WEBVTT - Brad DeLong on the FTX Collapse and the South Sea Bubble 0:00:10.080 --> 0:00:14.080 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.120 --> 0:00:18.080 I'm Joe Wisntal and I'm Tracy Halloway. Tracy, you know, 0:00:18.760 --> 0:00:23.280 the specifics of the f t X Saga disaster collapse 0:00:23.320 --> 0:00:25.280 are still coming out, but one thing we do know 0:00:25.640 --> 0:00:29.880 is that, you know, there's nothing really that new about manias. 0:00:30.040 --> 0:00:33.080 There's nothing really new about bubbles. There's nothing really new 0:00:33.120 --> 0:00:36.800 about sort of like wildcat shadow banks that implode and 0:00:36.840 --> 0:00:38.800 lose a lot of money. Like in a way, the 0:00:38.880 --> 0:00:42.080 story is as old as time. Well, I I broadly 0:00:42.240 --> 0:00:45.680 agree with that, like every speculative bubble is going to 0:00:45.760 --> 0:00:48.839 have some similarities. But I feel like, I don't know, 0:00:48.880 --> 0:00:50.960 I feel like when it comes to crypto, there is 0:00:51.000 --> 0:00:54.960 something about it specifically that just feels like really really 0:00:55.680 --> 0:00:58.800 I'm trying to think of the right word, maybe cynical 0:00:59.440 --> 0:01:04.160 or nileistic. Like it's hard to tell how many true 0:01:04.160 --> 0:01:07.400 believers are out there versus people who are basically just 0:01:07.440 --> 0:01:10.919 gambling on digital tokens who want to get rich quickly. 0:01:11.080 --> 0:01:14.119 But I do feel like, and I wrote this after 0:01:14.200 --> 0:01:17.760 we recorded that episode with Sam bankman Fried and Matt 0:01:17.840 --> 0:01:20.120 Levin where he described yield farming as you know, the 0:01:20.160 --> 0:01:23.119 magic money box. But it feels like people kind of 0:01:23.240 --> 0:01:28.280 run two bubbles nowadays. And Lily Frankis talked to us 0:01:28.319 --> 0:01:30.520 about this as well, but she was saying, people sort 0:01:30.560 --> 0:01:33.040 of have this compressed timeline where they just see an 0:01:33.040 --> 0:01:35.679 opportunity to get rich quick, and the idea is to 0:01:35.720 --> 0:01:38.440 get out before everyone else. But as you say, there 0:01:38.440 --> 0:01:41.200 have been bubbles throughout history where people have tried to 0:01:41.240 --> 0:01:43.880 do the exact same thing. No, but I think you 0:01:44.200 --> 0:01:46.520 make a really good point and homing in on this 0:01:46.600 --> 0:01:49.040 idea of running two bubbles is sort of like this 0:01:49.440 --> 0:01:52.320 strategy that a lot of people employ. Like I've always 0:01:52.360 --> 0:01:53.920 sort of had this theory and i don't know if 0:01:53.960 --> 0:01:56.280 it's really true because I've never looked at it empirically. 0:01:56.560 --> 0:01:59.920 So it's like just for twitter type of theory, you know, 0:02:00.160 --> 0:02:04.240 it's like I don't have to do you have any 0:02:04.280 --> 0:02:08.040 other types of theory? Not really, that was mean Carmen 0:02:08.080 --> 0:02:09.920 cut that. No, No, keep that and keep that in 0:02:10.280 --> 0:02:12.480 people getting to hear the real, the real back and 0:02:12.520 --> 0:02:14.920 forth between us. But you know, just this like idea 0:02:15.040 --> 0:02:18.560 of like in a period of economic procarity and so forth, 0:02:19.000 --> 0:02:21.760 if you don't feel like there's like tremendous like economic 0:02:21.760 --> 0:02:25.200 opportunities for you, then you have to run towards bubbles, 0:02:25.240 --> 0:02:27.480 because maybe a bubble will come round two or three, 0:02:27.639 --> 0:02:30.200 four times in your life maybe, And if you don't 0:02:30.200 --> 0:02:31.880 strike it rich on one of them, like when you're 0:02:31.880 --> 0:02:33.880 gonna make it. Well, this is exactly it. If you 0:02:33.960 --> 0:02:37.640 don't see the possibility of getting rich or even you know, 0:02:37.960 --> 0:02:41.200 reasonably comfortable in your day to day job, then why 0:02:41.240 --> 0:02:44.440 wouldn't you look at something like crypto as basically a 0:02:44.440 --> 0:02:47.959 lottery ticket, right, You could get lucky if you put 0:02:48.080 --> 0:02:50.880 enough money into this investment and if enough people do 0:02:50.960 --> 0:02:52.799 the same thing. So I think that's how a lot 0:02:52.800 --> 0:02:55.600 of people were viewing it, this sort of lottery ticket, 0:02:56.000 --> 0:02:58.200 you know. And there's another thing and you sort of 0:02:58.280 --> 0:03:01.519 touched on this, which is that know, yes, okay, there's 0:03:01.520 --> 0:03:05.480 always bubbles throughout history, but some bubbles in particular like 0:03:05.600 --> 0:03:08.600 really cellvision of like changing the world. Right, So it's 0:03:08.600 --> 0:03:11.639 like cryptocurrencies are like beanie babies, is I think people say, 0:03:11.720 --> 0:03:14.560 But I don't even think that at the very peak 0:03:14.680 --> 0:03:19.120 of like the beanie baby mania, that anyone actually believe 0:03:19.200 --> 0:03:20.880 like they were going to change the world right, as 0:03:20.919 --> 0:03:22.239 far as I know, as far as I know, I 0:03:22.240 --> 0:03:24.240 don't think. So we're going to have the beanie baby 0:03:24.320 --> 0:03:27.119 based economy and everyone is going to have their own 0:03:27.120 --> 0:03:31.080 beanie baby wallet, and we'll have financial independence and we 0:03:31.120 --> 0:03:34.040 won't have to go through you know, middlemen like the banks. 0:03:34.080 --> 0:03:37.400 It'll be great. We'll just trade beanie babies with each other. Yeah, 0:03:37.440 --> 0:03:39.280 I think. I think you're right. I think that's exactly 0:03:39.360 --> 0:03:41.560 what happened. But no, like so, you know, some of 0:03:41.600 --> 0:03:44.560 these manias, and the dot com one of course too 0:03:44.680 --> 0:03:46.440 is like the world is going to change, and they 0:03:46.480 --> 0:03:48.440 were kind of right about that, because the Internet did 0:03:48.520 --> 0:03:50.400 change the world. But you know, I do want to 0:03:50.520 --> 0:03:53.600 understand more about not only like the history of bubbles, 0:03:53.840 --> 0:03:56.760 not only what the FTX and crypto implosion is similar to, 0:03:57.440 --> 0:04:00.520 but like what history says also about this sort of 0:04:00.560 --> 0:04:02.520 like what I perceive is like this cat and mouse 0:04:02.560 --> 0:04:06.000 game that regulators play with different kinds of neil banks 0:04:06.040 --> 0:04:08.920 of swords. I understand like neil bank might meet something else, 0:04:08.960 --> 0:04:11.560 but I mean like new attempts to recreate the financial 0:04:11.560 --> 0:04:15.960 system and the endless sort of chase and sort of 0:04:16.000 --> 0:04:19.520 attempt to regulate them, and the hot money flows out 0:04:19.560 --> 0:04:23.640 of the regulated system totally. I think looking into the 0:04:23.640 --> 0:04:27.520 similarities and the differences with pass bubbles is definitely something 0:04:27.560 --> 0:04:29.400 that we need to do. The other thing that I 0:04:29.480 --> 0:04:32.799 find striking about crypto and I know there have been 0:04:32.839 --> 0:04:37.599 you know, private money projects throughout history, but it does 0:04:37.680 --> 0:04:41.159 feel like Crypto was almost like the apex of that effort, 0:04:41.200 --> 0:04:45.799 Like we are going to create a financial bubble out 0:04:45.839 --> 0:04:50.080 of pure like money that we have created. I don't know, 0:04:50.120 --> 0:04:55.120 it feels like the financial like speculative mania kind of 0:04:55.240 --> 0:04:59.080 reached almost its purest form when it comes to crypto, 0:04:59.200 --> 0:05:03.280 Like this is about making money with pretend money that 0:05:03.320 --> 0:05:06.560 we have created. Like that's what it feels like to me. Yeah, 0:05:06.920 --> 0:05:08.479 we could go down to this rabbit hole. But like 0:05:08.520 --> 0:05:11.120 this idea of like the complete separation of a new 0:05:11.160 --> 0:05:15.200 financial system from the existing regulated legal financial system is 0:05:15.240 --> 0:05:17.840 like a financial fascinating angle. Anyway, you and I we 0:05:17.920 --> 0:05:20.920 could chat for hours, but should we should we talk? 0:05:21.000 --> 0:05:22.320 Should we bring it in an action? Should we bring 0:05:22.360 --> 0:05:24.640 it in? Yeah? Yeah, we should, we should. Okay, So 0:05:24.680 --> 0:05:27.000 I'm very excited about our guests. We've never had him 0:05:27.080 --> 0:05:29.560 on the show before, I don't think, but we have 0:05:29.680 --> 0:05:32.720 been reading him forever for as long as like the 0:05:32.760 --> 0:05:37.040 financial or eco blogg Is fhere and twitter sphere has existed. 0:05:37.120 --> 0:05:39.440 One of the true originals we're gonna be speaking to 0:05:39.960 --> 0:05:43.240 Brad DeLong. He's a professor of economics at the University 0:05:43.279 --> 0:05:47.080 of California at Berkeley. He's probably been two online since 0:05:48.720 --> 0:05:50.840 and he is the author of a new book called 0:05:50.920 --> 0:05:55.599 Slouching Towards Utopia and Economic History of the twentieth Century. 0:05:55.640 --> 0:05:58.440 This is a true specialty economic history. So how does 0:05:58.520 --> 0:06:02.440 FTX and crypto it into history? Brad, Thank you so 0:06:02.560 --> 0:06:05.200 much for coming on the podcast. I can't believe it's 0:06:05.200 --> 0:06:07.920 taken us this long to have you on. Now, thank 0:06:07.960 --> 0:06:10.840 you very very much for inviting me. Now, it's true 0:06:10.839 --> 0:06:12.960 that I actually have been in the same room when 0:06:13.120 --> 0:06:16.480 Joe with the past and I have actually spoken words 0:06:16.520 --> 0:06:18.839 out of my mouth that have caused vibration to the 0:06:18.920 --> 0:06:21.560 air that have gone into his ears, and he has 0:06:21.640 --> 0:06:24.320 talked back. Although that was a decade ago, yeah, um, 0:06:24.360 --> 0:06:27.800 But overwhelmingly over the past three well five years or so, 0:06:27.960 --> 0:06:30.240 and as long as odd Lots been running, it's been 0:06:30.320 --> 0:06:33.640 very much a paras social relationship in which I listened 0:06:33.640 --> 0:06:35.880 to Joe and Tracy and then I argue with them 0:06:35.960 --> 0:06:38.600 volubly in my shower until my wife tells them to 0:06:38.720 --> 0:06:42.799 shut up. And so it's great to be here, great 0:06:42.839 --> 0:06:45.480 to be here. Actually for reals here in the metaverse, 0:06:45.760 --> 0:06:48.920 we are definitely We're glad to have you, Brad. We're 0:06:48.960 --> 0:06:51.920 definitely clipping that Kerman and putting that out as an 0:06:51.960 --> 0:06:56.400 audiogram on Twitter as soon as possible. What is uh 0:06:56.520 --> 0:06:58.320 if there is still a Twitter? If there is still 0:06:58.360 --> 0:07:00.440 a Twitter by the time this episode and comes out, 0:07:00.480 --> 0:07:03.480 which I hope f t X. I say those letters 0:07:03.520 --> 0:07:06.159 to you, and as an economic historian, what comes to 0:07:06.200 --> 0:07:09.480 mind first? What are those words conjure up for you? First? 0:07:09.520 --> 0:07:12.280 It conjures up the south Sea Bubble of the early 0:07:12.400 --> 0:07:17.320 seventeen hundreds. You see, Great Britain had gone all in 0:07:17.440 --> 0:07:21.080 and its wars with France starting in six nine, and 0:07:21.160 --> 0:07:24.920 had issued many, many metric f tons of debt during it. 0:07:24.920 --> 0:07:27.320 It was a country of six million fighting a country 0:07:27.320 --> 0:07:30.520 of twenty million and winning, you know, and piling up 0:07:30.560 --> 0:07:33.960 dead issue after debt issue after debt issue. But all 0:07:34.000 --> 0:07:37.400 of them were on different terms. None of them were tradeable. 0:07:38.000 --> 0:07:41.440 And along comes the south Sea Corporation with the idea 0:07:41.520 --> 0:07:44.320 that we are going to create a different form of money. 0:07:45.080 --> 0:07:47.040 We are going to buy up all of the British 0:07:47.160 --> 0:07:50.360 National debt. We are going to consolidate it. We're going 0:07:50.400 --> 0:07:53.000 to take all the different securities and mesh them together, 0:07:53.600 --> 0:07:56.720 and then we are going to sell equal identical shares 0:07:57.000 --> 0:08:01.320 of all of the consolidated debts. And because we're selling 0:08:01.440 --> 0:08:05.280 one product, it's going to be tradeable, it's going to 0:08:05.320 --> 0:08:07.960 be clear what it is, because it's just a particular 0:08:08.040 --> 0:08:11.480 slice of the total debt. And the proprietors of the 0:08:11.520 --> 0:08:14.720 south Sea Company said, we're going to get fabulously rich 0:08:14.800 --> 0:08:18.040 here because going we're going to create this enormous liquidity 0:08:18.080 --> 0:08:22.240 premium in the British National debt which is not previously unexisted, 0:08:22.480 --> 0:08:25.000 and we're going to skim off a third of that 0:08:25.080 --> 0:08:30.120 liquidity value for us and our financers, and for you, 0:08:30.320 --> 0:08:32.760 Mr Member of Parliament, if you will help Greece our 0:08:32.800 --> 0:08:34.800 bills go through the House of Commons so we can 0:08:34.840 --> 0:08:40.320 actually do this enormous bubble followed by enormous crash. You know. 0:08:40.559 --> 0:08:43.480 Source of the Sir Isaac Newton quote. I can calculate 0:08:43.520 --> 0:08:46.520 the motions of heavenly bodies, but I cannot calculate the 0:08:46.559 --> 0:08:50.000 madness of craps. So talk to us a little bit 0:08:50.000 --> 0:08:53.960 more like, what exactly is the parallel here other than 0:08:54.679 --> 0:08:57.880 the south Sea Bubble, you know, involved creating a new 0:08:57.960 --> 0:09:00.760 type of money, Like, are there other ways in the 0:09:00.800 --> 0:09:04.080 way that the bubble built, in the way that people 0:09:04.160 --> 0:09:09.680 sort of marketed that idea to investors? Um, Yes, indeed, yes, 0:09:09.720 --> 0:09:14.600 indeed that it's not just what the original Bitcoin and 0:09:14.600 --> 0:09:17.720 ethereum people saying, we're going to have a whole new 0:09:17.760 --> 0:09:20.440 form of money. It's also that you're getting in on 0:09:20.520 --> 0:09:23.400 the ground floor of what's going to be a truly 0:09:23.440 --> 0:09:27.439 remarkable financial transformation. It's also going to be that we 0:09:27.559 --> 0:09:30.880 understand how to work the political system to make it 0:09:30.960 --> 0:09:34.880 work for us. And it's also a huge number of 0:09:34.920 --> 0:09:40.080 copycats with all kinds of things, some of which are public, 0:09:40.200 --> 0:09:43.280 some of which are not, some of which are promises 0:09:43.360 --> 0:09:45.920 that we will have a business model at some point 0:09:45.920 --> 0:09:49.120 in the future, some of which are totally blue sky 0:09:49.280 --> 0:09:53.679 and incapable of realization in less than a century. And 0:09:53.760 --> 0:09:56.960 some of them are ideas that actually worked out in 0:09:57.000 --> 0:09:59.559 the very long run, right like the South Sea Bubble 0:09:59.600 --> 0:10:03.320 company that wanted to send out an expedition to establish 0:10:03.400 --> 0:10:06.880 a trading post at the closest place where the Great 0:10:06.960 --> 0:10:09.680 Lakes meet the Mississippi River where you just have to 0:10:09.720 --> 0:10:12.560 cut it drag a canoe across three miles. The Mississippi 0:10:12.679 --> 0:10:15.880 River turned out to be important. Yes, And you know, 0:10:15.920 --> 0:10:18.560 where's the place where you drag a canoe across three 0:10:18.559 --> 0:10:20.800 miles to get from the Mississippi to the Great Lakes. 0:10:21.360 --> 0:10:28.320 You know what that's now called Chicago. I was thinking 0:10:29.080 --> 0:10:33.360 that was embarrassing on our part, but alas a hundred 0:10:33.400 --> 0:10:36.160 and sixty years too early for anyone to actually want 0:10:36.200 --> 0:10:38.960 to live in Chicago where the wind comes howling in 0:10:39.040 --> 0:10:41.400 from Lake Michigan, and where I was last weekend, where's 0:10:41.480 --> 0:10:44.760 fifteen degrees. So you know, going back to just the 0:10:45.240 --> 0:10:49.920 south Sea Company like buying up all of the non 0:10:49.920 --> 0:10:53.520 fungible British debt and all of these different like sort 0:10:53.520 --> 0:10:56.679 of like random liquid que SIPs and turning it into 0:10:56.760 --> 0:10:59.719 something that's liquid and fungible on every shared where it 0:10:59.760 --> 0:11:02.319 seems like a pretty good idea. It is a very 0:11:02.360 --> 0:11:05.240 good idea. In the end, it was actually executed, but 0:11:05.280 --> 0:11:07.840 it was executed by the Bank of England and not 0:11:08.000 --> 0:11:10.439 by the south Sea Company, which is one reason why 0:11:10.440 --> 0:11:13.000 the Bank of England still has its very large financial 0:11:13.000 --> 0:11:15.960 temple on thread Needle Street, while there is no physical 0:11:16.000 --> 0:11:18.640 sign of the south Sea Company anywhere in this fallen 0:11:18.679 --> 0:11:23.280 sublunary sphere. M hm brad. What was the trigger for 0:11:23.320 --> 0:11:26.440 the south Sea bubble actually collapsing and are there any 0:11:26.480 --> 0:11:29.760 parallels there with what we're seeing now in crypto? It's 0:11:30.000 --> 0:11:34.600 very hard to tell what the trigger is. John Kenneth 0:11:34.640 --> 0:11:39.920 Galbraith used to say that there's this thing called the bezel, 0:11:41.200 --> 0:11:43.880 which is the money that the early adopters who have 0:11:43.960 --> 0:11:47.240 now selled out have known they've won, but the money 0:11:47.320 --> 0:11:49.840 that the people, the greater fools, do not yet know 0:11:49.920 --> 0:11:53.240 that they have lost. It looks like the trigger was 0:11:53.400 --> 0:11:56.880 the south Sea Company actually attempting to flex its political 0:11:57.000 --> 0:12:02.840 muscles and get Parliament to push out some of its competitors, 0:12:02.880 --> 0:12:05.360 to rule that some of its competitors would in fact 0:12:05.360 --> 0:12:09.040 be illegal, in order to concentrate demand for bubble like 0:12:09.120 --> 0:12:11.680 assets in the shares of the south Sea Company, which 0:12:11.679 --> 0:12:14.400 we're still trading on a win issued basis, and wanting 0:12:14.440 --> 0:12:17.320 to push them up to the sky um. But that 0:12:17.320 --> 0:12:21.240 that caused enough selling and enough loss of value elsewhere 0:12:21.559 --> 0:12:24.040 that people began to question the value of the south 0:12:24.040 --> 0:12:27.280 Sea Company's stock as well. You know, and once people 0:12:27.360 --> 0:12:32.200 start saying, maybe this isn't actually as good, maybe I 0:12:32.280 --> 0:12:37.040 am the greatest fool, then the thing is over. Joe, 0:12:37.080 --> 0:12:39.800 I cannot tell you how many columns I have both 0:12:39.880 --> 0:12:43.840 written and read over my lifetime in finance that start 0:12:43.880 --> 0:12:47.640 with galper It's the bezel. It's like the perfect analogy 0:12:47.800 --> 0:12:50.280 for so many things. It's a bit of a cliche, 0:12:50.360 --> 0:12:52.760 but it also is perfect. I'm also kind of struck 0:12:52.800 --> 0:12:56.640 by this politics point in because again, you know, thinking 0:12:56.640 --> 0:13:00.440 about parallels. A is you had SBF who had attempted 0:13:00.480 --> 0:13:05.839 to become extremely influential within politics, and not only that 0:13:06.120 --> 0:13:10.240 to your point, even you know this idea of politics, 0:13:10.280 --> 0:13:12.559 of the idea of like pushing out others, and literally 0:13:12.960 --> 0:13:16.640 just like in the weeks before the ft X collapsed, 0:13:16.880 --> 0:13:20.040 he was advocating for a certain type of defy regulation 0:13:20.120 --> 0:13:24.160 that many people in defy believe its targeting them. And 0:13:24.240 --> 0:13:27.679 so this is actually maybe more parallels than maybe we 0:13:27.720 --> 0:13:31.960 would have guessed. Yes, yes, yes, yes. And there's a 0:13:32.080 --> 0:13:35.040 very nice south Sea bubble book by Tom Levinson called 0:13:35.080 --> 0:13:38.800 Money for Nothing, which I think everyone should read, along 0:13:38.840 --> 0:13:43.160 with Sequoia capitals pieces on why we're investing so much 0:13:43.160 --> 0:13:45.360 and Sam Bankman read and why you should invest in 0:13:45.440 --> 0:14:05.040 them too. Um that everyone should read this much so 0:14:05.640 --> 0:14:08.080 one of the things when it comes to bubbles, and 0:14:08.160 --> 0:14:10.120 Joe kind of touched on this in the intro, but 0:14:10.559 --> 0:14:14.480 almost every big bubble actually does tell some sort of 0:14:14.520 --> 0:14:19.440 compelling story. And obviously in hindsight you think, well, this 0:14:19.600 --> 0:14:22.800 was blown completely out of proportion, or parts of this 0:14:22.880 --> 0:14:24.960 were true, but not all of it, like in the 0:14:25.000 --> 0:14:27.640 dot com bubble. Like talk to us a little bit 0:14:27.680 --> 0:14:31.680 more about that psychological aspect of bubbles and how do 0:14:31.760 --> 0:14:37.040 people actually differentiate between you know, life world changing technology 0:14:37.280 --> 0:14:42.760 versus a speculative asset. Well, mostly mostly there is a 0:14:42.920 --> 0:14:48.640 story about a life changing and very profitable technology underneath there. 0:14:49.440 --> 0:14:53.320 You know, that is the end driving the thing, right 0:14:53.720 --> 0:14:56.840 that we are going to build a railroad from New 0:14:56.920 --> 0:14:59.920 York to Chicago, and then we are going to collect 0:15:00.000 --> 0:15:03.920 a huge amount of money because we own the railroad 0:15:04.000 --> 0:15:06.760 from New York to Chicago. But then it turns out 0:15:06.840 --> 0:15:08.920 that there actually is a lot of money that wants 0:15:08.920 --> 0:15:11.040 to do this, and there is not one railroad, but 0:15:11.080 --> 0:15:14.320 there are three railroads from New York to Chicago, and 0:15:14.600 --> 0:15:17.400 you know, each of them has high fixed but very 0:15:17.440 --> 0:15:20.440 low variable costs, so each of them has an incentive 0:15:20.480 --> 0:15:23.680 to undercut the others, and so none of the railroads 0:15:23.680 --> 0:15:26.320 can ever make any money because whenever anyone jacks up 0:15:26.360 --> 0:15:28.800 their rates, one of the other two undercuts it, and 0:15:28.840 --> 0:15:32.040 so all the railroads go smash with their equity going 0:15:32.080 --> 0:15:35.320 to zero and their bonds going to very steep discounts. 0:15:35.360 --> 0:15:39.440 But at the end, the United States has three railroads 0:15:39.480 --> 0:15:42.320 from New York to Chicago, and everyone who wants to 0:15:42.360 --> 0:15:44.800 move goods or people from New York to Chicago and 0:15:44.840 --> 0:15:49.560 back is enormously blessed by this, you know. Joe Stiglett 0:15:49.600 --> 0:15:52.360 says something similar about the dot com bubble right that 0:15:52.560 --> 0:15:54.880 m c I World Calm was saying it was making 0:15:54.960 --> 0:15:58.840 huge amounts of fortunes by building out fiber everywhere it 0:15:58.920 --> 0:16:01.080 was lying in its account thing. But lots of other 0:16:01.080 --> 0:16:03.840 people followed it, and then we had a decade of 0:16:03.920 --> 0:16:08.360 dark fiber in which transferring bits across the United States 0:16:08.400 --> 0:16:12.600 was essentially free, and that nourished the growth of the Internet. 0:16:12.880 --> 0:16:16.600 That is, the collective losses of investors in telecom during 0:16:16.640 --> 0:16:20.040 the dot com bubble was a social gift in terms 0:16:20.120 --> 0:16:23.920 that it produced a huge amount of telecommunications infrastructure that 0:16:24.080 --> 0:16:26.080 all of us in the first decade of the twenty 0:16:26.120 --> 0:16:29.520 first century benefited from massively. In the case of the 0:16:29.520 --> 0:16:32.280 south Sea bubble, you've got the British bond mark that 0:16:32.840 --> 0:16:36.200 rich British people could move their money from land to 0:16:36.280 --> 0:16:41.360 commercial enterprises, into government debt and out again swiftly and easily, 0:16:41.480 --> 0:16:44.880 and so have more options and more peace of mind. 0:16:45.360 --> 0:16:50.400 But in the crypto bubble, um, what do you get right? 0:16:50.520 --> 0:16:53.240 I wanted to bid on the Financial Times n f 0:16:53.360 --> 0:16:56.800 T M f t X Tombstone, but could not connect 0:16:56.840 --> 0:16:59.400 by wall by Slanto wallet to the f T S site, 0:16:59.440 --> 0:17:02.000 so I never bit on it at all. But you 0:17:02.040 --> 0:17:05.159 get a particular number that says it gives you some 0:17:05.240 --> 0:17:08.040 kind of special claim on a particular picture of a 0:17:08.040 --> 0:17:12.360 monkey that everyone has on their desktop. It's very unclear. 0:17:13.680 --> 0:17:17.720 Usually there is real money there. There is actually a 0:17:17.760 --> 0:17:20.320 pot of gold at the end of the rainbow, but 0:17:20.560 --> 0:17:24.440 it was never too clear what the pot of gold 0:17:24.520 --> 0:17:27.679 was supposed to be in crypto, you know, just setting 0:17:27.720 --> 0:17:31.720 aside this question of like, has any productive infrastructure been 0:17:31.800 --> 0:17:34.280 laid that we will benefit from this? Because I do 0:17:34.640 --> 0:17:37.200 I don't know what the answer it is also striking 0:17:37.320 --> 0:17:40.840 your point about you know, you have the real road boom, 0:17:40.880 --> 0:17:42.960 but no one can make money operating a real road. 0:17:43.119 --> 0:17:45.679 And again kind of an interesting parallel here with crypto, 0:17:45.760 --> 0:17:51.480 where you have like this insane bowl market for it's 0:17:51.480 --> 0:17:53.800 hard to find actually the entity to accrued a lot 0:17:53.840 --> 0:17:56.920 of profits even during the boom, you know, and especially 0:17:56.960 --> 0:17:59.000 f TX, and people are like, how did you lose money? 0:17:59.119 --> 0:18:00.679 Is the biggest boom of the time and you were 0:18:00.680 --> 0:18:03.679 trading it and you're mostly long cryptone is still you 0:18:03.720 --> 0:18:06.719 managed to lose money. So I find that to be fascinating. 0:18:06.800 --> 0:18:09.240 You know, another question I want to ask about the 0:18:09.240 --> 0:18:13.080 south Sea Company. You know, whenever, whenever anyone goes bust, right, 0:18:13.320 --> 0:18:16.520 there's a question of like, well, were they fraud stirs 0:18:16.560 --> 0:18:19.439 from the beginning? Was it a fraud? Was it just 0:18:19.600 --> 0:18:22.959 a wrong way bet which can happen in finance and 0:18:23.119 --> 0:18:27.080 people lose money, but it doesn't necessarily mean anything nefarious. 0:18:27.119 --> 0:18:31.760 The people operating the south Sea Company, how did they 0:18:31.800 --> 0:18:33.560 see it? Did they see us so we have a 0:18:33.640 --> 0:18:36.080 chance to take everyone's money? Or do they really believe 0:18:36.119 --> 0:18:39.920 they were building something important? Oh? They said, we have 0:18:40.280 --> 0:18:43.840 bonds that are currently yielding six percent in the market. 0:18:44.280 --> 0:18:47.880 We can issue consoles that will yield four percent um, 0:18:47.920 --> 0:18:51.480 we can earn fifty on the value of the British 0:18:51.520 --> 0:18:54.920 government debt if we managed to get this deal done 0:18:55.520 --> 0:18:58.119 and cream off at least a third of that from themselves. 0:18:58.240 --> 0:19:01.840 They were really, really true believes um. But of course, 0:19:01.960 --> 0:19:05.479 once they have salted the market, lots and lots and 0:19:05.560 --> 0:19:10.119 lots of other people come in with other opportunities, people 0:19:10.160 --> 0:19:14.840 who are significantly less true believer ish, and sufficiently more 0:19:15.760 --> 0:19:18.920 people are willing to give other people money for badly 0:19:18.960 --> 0:19:21.919 thought out business plans. I too, can come up with 0:19:21.960 --> 0:19:24.280 a badly thought out business plan, and then I'll be 0:19:24.359 --> 0:19:28.040 off to France before anyone actually asks for their money back. 0:19:28.760 --> 0:19:32.720 M hmm. This is a related question, but do you 0:19:32.800 --> 0:19:36.480 think once once you start having those types of speculators 0:19:36.600 --> 0:19:40.280 or I guess hangers on come into an industry, does 0:19:40.320 --> 0:19:45.080 it start to affect the behavior of like, even legitimate 0:19:45.119 --> 0:19:48.720 players within that speculative industry. And the reason I ask 0:19:48.840 --> 0:19:51.639 is because in the course of prepping for this episode, 0:19:51.960 --> 0:19:58.359 I found this quote from Vitalic Peuterin from that I 0:19:58.400 --> 0:20:01.320 thought was fascinating in retrospe But the quote is in 0:20:01.359 --> 0:20:05.040 the case of ethereum, if somehow eight percent of Ethereum's 0:20:05.119 --> 0:20:09.120 users just end up being cryptocurrency speculators. Would we then 0:20:09.200 --> 0:20:14.000 have a social responsibility to start optimizing for that constituency 0:20:14.040 --> 0:20:17.880 because that would end up being our constituency. Like that 0:20:17.920 --> 0:20:22.800 to me is interesting. Is there a reflexivity between the industry, 0:20:22.960 --> 0:20:28.639 the speculative industry and the speculators um? The fact you 0:20:28.640 --> 0:20:32.439 mean that the existence of speculators deranges people exactly? Like 0:20:32.520 --> 0:20:35.880 does it? Does it change their own behavior? So maybe 0:20:35.960 --> 0:20:38.679 I was growing two lips because I love two lips, 0:20:38.800 --> 0:20:41.800 But now that I have all these people speculating, you know, 0:20:42.000 --> 0:20:46.760 like the calculation starts to change. Yeah. The old teacher 0:20:46.840 --> 0:20:50.080 Charlie Kimdlberger had a very nice line about this. You know, 0:20:50.119 --> 0:20:53.240 there's nothing that deranges you more than watching a friend 0:20:53.240 --> 0:20:56.680 to become rich. I like that, you know. And as 0:20:56.720 --> 0:20:59.320 the late Richard Blum says, after a while, if you 0:20:59.359 --> 0:21:02.800 see lots of people around you who have become fabulously 0:21:02.920 --> 0:21:05.680 rich by making stupid investments, you begin to think making 0:21:05.720 --> 0:21:09.000 stupid investments is a good business model. You know, it 0:21:09.119 --> 0:21:17.560 really does unhinge everyone, especially because economists are always wrong 0:21:17.720 --> 0:21:21.600 in always thinking that bubbles and such will crash before 0:21:21.640 --> 0:21:24.919 they do right, And so it hangs on, and it 0:21:25.000 --> 0:21:28.080 hangs on, and it hangs on far beyond the point 0:21:28.560 --> 0:21:31.400 at which the sober economists have been saying, this will 0:21:31.520 --> 0:21:35.240 certainly not going to be sustained for this long, right, 0:21:35.760 --> 0:21:38.440 And then there comes the point when economists began saying, well, 0:21:38.480 --> 0:21:41.280 maybe g this time it is different, at which case 0:21:41.280 --> 0:21:43.840 you better sell quickly. So, just on the topic of 0:21:43.920 --> 0:21:48.000 bubbles actually crashing, I mean, you can get different types 0:21:48.119 --> 0:21:52.200 of mania crashes. So you can get relatively small ones 0:21:52.320 --> 0:21:55.199 that don't seem to have a broader impact on the 0:21:55.200 --> 0:21:58.600 economy or the financial system. I mean, beanie babies might 0:21:58.640 --> 0:22:01.720 have been painful for some individuals, but I don't think 0:22:01.720 --> 0:22:06.520 it actually to like a credit crisis or anything like that. 0:22:06.880 --> 0:22:09.200 But you can also have these big bubbles that crash 0:22:09.280 --> 0:22:13.000 and have enormous consequences for the economy. Talk to us 0:22:13.000 --> 0:22:16.439 about how how those effects play out. Yeah, and I 0:22:16.480 --> 0:22:20.200 was about to ask you what the key is leverage. Yes, 0:22:20.280 --> 0:22:23.720 the dot com bubble crashed. When the dot com bubble crashed, 0:22:23.720 --> 0:22:27.720 it took down four trillion dollars of wealth that people 0:22:27.800 --> 0:22:32.040 thought they had. But because it had all been equity 0:22:33.320 --> 0:22:35.440 and the investors of the dot com bubble who went 0:22:35.520 --> 0:22:40.600 broke weren't high. They leveraged. The unemployment rate only goes 0:22:40.680 --> 0:22:45.280 up by one percentage point and comes back down fairly quickly. 0:22:45.560 --> 0:22:49.440 By contrast, you know, I remember March of two thousand 0:22:49.520 --> 0:22:51.560 and eight and we were doing our rough back of 0:22:51.600 --> 0:22:56.720 the envelope calculations about the subprime collapse, and we concluded 0:22:57.160 --> 0:23:00.280 that there was about five billion dollars of more ages 0:23:00.320 --> 0:23:02.199 that weren't going to be paid off. And you know, 0:23:02.280 --> 0:23:05.479 that's one eighth the size of the dot com crash. 0:23:05.720 --> 0:23:09.520 And yet that one eighth as large loss created a 0:23:09.520 --> 0:23:13.239