,
Speaker 4: and then they don't know well, they don't know anything
Speaker 4: that they don't have the data from after a certain date,
Speaker 4: So that that's a limitation. But the thing I worry
Speaker 4: most about with the law is that you have to
Speaker 4: be able to spot the hallucinations or you're going to
Speaker 4: get yourself in very big trouble. And I think this
Speaker 4: is true for a lot of different feels in and
Speaker 4: this is again just to digress a little, why the
Speaker 4: profitability narrative is not true right because the only place
Speaker 4: where you can just put this content out and just
Speaker 4: leave it there is in very low stakes places right
Speaker 4: where it doesn't matter if you get something wrong. But
Speaker 4: even you know, things that you wouldn't think are such
Speaker 4: a big deal have proved to be quite high stake.
Speaker 4: So Air Canada had a chat bot that told a
Speaker 4: customer that if they wanted to apply for a bereavement
Speaker 4: discount for a flight, they could do that after their
Speaker 4: flight was done. Now that's not Air Canada's policy. You
Speaker 4: had to do it in advance. And so this customer
Speaker 4: tried to get their refund after the fact, and Air
Speaker 4: Canada said, well, the chat buck got it wrong, too bad,
Speaker 4: So sad for you, and.
Speaker 2: It's your chat bought you own well responsible for it exactly,
Speaker 2: yet not my mistake, your mistake exactly.
Speaker 4: And so even in these sort of reasonably low stakes
Speaker 4: customer service interactions, there's reason to be really worried about inaccuracy.
Speaker 4: Now you start dialing up to things, to medical advice,
Speaker 4: legal advice, you know, it's just you can't rely on them.
Speaker 4: And I worry that we're putting people in a very
Speaker 4: difficult position because it's a lot easier to get something
Speaker 4: right when you write it yourself than it is to
Speaker 4: find mistakes in something so some one else is put together.
Speaker 2: So let me push back a little bit, because I've
Speaker 2: been watching the AI reading medical scans, and at some
Speaker 2: point last year, when maybe it was two years ago,
Speaker 2: the technology theoretically past the accuracy rate of humans, fewer
Speaker 2: false positives, more identifying missed negatives that should have been
Speaker 2: positive than people. Is that not accurate or where are
Speaker 2: we with the medical application of that?
Speaker 4: So this is why I think it's so important to
Speaker 4: disaggregate the different kinds of AI, because that is not
Speaker 4: sort of LLLM based AI. And as I said, some
Speaker 4: of those tools are great. I can't weigh in on
Speaker 4: medical imaging and things like that, so it may very
Speaker 4: well be the case. What I'm talking about is, you
Speaker 4: know what, if you've got you know, a doctor coming
Speaker 4: up with instructions for a care plan for their patients
Speaker 4: and they let the AI do it, right, if there's
Speaker 4: a mistake in there, they're much less likely to catch it.
Speaker 4: If the AI, because you know, you know how things go,
Speaker 4: you'll be expected to look at more of these because
Speaker 4: you're not generating them yourself, right, And it's always easier
Speaker 4: to get things right when you do it yourself than
Speaker 4: when you're reviewing someone else. I mean, when we were lawyers,
Speaker 4: we used to That's why you want to have the
Speaker 4: pen on contracts. You want to you want to hide
Speaker 4: things from the other side. And now it's now it's
Speaker 4: the AI hiding stuff from you. And I worry that,
Speaker 4: especially with younger lawyers coming up through the ranks who
Speaker 4: are encouraged to rely on these tools from the beginning,
Speaker 4: who won't actually develop the skills because you don't learn
Speaker 4: well when you sort of don't process it yourself. So
Speaker 4: if you're spent your whole career using AI, you're not
Speaker 4: going to be able to spot the problems.
Speaker 3: In the AI and not can have the skill set.
Speaker 4: No, And so then I'm worried about, you know, those
Speaker 4: young lawyers getting sued from malpractice because they missed something
Speaker 4: that the AI generated, but they were never even given
Speaker 4: the opportunity to learn how to spot it themselves.
Speaker 2: It's a problem with the wrongs on the ladder being removed,
Speaker 2: especially we see that now manifesting itself. The unemployment rate
Speaker 2: of the under thirty is about double what it is
Speaker 2: for the national unemployment rate. And I can't help but
Speaker 2: wonder how much of that is somehow related to the
Speaker 2: proliferation of AI tools for white collar job.
Speaker 4: I think, you know, Corey Doctor, who does a lot
Speaker 4: of work in the tech space, has a great quote
Speaker 4: on this that I'm going to butcher a little, not
Speaker 4: say it quite as well as he does it, but
Speaker 4: he said, the AI can't do your job, but the
Speaker 4: AI salesman can convince your boss to replace.
Speaker 3: You with AI that can't do your job.
Speaker 4: Right, So it's I think you're right that there is
Speaker 4: at this moment, you know. I mean, it's also hard
Speaker 4: to say how much of this is a AI washing
Speaker 4: as a post to real AI displacement. Right the economy's
Speaker 4: not in a great place right now. People don't want
Speaker 4: to hire anyway. It looks a lot better if you say, well,
Speaker 4: we're not hiring because we're replacing them with AI, than
Speaker 4: just we're having a rough time we're not hiring.
Speaker 2: AI washing is a phrase I haven't heard used in
Speaker 2: modern parlance yet, but it certainly makes a whole lot
Speaker 2: of sense. The line I heard, and I don't know
Speaker 2: where I'm stealing this from, is you're not going to
Speaker 2: be replaced by AI. You're going to be replaced by
Speaker 2: somebody with a greater facility working with AI than you have,
Speaker 2: and it sort of creates a self fulfilling arms race
Speaker 2: to make sure you learn how to use that tool.
Speaker 2: Otherwise you're at risk for being replaced by somebody who
Speaker 2: knows how to use that tool.
Speaker 4: I've heard that too, But I don't think these tools
Speaker 4: are that hard to use, right, I mean, that's a
Speaker 4: failure on the part of the AI companies if they're
Speaker 4: so hard to use, right, It wasn't hard to use Google.
Speaker 2: Search Perplexity and even chat GPT is absolutely easiest part
Speaker 2: I use, don't. I don't find them difficult. Sometimes you
Speaker 2: have to keep changing the prompts to get an improved answer.
Speaker 2: Like if you just ask a question and walk away,
Speaker 2: well then you're getting what everybody gets. But if I
Speaker 2: don't really buy into the prompt engineer job title, but
Speaker 2: a little exposure is the more you ask it and
Speaker 2: the more you vary it, you get a variety of
Speaker 2: answers and eventually you come up with something, Oh that's
Speaker 2: interesting and different. Let me take a look at that.
Speaker 4: So, I mean I have strong feelings about this as
Speaker 4: an educator, because if these tools are worth their salt.
Speaker 4: It shouldn't take our students long to figure out how
Speaker 4: to use them, right, right, So why are we bringing
Speaker 4: them into education where what they really need to learn
Speaker 4: is how to spot hallucinations, how to think critically, so
Speaker 4: that if they are going to use these tools later,
Speaker 4: they can use them to the best of their abilities.
Speaker 3: This whole arms race.
Speaker 4: Sense of well, they need to use them in school
Speaker 4: so they don't get left behind. I'm like, it didn't
Speaker 4: take learn long to learn Google.
Speaker 3: They'll be fine.
Speaker 2: You've been pretty critical of things like crypto and stable coin.
Speaker 2: We're going to get to those in a moment. I
Speaker 2: want to talk about some other things you've discussed. You've
Speaker 2: brought up the whole idea of technology as a branding exercise,
Speaker 2: phrases like democratizing finance, disruptive technology, banking, the on banks.
Speaker 2: You've described these as just you know, marketing and not
Speaker 2: really accomplishing anything. Tell us a little bit about those
Speaker 2: and give us some examples.
Speaker 4: Sure, I mean, I think at the heart of all
Speaker 4: this is innovation speak in innovation worship, right. We alluded
Speaker 4: to that earlier, This sense that anything that is innovative
Speaker 4: is inherently good and must therefore be permitted at all costs,
Speaker 4: and that is sort of the font of a lot
Speaker 4: of the rhetoric and narrative that we get out of
Speaker 4: Silicon Valley that ultimately is there to attract funding, yes,
Speaker 4: but also to procure legal treatment that facilitates what they
Speaker 4: want to do. It actually creates offen an unleveled legal
Speaker 4: playing field where you have the incumbents who have to
Speaker 4: comply with all the laws, and then the disruptors, as
Speaker 4: you say, who don't have to comply with all the
Speaker 4: laws and can succeed on that basis even if their
Speaker 4: product isn't superior in the way we would typically expect
Speaker 4: a disruptor's product to be. So yeah, I mean, disruptive
Speaker 4: innovation goes back to Clayton Christiansen and the innovator's dilemma,
Speaker 4: This sense that if you stay still and just make
Speaker 4: good products, you'll be out competed by someone who is
Speaker 4: trying to do things a little differently. But you know,
Speaker 4: there's no real formula that you can take away from
Speaker 4: that as to what disruptive is in the of the beholder.
Speaker 2: So let me push back on that a little bit.
Speaker 2: And all my VC friends, I could just hear their
Speaker 2: voices in my head, and the pushback is, Look, most
Speaker 2: new companies fail, most new technologies crash and burn, most
Speaker 2: new ideas never make it. And even the best of
Speaker 2: the best vcs, they'll make one hundred investments for that
Speaker 2: one moonshot that works out, and most of the other
Speaker 2: ninety nine are at best break even but mostly losers.
Speaker 2: How could you say this is true? Oh? And real
Speaker 2: innovation often finds itself in between the regulatory regime because
Speaker 2: the technology that's being created was never anticipated by the
Speaker 2: regulators or anybody else.
Speaker 3: Fair pushback a lot of points that I would quibble with.
Speaker 3: There something that's fair. Quibble away, quibble away. All right, So.
Speaker 4: There's this idea that the law is a bat innovation
Speaker 4: because law is old and innovation is new, and the
Speaker 4: law couldn't possibly have contemplated the innovation. The story about
Speaker 4: the innovation is what makes it new. Right, most of
Speaker 4: the things that we're seeing in the fintech space, they're
Speaker 4: not that new. Right, As I said, you know, we've
Speaker 4: got fintech lending has a lot of the things that
Speaker 4: we didn't like about payday lending. Right, why shouldn't the
Speaker 4: laws from payday lending apply crypto basically. I mean the
Speaker 4: crypto markets for all the world look like the stocks
Speaker 4: and bonds and the unregulated markets of the nineteen twenties.
Speaker 3: We saw how that ended.
Speaker 4: They ended in such a spectacular crash that we ended
Speaker 4: up with the securities laws. Why shouldn't they apply? What's
Speaker 4: so different? Right, So, this construction of novelty is something
Speaker 4: that is done intentionally as a narrative. Now, I fully
Speaker 4: appreciate that we need the optimists in this world who
Speaker 4: are going to try new things.
Speaker 3: And I say that very early on in the book.
Speaker 4: The people who these stories are you because they attract
Speaker 4: funding two new things. So I'm not saying we should
Speaker 4: do away with it completely. My argument is that the
Speaker 4: yin and yang, the balance between the optimists and the realists,
Speaker 4: is badly out of whack because we give so much
Speaker 4: deference to the stories about innovation, about disruption, about how
Speaker 4: technology can solve problems that have been with us for centuries.
Speaker 4: We can magically get rid of intermediaries now with blockchain technology, apparently.
Speaker 2: Well, that was one of the story narratives, was this
Speaker 2: intermediation until it no longer was the story. But let's
Speaker 2: talk about some specific companies that you've mentioned, that you've
Speaker 2: written about, and I want to get your sense on it.
Speaker 2: And the oldest one was PayPal to this day, and
Speaker 2: I was a PayPal user back in the nineteen nineties,
Speaker 2: with eBay and those sort of things. To this day,
Speaker 2: I don't understand what they did was any different than
Speaker 2: a credit card, other than being a bit of middleware
Speaker 2: that eventually became a rentier. Why not just use a
Speaker 2: credit card? Why do I need PayPal between me and
Speaker 2: Amazon or me and eBay.
Speaker 4: So this is really an interesting story, and I learned
Speaker 4: a whole lot about this in research for this book
Speaker 4: by reading Max Chafkin's book The Contrarian about Peter Tiel
Speaker 4: and the start of the beginning of PayPal. And in fact,
Speaker 4: the idea for PayPal came from the same place that
Speaker 4: the idea for crypto has come from, which is this
Speaker 4: techno libertarian idea of we don't like regulation, we don't
Speaker 4: like central banks, we would like to have private money,
Speaker 4: and we would like technology to help us have private money.
Speaker 4: And PayPal wasn't the only one of these kinds of
Speaker 4: startups back in the early dot com bubble.
Speaker 3: So PayPal, I.
Speaker 4: Think succeeded because it sort of lucked into this deal
Speaker 4: with eBay, as you said, right, it sort of had
Speaker 4: no distinguishing features as far as I can tell, that
Speaker 4: made it any superior to the beans is and the
Speaker 4: fluses of this world. It lucked into this deal with eBay, so.
Speaker 2: And eventually they buys them to solve their I guess
Speaker 2: credit card management problem. I don't really understand. I still,
Speaker 2: you know, twenty or twenty five years later, I still
Speaker 2: don't understand why they were necessary.
Speaker 3: I think. Yeah.
Speaker 4: I mean, my knowledge of this comes primarily from reading
Speaker 4: Max Chafkin's book, which I highly recommend. But that's that's
Speaker 4: my understanding too. And so you know, they are a
Speaker 4: payments technology. I too struggle to sort of understand what
Speaker 4: they offer that a credit card doesn't in many ways.
Speaker 3: One thing they are, though.
Speaker 4: Is they are sort of the or regulatory arbitrage story
Speaker 4: in fintech, right, So you know I've said so much
Speaker 4: of fintech is actually about arbitrage in the law rather
Speaker 4: than technological superiority. PayPal from the beginning was flaunting quite
Speaker 4: aggressively the banking laws because only banks are allowed to
Speaker 4: accept deposits, and people were keeping money in their PayPal
Speaker 4: wallets and for all the world, that looks like keeping
Speaker 4: a deposit. Peter Tiel from the beginning was very aggressive
Speaker 4: on the lobbying to make sure that that was not
Speaker 4: considered deposit taking. Early on there were multiple states that
Speaker 4: were investigating it because they thought it was the unflawful
Speaker 4: taking of deposits. He lobbied heavily in Congress, and lobbied
Speaker 4: heavily at the FDIC, and ultimately, you know, that worked.
Speaker 4: And so I think that has sort of been the prototype,
Speaker 4: that blit scaling prototype. I think people perhaps underestimate the
Speaker 4: degree to which blit scaling is really about playing it
Speaker 4: on an unlegal, unleveled legal playing field.
Speaker 2: Let's talk about stable coins. What sort of value do
Speaker 2: they provide?
Speaker 4: Again, unless you are trying to do illicit transactions or gamble,
Speaker 4: not a whole lot, right.
Speaker 2: So, well, stable coin is worth a dollar, and it
Speaker 2: promises to always be worth a dollar. Don't we have dollars?
Speaker 2: Why do I need a stable coin?
Speaker 4: Well, you need a stable coin often to do illicit payments.
Speaker 4: So if you want, you know, if you're they're very popular,
Speaker 4: for example, with all kinds of dark cartels, and they're
Speaker 4: good for sanctions of Asian.
Speaker 3: They're also very good if.
Speaker 4: You want to gamble in crypto and you want to
Speaker 4: use it as sort of a cash management tool in
Speaker 4: between crypto investments, kind of like a money market mutual
Speaker 4: fund in your brokerage account for parking funds in between
Speaker 4: crypto gambling. But they've really never had any utility in
Speaker 4: any big way as a legal payments mechanism.
Speaker 2: All right, So what about you mentioned the blockchain. I
Speaker 2: keep reading that blockchain is going to allow us to
Speaker 2: use smart contracts and have things happen automatically that now
Speaker 2: have to be manually. What's the problem with blockchain?
Speaker 4: Well, first of all, smart contracts can work without a blockchain.
Speaker 4: Smart contracts pre date blockchains. They can run on all
Speaker 4: kinds of databases. So if you want that kind of
Speaker 4: functionality and it has pros and cons, and I've written
Speaker 4: about this aton, you can have that without a blockchain.
Speaker 4: The reason why you don't want to have it on
Speaker 4: a blockchain, and this is something that does not get
Speaker 4: anywhere near the attention it needs, is that there's all
Speaker 4: kinds of operational risks associated with the blockchains themselves. So
Speaker 4: blockchains are software, they are maintained by in the case
Speaker 4: of the Bitcoin blockchain, just a few individuals. In the
Speaker 4: case of the Ethereum blockchain, it's the Ethereum Foundation. They're
Speaker 4: not regulated at all. They have no obligation to invest
Speaker 4: in cybersecurity, to invest in getting their blockchains up and
Speaker 4: running again. Should something go wrong, You're just you're really
Speaker 4: sort of as I sometimes say, yolo ing operational risk
Speaker 4: with regards to these blockchains. And so if you want
Speaker 4: smart chain, so sorry smart contract functionality, don't use a blockchain.
Speaker 1: Huh.
Speaker 2: Coming up, we continue our conversation with Professor Hillary Allen
Speaker 2: discussing her new book, Fintech Dystopia, a summer beach read
Speaker 2: about Silicon Valley and how it's ruining fits. I'm Bury Ridults.
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
Speaker 2: Barry Riddults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 2: My extra special guest this week is Hillary Allen. She
Speaker 2: teaches at the American University Washington College of Law in Washington,
Speaker 2: d C. Where she specializes in regulation of financial and
Speaker 2: technology laws. So we mentioned stable coin, we've mentioned blockchain.
Speaker 2: Is there any value in any of the crypto coins?
Speaker 2: Be it bitcoin or ethereum. I know, we can't actually
Speaker 2: describe the last one hundred coins that are out there
Speaker 2: on the radio will violate George Colin's seven words you
Speaker 2: can't say on TV or radio. But there's an outside
Speaker 2: of the you know, ebu, doge coins and everything below that.
Speaker 2: What's the value of the first five or so cryptocurrencies?
Speaker 2: Is there anything worthwhile to these or is this just
Speaker 2: a solution in search of a problem.
Speaker 3: It's a solution in search of a problem. I mean essentially.
Speaker 4: Even so, Bitcoin often is seen as the most credible
Speaker 4: of these because it's been around the longest and has
Speaker 4: large Bitcoin and.
Speaker 2: Eth those are the two I hear about the most.
Speaker 4: But both of them are essentially ponzi's in the sense
Speaker 4: that there's nothing backing them. The only reason they have
Speaker 4: value is because someone else might buy them from you.
Speaker 4: If they choose not to, it could go to zero.
Speaker 4: And actually, someone put it to me this way. It's
Speaker 4: not that they could go to zero. They could go
Speaker 4: to less than zero because they don't even have any
Speaker 4: assets that could be used to administer a winding up right,
Speaker 4: and and that's expensive.
Speaker 3: You know you're gonna get the lawyers.
Speaker 2: In the courts that everybody involved that tho, Well, you're
Speaker 2: not suggesting that if you own bitcoin you may have
Speaker 2: a liability down the road. Is that? Is that the implication?
Speaker 4: No, I'm just saying that if someone was trying to
Speaker 4: work out the end of one of these things, there
Speaker 4: wouldn't even be you know, office furniture you could sell
Speaker 4: to pay the lawyers.
Speaker 2: Okay, you you've written about startups like farrahos I remember
Speaker 2: juico tell us a little bit about those two, and
Speaker 2: was that just, you know, one of these products that
Speaker 2: just didn't work out? What what's the problem with that
Speaker 2: technology solution to our juicing problems?
Speaker 4: So Juiceara is just my favorite metaphor for all of this.
Speaker 4: So for those of you who are unfamiliar with the
Speaker 4: gift that is Juicero. So basically, this was a machine
Speaker 4: that cost hundreds of dollars.
Speaker 3: It was Wi Fi enabled.
Speaker 2: Well, roll back the guy and you described this in
Speaker 2: the book. The guy who invented this previously had set
Speaker 2: off a fairly successful was it a juicing chain of
Speaker 2: companies that got bought, and so he had some credibility
Speaker 2: in the space. And now I'm not going to run restaurants.
Speaker 2: I'm going to create a technology that people can juice
Speaker 2: at home.
Speaker 3: It was venture funded. They put a lot of money into.
Speaker 2: This, one hundred plus million dollars and these these.
Speaker 3: What it did was it squeezed these juice patches.
Speaker 4: The problem was that people could just squeeze the juice
Speaker 4: patches with their bare hands and get all the juice.
Speaker 2: There was a notorious Bloomberg article of about out this,
Speaker 2: but it raises the question did the company already squeeze
Speaker 2: the juice and put in these pouches? Why didn't they, Like,
Speaker 2: why wasn't this set up so that you can actually
Speaker 2: put fresh fruit? Like doesn't it defeat the purpose if
Speaker 2: you're buying pouches? Or was the whole idea of the
Speaker 2: razor blade model?
Speaker 4: So, I mean, the reason why I love this as
Speaker 4: a metaphor is it really gets at this techno solutionism,
Speaker 4: which is one of the concepts that I'm really coming
Speaker 4: for in this book. And techno solutionism is this idea
Speaker 4: that everything in our world can be reduced into a
Speaker 4: technology problem, and that the only reason we haven't solved
Speaker 4: certain things is because we haven't spent enough time and
Speaker 4: money on developing the technology. And what that does is
Speaker 4: it sort of flattens some problems into it gets rid
Speaker 4: of the human messiness. It flattens problems, It ignores domain expertise.
Speaker 4: People who've been working in particular fields for a long
Speaker 4: time and know a lot of non tech stuff. It
Speaker 4: sort of dismisses their expertise. And sadly, you know, there's
Speaker 4: just this magic associated with technology at this point. And
Speaker 4: as I said, I'm not anti technology. A lot of
Speaker 4: it's great, but it doesn't deserve the level of sort
Speaker 4: of magical deference that we give it. It can't solve all
Speaker 4: our problems. And when we get into this mindset where
Speaker 4: we think that if we throw enough money at technology,
Speaker 4: it can solve anything and it will always be the
Speaker 4: best solutions, we end up squeezing pouches with a machine
Speaker 4: that we could squeeze.
Speaker 3: With our bare hands.
Speaker 4: And a joke that I try and make in the
Speaker 4: book is like with AI, we may be better off
Speaker 4: squeezing things with our bare minds.
Speaker 2: So one more company I have to ask about Farahose.
Speaker 2: I love the book Bad Blood, what really went into
Speaker 2: details about how corrosive and co opting, co opting the
Speaker 2: company itself was for everybody around it, including the attorneys
Speaker 2: and all sorts of other bad actors. Why wasn't thereno
Speaker 2: It's just an idea that didn't work. That you can't
Speaker 2: if you want to draw a blood from a vein,
Speaker 2: you have to draw a blood from a vein. You
Speaker 2: can't just prick your fingertip and think that's going to
Speaker 2: be the same as venal draws.
Speaker 4: Well. So that's the thing with this techno solutionism. It
Speaker 4: presumes that everything is a tech problem waiting to be solved.
Speaker 4: It doesn't even countenance the possibility that there may not
Speaker 4: be a technological solution for what you want to do,
Speaker 4: that the technology you want may not be able to
Speaker 4: do the thing you wanted to do. And when you
Speaker 4: have that sort of collective sense, though, I think we
Speaker 4: have now that if we throw enough money at any technology,
Speaker 4: it can solve any problem we give it. You can
Speaker 4: see how people get so susceptible to being sort of
Speaker 4: drawn into the stories that outright con people like Elizabeth
Speaker 4: Holmes might be telling, but also the stories that we're
Speaker 4: being told about.
Speaker 3: You know about.
Speaker 4: AI right now, about crypto. You know, the more you
Speaker 4: know about these technologies, the less impressive they seem, and
Speaker 4: the more clearly it becomes illuminated that they just can't
Speaker 4: do a lot of the things that they're going to do.
Speaker 4: But that's so counter to how we typically talk about
Speaker 4: technologies that it sort of it feels a bit weird
Speaker 4: to talk like that, and you sort of you're going
Speaker 4: against societal norms in a way. And so one of
Speaker 4: the things that I really wanted to do with this
Speaker 4: is to start making it easier to talk about these
Speaker 4: things critically, to be not such an outlier to express
Speaker 4: your frustrations. And I think we're actually having a moment
Speaker 4: like that about AI because so many people really hate it.
Speaker 2: Really, so you use the phrase techno solutionism, and Fairhos
Speaker 2: is really the poster child for that. Because as you're
Speaker 2: describing a lot of these things, I am recalling the story,
Speaker 2: especially what you're referring to with domain expertise. She had
Speaker 2: no medical or medical device training. None of the vcs
Speaker 2: who put money into Fairnose were healthcare, biotech medical devices
Speaker 2: like they all passed. Eventually, she hired a number of
Speaker 2: people to try and with some background, but they seem
Speaker 2: to turn over pretty quickly because now you can't do
Speaker 2: that what you just pricking the skin, You're getting all
Speaker 2: the interstitial tissue and fluids, and you're corrupting the sample
Speaker 2: that you want to test for something you have. The
Speaker 2: reason we draw from the vein is very medically specific,
Speaker 2: and yet it attracted Henry Kissinger and the all sorts
Speaker 2: of big law firms and everybody plowed in. She's the
Speaker 2: next Stieve Jobs, the youngest self made female billionaire. Is
Speaker 2: about us, that we're just so susceptible to buying into
Speaker 2: these narrative twels that turn out to be nonsense.
Speaker 4: So, I mean, part of it is that we're humans,
Speaker 4: and humans have often sort of been snowed by things
Speaker 4: that are flashy and shiny and exciting. I mean, that's
Speaker 4: just very much the human condition. Some of the stuff
Speaker 4: I talk about in the book that I really enjoyed
Speaker 4: working on was the cognitive psychology aspects of it.
Speaker 3: You know, sort of.
Speaker 4: When we hear certain stories, it's very difficult to budge ourselves.
Speaker 3: And be contrariant.
Speaker 4: And as I was saying earlier, so you sort of
Speaker 4: need a collective tipping point where people start to question
Speaker 4: it so you don't feel like an outlier or the
Speaker 4: norm when you start to question these things, and so
Speaker 4: I think there's a role for media here. I think
Speaker 4: there's a role for education. Unfortunately, the people who benefit
Speaker 4: from technically also know this and have a very big
Speaker 4: media presence and invest a lot in education. So it's
Speaker 4: an uphill battle to start talking about these things differently.
Speaker 4: But you know, ultimately we are all human and it's
Speaker 4: nicer to believe that something will succeed than that it
Speaker 4: will fail. I mean, you might not think I'd be
Speaker 4: much fun at cocktail parties.
Speaker 3: Although I am.
Speaker 2: And the book is available for free at Fintech Dystopia
Speaker 2: dot com dot com. Let's jump to our final questions,
Speaker 2: our favorite questions we ask all of our guests, starting
Speaker 2: with tell us about your mentors who helped steer your career.
Speaker 4: So my first mentors probably my first law firm partner
Speaker 4: boss in Australia, Stephen Kevinnagh, and I had thought I
Speaker 4: was going to be an ip lawyer, but we had
Speaker 4: a rotation system and we ended up and I ended
Speaker 4: up in his financial services practice and he was just
Speaker 4: a wonderful person to work for. It was a time
Speaker 4: when the law had just changed in Australia and he
Speaker 4: really was willing to hear what I had to say
Speaker 4: about this new law, and so it was just I
Speaker 4: just felt very invested in and that was lovely. And
Speaker 4: then I think as an academic Patricia McCoy, who I adore,
Speaker 4: sort of, I have had a very non traditional path
Speaker 4: to academia. I had more practice experience than is usually
Speaker 4: the case. I had fewer of the bells and whistles
Speaker 4: credentials that people usually have. And again, she just saw
Speaker 4: in me someone who was really passionate about preventing financial crises,
Speaker 4: about sort of systemic risk, and sort of was willing
Speaker 4: to look through the fact that I wasn't as polished
Speaker 4: as most of the other people trying to enter academia
Speaker 4: and support me, and I was very grateful for that.
Speaker 2: We've talked about a run of different books. What are
Speaker 2: some of your favorites? What are you reading now?
Speaker 4: Oh, I was an English lip major, so I have
Speaker 4: a many favorites. I'm very into the dystopian track, so
Speaker 4: Handmaid's Tale nineteen eighty four. I just finished the Parable
Speaker 4: of the Sewer in that Vein, which was parable of
Speaker 4: the Parable of the Sewer Octavia Butler. I also have
Speaker 4: always had a soft spot for really good children's literature,
Speaker 4: So Philip Pullman's Dark Materials trilogy is one of my favorites.
Speaker 4: And right now I'm reading with my kids Catherine Rundell's
Speaker 4: books Impossible Creatures and The Poison King, and it's just
Speaker 4: they're just so good. And then work wise, I've just
Speaker 4: started Jacob Silverman's Gilded Rage, which is very much on
Speaker 4: point for the conversation we're having Gilded Rage.
Speaker 2: You know, we talked about a few crypto related books.
Speaker 2: Did you see Zeke's number go up? It really is
Speaker 2: just an astonishing, astonishing work. What sort of advice would
Speaker 2: you give to a recent college grad interested in a
Speaker 2: career on whether it was law, financial technology, regulation, what's
Speaker 2: your advice to those people?
Speaker 4: It's a really hard time for them. And I talk
Speaker 4: to my students a lot about the careers, and you know,
Speaker 4: things are the ground is shifting under our feet, and
Speaker 4: in this time of uncertainty, really it's really hard to
Speaker 4: figure out what to do. So I would recommend investing
Speaker 4: in the fundamentals, and I think it's hard to do
Speaker 4: when AI is being pushed, but becoming a good communicator,
Speaker 4: learning how to write and speak to people clearly will
Speaker 4: never I.
Speaker 3: Think, go out of fashion. And investing in relationships.
Speaker 4: Again, we're in this time where everything is sort of
Speaker 4: becoming technologized and atomized, et cetera.
Speaker 3: But in my career, having good.
Speaker 4: Relationships with people, and I'm pretty sure you'll agree with
Speaker 4: this has been one of the most successful things that
Speaker 4: has helped me along the way. And so just investing
Speaker 4: in personal relationships I think is always good advice.
Speaker 2: Final question, what do you know about the world of fintech? Investing?
Speaker 2: Regulation today might have been useful twenty twenty five years ago.
Speaker 4: Honestly, I'm not sure that there's much because the world
Speaker 4: was very different twenty to twenty five years ago. You know,
Speaker 4: I always just invested in in index funds basically, and
Speaker 4: you know, and that worked out frankly great, really well.
Speaker 4: The challenge is, and I study financial crises, the challenge
Speaker 4: is that when things go horribly wrong, everything is correlated.
Speaker 3: Everything is correlated.
Speaker 2: All correlations go to one in a crisis, for sure.
Speaker 3: And I think we're on the brink of a crisis.
Speaker 2: When you say on the brink, days, weeks, months, years.
Speaker 3: Ah well.
Speaker 4: John Maynard Kaine said that the markets can stay irrational
Speaker 4: longer than you, and I can stay solvent, so I
Speaker 4: will never put a time.
Speaker 3: Frame on it.
Speaker 4: But I you know, all warning indicators are flat read
Speaker 4: at the same time as we are pulling back old
Speaker 4: regulatory apparatus, So I think it's safe to say we're
Speaker 4: on the brink of a crisis.
Speaker 2: How could that ever go wrong? How could regulation unleaches
Speaker 2: the animal spirits? As long as we're talking about canes,
Speaker 2: it's all good. Perhaps not, perhaps not? Hillary, Thank you
Speaker 2: so much for being so generous with your time. We
Speaker 2: have been speaking with Hillary Allen, professor of law at
Speaker 2: American University Washington College in DC and author of the
Speaker 2: book available for free online, Fintech Dystopia, a Summer beach
Speaker 2: read about how Silicon Valley is ruining things. If you
Speaker 2: enjoy this conversation, well check out any of the six
Speaker 2: hundred previous discussions we've had over the past twelve years.
Speaker 2: You could find those at iTunes, Spotify, YouTube, Bloomberg, or
Speaker 2: wherever you find your favorite podcast. I would be remiss
Speaker 2: if I didn't thank our crack staff that helps put
Speaker 2: these conversations together each week. Alexis Noriega is my video producer.
Speaker 2: Sean Russo is my researcher Anna Luke is my podcast producer.
Speaker 2: I'm Barry Ritolts. You've been listening to Masters in Business
Speaker 2: on Bloomberg Radio.