Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisntal and I'm Tracy Halloway. Tracy, you know,
Speaker 1: the specifics of the f t X Saga disaster collapse
Speaker 1: are still coming out, but one thing we do know
Speaker 1: is that, you know, there's nothing really that new about manias.
Speaker 1: There's nothing really new about bubbles. There's nothing really new
Speaker 1: about sort of like wildcat shadow banks that implode and
Speaker 1: lose a lot of money. Like in a way, the
Speaker 1: story is as old as time. Well, I I broadly
Speaker 1: agree with that, like every speculative bubble is going to
Speaker 1: have some similarities. But I feel like, I don't know,
Speaker 1: I feel like when it comes to crypto, there is
Speaker 1: something about it specifically that just feels like really really
Speaker 1: I'm trying to think of the right word, maybe cynical
Speaker 1: or nileistic. Like it's hard to tell how many true
Speaker 1: believers are out there versus people who are basically just
Speaker 1: gambling on digital tokens who want to get rich quickly.
Speaker 1: But I do feel like, and I wrote this after
Speaker 1: we recorded that episode with Sam bankman Fried and Matt
Speaker 1: Levin where he described yield farming as you know, the
Speaker 1: magic money box. But it feels like people kind of
Speaker 1: run two bubbles nowadays. And Lily Frankis talked to us
Speaker 1: about this as well, but she was saying, people sort
Speaker 1: of have this compressed timeline where they just see an
Speaker 1: opportunity to get rich quick, and the idea is to
Speaker 1: get out before everyone else. But as you say, there
Speaker 1: have been bubbles throughout history where people have tried to
Speaker 1: do the exact same thing. No, but I think you
Speaker 1: make a really good point and homing in on this
Speaker 1: idea of running two bubbles is sort of like this
Speaker 1: strategy that a lot of people employ. Like I've always
Speaker 1: sort of had this theory and i don't know if
Speaker 1: it's really true because I've never looked at it empirically.
Speaker 1: So it's like just for twitter type of theory, you know,
Speaker 1: it's like I don't have to do you have any
Speaker 1: other types of theory? Not really, that was mean Carmen
Speaker 1: cut that. No, No, keep that and keep that in
Speaker 1: people getting to hear the real, the real back and
Speaker 1: forth between us. But you know, just this like idea
Speaker 1: of like in a period of economic procarity and so forth,
Speaker 1: if you don't feel like there's like tremendous like economic
Speaker 1: opportunities for you, then you have to run towards bubbles,
Speaker 1: because maybe a bubble will come round two or three,
Speaker 1: four times in your life maybe, And if you don't
Speaker 1: strike it rich on one of them, like when you're
Speaker 1: gonna make it. Well, this is exactly it. If you
Speaker 1: don't see the possibility of getting rich or even you know,
Speaker 1: reasonably comfortable in your day to day job, then why
Speaker 1: wouldn't you look at something like crypto as basically a
Speaker 1: lottery ticket, right, You could get lucky if you put
Speaker 1: enough money into this investment and if enough people do
Speaker 1: the same thing. So I think that's how a lot
Speaker 1: of people were viewing it, this sort of lottery ticket,
Speaker 1: you know. And there's another thing and you sort of
Speaker 1: touched on this, which is that know, yes, okay, there's
Speaker 1: always bubbles throughout history, but some bubbles in particular like
Speaker 1: really cellvision of like changing the world. Right, So it's
Speaker 1: like cryptocurrencies are like beanie babies, is I think people say,
Speaker 1: But I don't even think that at the very peak
Speaker 1: of like the beanie baby mania, that anyone actually believe
Speaker 1: like they were going to change the world right, as
Speaker 1: far as I know, as far as I know, I
Speaker 1: don't think. So we're going to have the beanie baby
Speaker 1: based economy and everyone is going to have their own
Speaker 1: beanie baby wallet, and we'll have financial independence and we
Speaker 1: won't have to go through you know, middlemen like the banks.
Speaker 1: It'll be great. We'll just trade beanie babies with each other. Yeah,
Speaker 1: I think. I think you're right. I think that's exactly
Speaker 1: what happened. But no, like so, you know, some of
Speaker 1: these manias, and the dot com one of course too
Speaker 1: is like the world is going to change, and they
Speaker 1: were kind of right about that, because the Internet did
Speaker 1: change the world. But you know, I do want to
Speaker 1: understand more about not only like the history of bubbles,
Speaker 1: not only what the FTX and crypto implosion is similar to,
Speaker 1: but like what history says also about this sort of
Speaker 1: like what I perceive is like this cat and mouse
Speaker 1: game that regulators play with different kinds of neil banks
Speaker 1: of swords. I understand like neil bank might meet something else,
Speaker 1: but I mean like new attempts to recreate the financial
Speaker 1: system and the endless sort of chase and sort of
Speaker 1: attempt to regulate them, and the hot money flows out
Speaker 1: of the regulated system totally. I think looking into the
Speaker 1: similarities and the differences with pass bubbles is definitely something
Speaker 1: that we need to do. The other thing that I
Speaker 1: find striking about crypto and I know there have been
Speaker 1: you know, private money projects throughout history, but it does
Speaker 1: feel like Crypto was almost like the apex of that effort,
Speaker 1: Like we are going to create a financial bubble out
Speaker 1: of pure like money that we have created. I don't know,
Speaker 1: it feels like the financial like speculative mania kind of
Speaker 1: reached almost its purest form when it comes to crypto,
Speaker 1: Like this is about making money with pretend money that
Speaker 1: we have created. Like that's what it feels like to me. Yeah,
Speaker 1: we could go down to this rabbit hole. But like
Speaker 1: this idea of like the complete separation of a new
Speaker 1: financial system from the existing regulated legal financial system is
Speaker 1: like a financial fascinating angle. Anyway, you and I we
Speaker 1: could chat for hours, but should we should we talk?
Speaker 1: Should we bring it in an action? Should we bring
Speaker 1: it in? Yeah? Yeah, we should, we should. Okay, So
Speaker 1: I'm very excited about our guests. We've never had him
Speaker 1: on the show before, I don't think, but we have
Speaker 1: been reading him forever for as long as like the
Speaker 1: financial or eco blogg Is fhere and twitter sphere has existed.
Speaker 1: One of the true originals we're gonna be speaking to
Speaker 1: Brad DeLong. He's a professor of economics at the University
Speaker 1: of California at Berkeley. He's probably been two online since
Speaker 1: and he is the author of a new book called
Speaker 1: Slouching Towards Utopia and Economic History of the twentieth Century.
Speaker 1: This is a true specialty economic history. So how does
Speaker 1: FTX and crypto it into history? Brad, Thank you so
Speaker 1: much for coming on the podcast. I can't believe it's
Speaker 1: taken us this long to have you on. Now, thank
Speaker 1: you very very much for inviting me. Now, it's true
Speaker 1: that I actually have been in the same room when
Speaker 1: Joe with the past and I have actually spoken words
Speaker 1: out of my mouth that have caused vibration to the
Speaker 1: air that have gone into his ears, and he has
Speaker 1: talked back. Although that was a decade ago, yeah, um,
Speaker 1: But overwhelmingly over the past three well five years or so,
Speaker 1: and as long as odd Lots been running, it's been
Speaker 1: very much a paras social relationship in which I listened
Speaker 1: to Joe and Tracy and then I argue with them
Speaker 1: volubly in my shower until my wife tells them to
Speaker 1: shut up. And so it's great to be here, great
Speaker 1: to be here. Actually for reals here in the metaverse,
Speaker 1: we are definitely We're glad to have you, Brad. We're
Speaker 1: definitely clipping that Kerman and putting that out as an
Speaker 1: audiogram on Twitter as soon as possible. What is uh
Speaker 1: if there is still a Twitter? If there is still
Speaker 1: a Twitter by the time this episode and comes out,
Speaker 1: which I hope f t X. I say those letters
Speaker 1: to you, and as an economic historian, what comes to
Speaker 1: mind first? What are those words conjure up for you? First?
Speaker 1: It conjures up the south Sea Bubble of the early
Speaker 1: seventeen hundreds. You see, Great Britain had gone all in
Speaker 1: and its wars with France starting in six nine, and
Speaker 1: had issued many, many metric f tons of debt during it.
Speaker 1: It was a country of six million fighting a country
Speaker 1: of twenty million and winning, you know, and piling up
Speaker 1: dead issue after debt issue after debt issue. But all
Speaker 1: of them were on different terms. None of them were tradeable.
Speaker 1: And along comes the south Sea Corporation with the idea
Speaker 1: that we are going to create a different form of money.
Speaker 1: We are going to buy up all of the British
Speaker 1: National debt. We are going to consolidate it. We're going
Speaker 1: to take all the different securities and mesh them together,
Speaker 1: and then we are going to sell equal identical shares
Speaker 1: of all of the consolidated debts. And because we're selling
Speaker 1: one product, it's going to be tradeable, it's going to
Speaker 1: be clear what it is, because it's just a particular
Speaker 1: slice of the total debt. And the proprietors of the
Speaker 1: south Sea Company said, we're going to get fabulously rich
Speaker 1: here because going we're going to create this enormous liquidity
Speaker 1: premium in the British National debt which is not previously unexisted,
Speaker 1: and we're going to skim off a third of that
Speaker 1: liquidity value for us and our financers, and for you,
Speaker 1: Mr Member of Parliament, if you will help Greece our
Speaker 1: bills go through the House of Commons so we can
Speaker 1: actually do this enormous bubble followed by enormous crash. You know.
Speaker 1: Source of the Sir Isaac Newton quote. I can calculate
Speaker 1: the motions of heavenly bodies, but I cannot calculate the
Speaker 1: madness of craps. So talk to us a little bit
Speaker 1: more like, what exactly is the parallel here other than
Speaker 1: the south Sea Bubble, you know, involved creating a new
Speaker 1: type of money, Like, are there other ways in the
Speaker 1: way that the bubble built, in the way that people
Speaker 1: sort of marketed that idea to investors? Um, Yes, indeed, yes,
Speaker 1: indeed that it's not just what the original Bitcoin and
Speaker 1: ethereum people saying, we're going to have a whole new
Speaker 1: form of money. It's also that you're getting in on
Speaker 1: the ground floor of what's going to be a truly
Speaker 1: remarkable financial transformation. It's also going to be that we
Speaker 1: understand how to work the political system to make it
Speaker 1: work for us. And it's also a huge number of
Speaker 1: copycats with all kinds of things, some of which are public,
Speaker 1: some of which are not, some of which are promises
Speaker 1: that we will have a business model at some point
Speaker 1: in the future, some of which are totally blue sky
Speaker 1: and incapable of realization in less than a century. And
Speaker 1: some of them are ideas that actually worked out in
Speaker 1: the very long run, right like the South Sea Bubble
Speaker 1: company that wanted to send out an expedition to establish
Speaker 1: a trading post at the closest place where the Great
Speaker 1: Lakes meet the Mississippi River where you just have to
Speaker 1: cut it drag a canoe across three miles. The Mississippi
Speaker 1: River turned out to be important. Yes, And you know,
Speaker 1: where's the place where you drag a canoe across three
Speaker 1: miles to get from the Mississippi to the Great Lakes.
Speaker 1: You know what that's now called Chicago. I was thinking
Speaker 1: that was embarrassing on our part, but alas a hundred
Speaker 1: and sixty years too early for anyone to actually want
Speaker 1: to live in Chicago where the wind comes howling in
Speaker 1: from Lake Michigan, and where I was last weekend, where's
Speaker 1: fifteen degrees. So you know, going back to just the
Speaker 1: south Sea Company like buying up all of the non
Speaker 1: fungible British debt and all of these different like sort
Speaker 1: of like random liquid que SIPs and turning it into
Speaker 1: something that's liquid and fungible on every shared where it
Speaker 1: seems like a pretty good idea. It is a very
Speaker 1: good idea. In the end, it was actually executed, but
Speaker 1: it was executed by the Bank of England and not
Speaker 1: by the south Sea Company, which is one reason why
Speaker 1: the Bank of England still has its very large financial
Speaker 1: temple on thread Needle Street, while there is no physical
Speaker 1: sign of the south Sea Company anywhere in this fallen
Speaker 1: sublunary sphere. M hm brad. What was the trigger for
Speaker 1: the south Sea bubble actually collapsing and are there any
Speaker 1: parallels there with what we're seeing now in crypto? It's
Speaker 1: very hard to tell what the trigger is. John Kenneth
Speaker 1: Galbraith used to say that there's this thing called the bezel,
Speaker 1: which is the money that the early adopters who have
Speaker 1: now selled out have known they've won, but the money
Speaker 1: that the people, the greater fools, do not yet know
Speaker 1: that they have lost. It looks like the trigger was
Speaker 1: the south Sea Company actually attempting to flex its political
Speaker 1: muscles and get Parliament to push out some of its competitors,
Speaker 1: to rule that some of its competitors would in fact
Speaker 1: be illegal, in order to concentrate demand for bubble like
Speaker 1: assets in the shares of the south Sea Company, which
Speaker 1: we're still trading on a win issued basis, and wanting
Speaker 1: to push them up to the sky um. But that
Speaker 1: that caused enough selling and enough loss of value elsewhere
Speaker 1: that people began to question the value of the south
Speaker 1: Sea Company's stock as well. You know, and once people
Speaker 1: start saying, maybe this isn't actually as good, maybe I
Speaker 1: am the greatest fool, then the thing is over. Joe,
Speaker 1: I cannot tell you how many columns I have both
Speaker 1: written and read over my lifetime in finance that start
Speaker 1: with galper It's the bezel. It's like the perfect analogy
Speaker 1: for so many things. It's a bit of a cliche,
Speaker 1: but it also is perfect. I'm also kind of struck
Speaker 1: by this politics point in because again, you know, thinking
Speaker 1: about parallels. A is you had SBF who had attempted
Speaker 1: to become extremely influential within politics, and not only that
Speaker 1: to your point, even you know this idea of politics,
Speaker 1: of the idea of like pushing out others, and literally
Speaker 1: just like in the weeks before the ft X collapsed,
Speaker 1: he was advocating for a certain type of defy regulation
Speaker 1: that many people in defy believe its targeting them. And
Speaker 1: so this is actually maybe more parallels than maybe we
Speaker 1: would have guessed. Yes, yes, yes, yes. And there's a
Speaker 1: very nice south Sea bubble book by Tom Levinson called
Speaker 1: Money for Nothing, which I think everyone should read, along
Speaker 1: with Sequoia capitals pieces on why we're investing so much
Speaker 1: and Sam Bankman read and why you should invest in
Speaker 1: them too. Um that everyone should read this much so
Speaker 1: one of the things when it comes to bubbles, and
Speaker 1: Joe kind of touched on this in the intro, but
Speaker 1: almost every big bubble actually does tell some sort of
Speaker 1: compelling story. And obviously in hindsight you think, well, this
Speaker 1: was blown completely out of proportion, or parts of this
Speaker 1: were true, but not all of it, like in the
Speaker 1: dot com bubble. Like talk to us a little bit
Speaker 1: more about that psychological aspect of bubbles and how do
Speaker 1: people actually differentiate between you know, life world changing technology
Speaker 1: versus a speculative asset. Well, mostly mostly there is a
Speaker 1: story about a life changing and very profitable technology underneath there.
Speaker 1: You know, that is the end driving the thing, right
Speaker 1: that we are going to build a railroad from New
Speaker 1: York to Chicago, and then we are going to collect
Speaker 1: a huge amount of money because we own the railroad
Speaker 1: from New York to Chicago. But then it turns out
Speaker 1: that there actually is a lot of money that wants
Speaker 1: to do this, and there is not one railroad, but
Speaker 1: there are three railroads from New York to Chicago, and
Speaker 1: you know, each of them has high fixed but very
Speaker 1: low variable costs, so each of them has an incentive
Speaker 1: to undercut the others, and so none of the railroads
Speaker 1: can ever make any money because whenever anyone jacks up
Speaker 1: their rates, one of the other two undercuts it, and
Speaker 1: so all the railroads go smash with their equity going
Speaker 1: to zero and their bonds going to very steep discounts.
Speaker 1: But at the end, the United States has three railroads
Speaker 1: from New York to Chicago, and everyone who wants to
Speaker 1: move goods or people from New York to Chicago and
Speaker 1: back is enormously blessed by this, you know. Joe Stiglett
Speaker 1: says something similar about the dot com bubble right that
Speaker 1: m c I World Calm was saying it was making
Speaker 1: huge amounts of fortunes by building out fiber everywhere it
Speaker 1: was lying in its account thing. But lots of other
Speaker 1: people followed it, and then we had a decade of
Speaker 1: dark fiber in which transferring bits across the United States
Speaker 1: was essentially free, and that nourished the growth of the Internet.
Speaker 1: That is, the collective losses of investors in telecom during
Speaker 1: the dot com bubble was a social gift in terms
Speaker 1: that it produced a huge amount of telecommunications infrastructure that
Speaker 1: all of us in the first decade of the twenty
Speaker 1: first century benefited from massively. In the case of the
Speaker 1: south Sea bubble, you've got the British bond mark that
Speaker 1: rich British people could move their money from land to
Speaker 1: commercial enterprises, into government debt and out again swiftly and easily,
Speaker 1: and so have more options and more peace of mind.
Speaker 1: But in the crypto bubble, um, what do you get right?
Speaker 1: I wanted to bid on the Financial Times n f
Speaker 1: T M f t X Tombstone, but could not connect
Speaker 1: by wall by Slanto wallet to the f T S site,
Speaker 1: so I never bit on it at all. But you
Speaker 1: get a particular number that says it gives you some
Speaker 1: kind of special claim on a particular picture of a
Speaker 1: monkey that everyone has on their desktop. It's very unclear.
Speaker 1: Usually there is real money there. There is actually a
Speaker 1: pot of gold at the end of the rainbow, but
Speaker 1: it was never too clear what the pot of gold
Speaker 1: was supposed to be in crypto, you know, just setting
Speaker 1: aside this question of like, has any productive infrastructure been
Speaker 1: laid that we will benefit from this? Because I do
Speaker 1: I don't know what the answer it is also striking
Speaker 1: your point about you know, you have the real road boom,
Speaker 1: but no one can make money operating a real road.
Speaker 1: And again kind of an interesting parallel here with crypto,
Speaker 1: where you have like this insane bowl market for it's
Speaker 1: hard to find actually the entity to accrued a lot
Speaker 1: of profits even during the boom, you know, and especially
Speaker 1: f TX, and people are like, how did you lose money?
Speaker 1: Is the biggest boom of the time and you were
Speaker 1: trading it and you're mostly long cryptone is still you
Speaker 1: managed to lose money. So I find that to be fascinating.
Speaker 1: You know, another question I want to ask about the
Speaker 1: south Sea Company. You know, whenever, whenever anyone goes bust, right,
Speaker 1: there's a question of like, well, were they fraud stirs
Speaker 1: from the beginning? Was it a fraud? Was it just
Speaker 1: a wrong way bet which can happen in finance and
Speaker 1: people lose money, but it doesn't necessarily mean anything nefarious.
Speaker 1: The people operating the south Sea Company, how did they
Speaker 1: see it? Did they see us so we have a
Speaker 1: chance to take everyone's money? Or do they really believe
Speaker 1: they were building something important? Oh? They said, we have
Speaker 1: bonds that are currently yielding six percent in the market.
Speaker 1: We can issue consoles that will yield four percent um,
Speaker 1: we can earn fifty on the value of the British
Speaker 1: government debt if we managed to get this deal done
Speaker 1: and cream off at least a third of that from themselves.
Speaker 1: They were really, really true believes um. But of course,
Speaker 1: once they have salted the market, lots and lots and
Speaker 1: lots of other people come in with other opportunities, people
Speaker 1: who are significantly less true believer ish, and sufficiently more
Speaker 1: people are willing to give other people money for badly
Speaker 1: thought out business plans. I too, can come up with
Speaker 1: a badly thought out business plan, and then I'll be
Speaker 1: off to France before anyone actually asks for their money back.
Speaker 1: M hmm. This is a related question, but do you
Speaker 1: think once once you start having those types of speculators
Speaker 1: or I guess hangers on come into an industry, does
Speaker 1: it start to affect the behavior of like, even legitimate
Speaker 1: players within that speculative industry. And the reason I ask
Speaker 1: is because in the course of prepping for this episode,
Speaker 1: I found this quote from Vitalic Peuterin from that I
Speaker 1: thought was fascinating in retrospe But the quote is in
Speaker 1: the case of ethereum, if somehow eight percent of Ethereum's
Speaker 1: users just end up being cryptocurrency speculators. Would we then
Speaker 1: have a social responsibility to start optimizing for that constituency
Speaker 1: because that would end up being our constituency. Like that
Speaker 1: to me is interesting. Is there a reflexivity between the industry,
Speaker 1: the speculative industry and the speculators um? The fact you
Speaker 1: mean that the existence of speculators deranges people exactly? Like
Speaker 1: does it? Does it change their own behavior? So maybe
Speaker 1: I was growing two lips because I love two lips,
Speaker 1: But now that I have all these people speculating, you know,
Speaker 1: like the calculation starts to change. Yeah. The old teacher
Speaker 1: Charlie Kimdlberger had a very nice line about this. You know,
Speaker 1: there's nothing that deranges you more than watching a friend
Speaker 1: to become rich. I like that, you know. And as
Speaker 1: the late Richard Blum says, after a while, if you
Speaker 1: see lots of people around you who have become fabulously
Speaker 1: rich by making stupid investments, you begin to think making
Speaker 1: stupid investments is a good business model. You know, it
Speaker 1: really does unhinge everyone, especially because economists are always wrong
Speaker 1: in always thinking that bubbles and such will crash before
Speaker 1: they do right, And so it hangs on, and it
Speaker 1: hangs on, and it hangs on far beyond the point
Speaker 1: at which the sober economists have been saying, this will
Speaker 1: certainly not going to be sustained for this long, right,
Speaker 1: And then there comes the point when economists began saying, well,
Speaker 1: maybe g this time it is different, at which case
Speaker 1: you better sell quickly. So, just on the topic of
Speaker 1: bubbles actually crashing, I mean, you can get different types
Speaker 1: of mania crashes. So you can get relatively small ones
Speaker 1: that don't seem to have a broader impact on the
Speaker 1: economy or the financial system. I mean, beanie babies might
Speaker 1: have been painful for some individuals, but I don't think
Speaker 1: it actually to like a credit crisis or anything like that.
Speaker 1: But you can also have these big bubbles that crash
Speaker 1: and have enormous consequences for the economy. Talk to us
Speaker 1: about how how those effects play out. Yeah, and I
Speaker 1: was about to ask you what the key is leverage. Yes,
Speaker 1: the dot com bubble crashed. When the dot com bubble crashed,
Speaker 1: it took down four trillion dollars of wealth that people
Speaker 1: thought they had. But because it had all been equity
Speaker 1: and the investors of the dot com bubble who went
Speaker 1: broke weren't high. They leveraged. The unemployment rate only goes
Speaker 1: up by one percentage point and comes back down fairly quickly.
Speaker 1: By contrast, you know, I remember March of two thousand
Speaker 1: and eight and we were doing our rough back of
Speaker 1: the envelope calculations about the subprime collapse, and we concluded
Speaker 1: that there was about five billion dollars of more ages
Speaker 1: that weren't going to be paid off. And you know,
Speaker 1: that's one eighth the size of the dot com crash.
Speaker 1: And yet that one eighth as large loss created a
Speaker 1: crisis that pushed the unemployment up by six percent, and
Speaker 1: it took us a full decade to get back to
Speaker 1: full employment after that for lots of reasons, but the
Speaker 1: huge difference was that the people who had been investing
Speaker 1: in subprime when they shouldn't be were the major money
Speaker 1: center banks who were saying, Aha, here's a chance for
Speaker 1: us to do some regulatory arbitrage. These derivatives are rated
Speaker 1: triple A, so we can use them as our core reserves,
Speaker 1: and they're paying us fifteen basis points more than real
Speaker 1: triple A assets are. And it was the fact that
Speaker 1: that was held by guys who were leveraged forty to one,
Speaker 1: you know, as their core reserves that made a simple
Speaker 1: crash of an asset into an enormous, interlinked chain of
Speaker 1: bankruptcies were at the them. No one is sure is
Speaker 1: they're they're solving because everyone has so much counterparty risk.
Speaker 1: They do not understand that everyone pulls into their shells
Speaker 1: and sells what they can and otherwise hunkers. Now, we
Speaker 1: don't think that's going to happen outside the crypto sphere
Speaker 1: right now, We really do not think so. So another
Speaker 1: question in a sort of how these patterns work out,
Speaker 1: and again it seems like one possibility with the FTX
Speaker 1: story is that it started off as like a sort of, um,
Speaker 1: you know, let's build an online crypto futures exchange, let's
Speaker 1: build a crypto hedge fund, and maybe it started out
Speaker 1: working well and it grew, and then at some point
Speaker 1: as it started to lapse, what maybe started as sort
Speaker 1: of like, let's attempt to build a business, and we
Speaker 1: don't know, and so this is you know, maybe you know,
Speaker 1: edge more towards bad business practices like moving FTX customer
Speaker 1: money to ALAMT or other things that someone might allege
Speaker 1: his fraud or lying to the public about the safety
Speaker 1: of the reserves. You pointed out that, you know, in
Speaker 1: a boom, at a bubble, you can have this sort
Speaker 1: of like the derangement of behavior. So if Tracy is
Speaker 1: a tulip farmer who just likes the flowers and then
Speaker 1: suddenly gets into it for money, or I think baby
Speaker 1: babies are cute and suddenly I'm a speculator. You know,
Speaker 1: do you have a similar phenomenon where people can start
Speaker 1: an entity and have sort of like genuine good faith
Speaker 1: intentions of building a business, but as the as it
Speaker 1: all tips over and collapses, essentially the fraud becomes the
Speaker 1: attempt to keep the real business going. Well. Then first
Speaker 1: there's one stage in which you think, well, g there's
Speaker 1: a hiccup, but we can recover, and then G that
Speaker 1: didn't work. Now the question is do we start doing
Speaker 1: something that we really shouldn't thinking that we will probably
Speaker 1: recover and then we can paper it over. And then
Speaker 1: there comes a stage where this is going down, and
Speaker 1: do we try to grab for everything we can at
Speaker 1: the moment in order to flee to France or to
Speaker 1: kind of position ourselves better for future negotiations, you know,
Speaker 1: that's rarely an immediate, once and for all decision. It's
Speaker 1: something that happens gradually and then suddenly right that. I'm
Speaker 1: sure that Sam Bankman Freed did not set out to
Speaker 1: steal eight billion dollars from ft X and lose some
Speaker 1: of it in trading in Alameda and perhaps secrete some
Speaker 1: of it someplace else in places we do not know
Speaker 1: since the accountants messed up. But he did start out
Speaker 1: thinking that money from f t X could be very
Speaker 1: useful in getting Alameda over this particular bad patch, and
Speaker 1: then things it a snowball after that. If you want
Speaker 1: to be a rich person and live a rich life,
Speaker 1: you moderate your bets according to what's called the Kelly criteria.
Speaker 1: Right you value. You won't take a bet that involves
Speaker 1: a fifty chance of losing half your money unless the
Speaker 1: upside more than doubles gives you a fifty chance of
Speaker 1: more than doubling your money. And the problem with Sam
Speaker 1: Bankman Fried and company is that they've been listening to
Speaker 1: these philosophers who are telling them that they should make
Speaker 1: any positive net present value value bet whatsoever. And if
Speaker 1: you do that, if you make much risk your bets
Speaker 1: than the Kelly criterion. Then you wind up bankrupt with
Speaker 1: very high probability and extraordinarily filthy rich with very low probability,
Speaker 1: you know, but still positive expected value. And then the
Speaker 1: question is what do you have the moral fiber to
Speaker 1: do or not do in all those cases where bankruptcy
Speaker 1: is staring you in the face. You know, since you
Speaker 1: mentioned fleet of France, is there a pretty long history
Speaker 1: in these stories of someone winding up in another country's
Speaker 1: borders after it implodes? Is that is that a common
Speaker 1: through line threat financial collaption. It's a common story. I
Speaker 1: don't exactly know how common it actually is in terms
Speaker 1: of how much how much money actually gets taken up
Speaker 1: and gets wound up someplace else, relatively far away where
Speaker 1: other people cannot reach you. In Britain in the eighteen
Speaker 1: hundreds and before, when they actually had debtors prison, it
Speaker 1: was significantly more common than since. And it's not clear
Speaker 1: to what extent it's we're getting away with our ill
Speaker 1: gotten gains and to what extent it's simply that we
Speaker 1: do not want to have to spend our lives incarcerated
Speaker 1: in the Marshall Sea prison because we're never getting out
Speaker 1: of this. M um Brad you mentioned kindle Burger earlier,
Speaker 1: and of course he wrote a sort of seminal piece
Speaker 1: about financial manias and bubbles. But a big part of
Speaker 1: kindle Burger is talking about what should actually be when
Speaker 1: it comes to bubbles, and he talks a lot about
Speaker 1: a lender of last resort. There are other options to
Speaker 1: you know, he talks about like maybe you can do nothing,
Speaker 1: or you can declare a bank holiday or have some
Speaker 1: sort of central bank rescue that sort of thing. But
Speaker 1: when it comes to crypto, are any of those options
Speaker 1: on the table. What should be done about a speculative
Speaker 1: mania like crypto? Um, Well, the lender of last resort
Speaker 1: is mostly Kindleburger wearing his canesie and macro economist hat,
Speaker 1: and it's very much lend freely at a penalty rate
Speaker 1: on collateral that is good in normal times to systemically
Speaker 1: right to systemically important institutions in order to build a
Speaker 1: firewall between what's going on in finance and you know,
Speaker 1: the real economy of people kind of with jobs making
Speaker 1: things as to what should be actually done with the
Speaker 1: speculative assets themselves, you know, I mean, the money was gone,
Speaker 1: the money was ever really there. In some sense, wealth
Speaker 1: is trust that there is going to be an enterprise
Speaker 1: there in the future that is going to be doing
Speaker 1: something of value, and once the crash is over, there's
Speaker 1: no such thing. All you can do is hope to
Speaker 1: get back whatever some of the money that the people
Speaker 1: who bailed out relatively early managed to squirrel away when
Speaker 1: they said, I've been a fool, but here comes a
Speaker 1: greater fool. Let me hand this risk off to them.
Speaker 1: With things like the housing crisis of two thousand and
Speaker 1: eight and two thousand and ten, there were lots of
Speaker 1: things you could do in terms of settling who is
Speaker 1: actually going to bear the debts, who is going to
Speaker 1: eat the losses as fast as possible, so that then
Speaker 1: the economy can get going again and people don't find
Speaker 1: themselves hindered by the fact that that you worry that
Speaker 1: if you make a loan to them, your loan will
Speaker 1: then be grabbed and given away to one of their
Speaker 1: creditors and not actually be part of a bit ongoing,
Speaker 1: forward looking business. You know, that is where there are
Speaker 1: things to be done there. In the addition, they are
Speaker 1: kind of clearing the financial rubble away, so that you
Speaker 1: know the financial system of loaning and borrowing and enterprising
Speaker 1: can start again. But as I see it, there's no
Speaker 1: system of loaning and borrowing and enterprise. There's no enterprising
Speaker 1: underneath the loaning and borrowing. You know, there are computer
Speaker 1: programmers looking for Web three use cases, but they don't
Speaker 1: really need crypto assets to do this um and it's
Speaker 1: unclear how trading crypto assets helps discover those Web three
Speaker 1: use cases. M what about as the speculative mania builds,
Speaker 1: is there something that regulators should do, Like if they
Speaker 1: see something risky happening, should they immediately crack down on
Speaker 1: it or should they allow the free market to operate
Speaker 1: as long as it isn't fraud or necessarily illegal. And again,
Speaker 1: when it comes to crypto, we could have a whole
Speaker 1: other conversation about whether or not it's legal or not.
Speaker 1: But I do get the impression that regulators themselves or
Speaker 1: policymakers themselves are sort of caught up in the narrative,
Speaker 1: or at the very least they themselves are uncertain about
Speaker 1: whether or not they should believe this story about this
Speaker 1: brand new technology that's going to change the world, or
Speaker 1: if it's actually just a Ponzi scheme. Like there seems
Speaker 1: to be attention there within the minds of regulators. This
Speaker 1: is the the probably mythical story about what Alan Greenspan
Speaker 1: told FED governed, the late FED governor, the late and
Speaker 1: Ed Gramleck in the early two thousands when Graham Lick
Speaker 1: said you need to do something about subcrime, and green
Speaker 1: Span is supposed to be said, there are lenders who
Speaker 1: want to lend, There are borrowers who want to borrow.
Speaker 1: All of them have their congressmen on speed dial. I'm
Speaker 1: going to get in the middle of them and tell
Speaker 1: them you can't do this deal and then get ground
Speaker 1: into absolute dust up on Capitol Hill. You know, I
Speaker 1: can't do that. I have to sit back and then
Speaker 1: try to clean up the mess afterwards, you know, and
Speaker 1: hope that I can that. That's definitely a piece of it.
Speaker 1: But also regulators are likely to be um grabbed by
Speaker 1: the same currents of thought that makes them think this
Speaker 1: is the next new big thing as anyone else you know,
Speaker 1: and are unlikely to get in the way. But if
Speaker 1: you do have regulators right cutting down on leverage, making
Speaker 1: leverage really difficult is I think a very important thing
Speaker 1: to do. And also it's nice to not be in
Speaker 1: the free money business, right that if someone running a
Speaker 1: Ponzi scheme has to show someone five of real profits
Speaker 1: every year, or actually pay out five percent on values
Speaker 1: every year. It's much harder to keep it going than
Speaker 1: if the treasury rate is zero and you don't have
Speaker 1: to pay out anything um every year, but just send
Speaker 1: them a statement saying their balance has grown. M I
Speaker 1: think the problem, on the other hand, is that raising
Speaker 1: interest rates puts a lot of real people out of work.
Speaker 1: I think there's really important or interesting about like this
Speaker 1: sort of dilemma of regulators. And it's like, you know,
Speaker 1: you hear this all the time with crypto. It's like like,
Speaker 1: don't don't tamp down on innovation, and it's really important
Speaker 1: there's gonna be some innovation coming. And I said, you
Speaker 1: sort of get that, you know, that sort of conflict
Speaker 1: among regulators, Like I don't want to be the regulator
Speaker 1: who like stamped on some innovation and then it flourishes
Speaker 1: elsewhere and makes finance more efficient. But this idea of like, well,
Speaker 1: just just take care of the leverage channel and then okay,
Speaker 1: do whatever you want, just hive it off, Like it
Speaker 1: seems like that is like a way to think about
Speaker 1: It's like, all right, do we want to like completely
Speaker 1: kill crypto because of it. I don't know, maybe maybe not,
Speaker 1: but maybe it's just the better way to think about
Speaker 1: it is just hive it off from any entity that
Speaker 1: could have like systemic leverage, like an f d C
Speaker 1: in shirt retail bank account, and a bunch of people
Speaker 1: pointing out that, you know, if you gamble on the
Speaker 1: stock market, there are actual companies you're gambling on that
Speaker 1: have actual profits, and that the SNP earnings yield is
Speaker 1: what four and a half percent? Now, you know, so
Speaker 1: there are four and a half cents coming into the
Speaker 1: system every year for each dollar that's in the system,
Speaker 1: as opposed to crypto, where nothing's coming in and where
Speaker 1: there are hopes for the future. It's that someday when
Speaker 1: someone actually finds a Web three use case, they're going
Speaker 1: to want to build their Web three use case on
Speaker 1: top of this particular blockchain coin that you happen to
Speaker 1: own today. And no one has ever explained to me
Speaker 1: why anyone in the future would ever who has a
Speaker 1: Web three use case would ever want to give away
Speaker 1: a lot of the value to today's holders of bitcoin
Speaker 1: of it, or if they're that's a great point. So
Speaker 1: just going back to some of our discussion UM at
Speaker 1: the intro, and it does feel to me like with Crypto,
Speaker 1: there was a sense of nihilism about it. And I'm
Speaker 1: sure some people are true believers. In fact, I know
Speaker 1: some people are because they yell at me on Twitter
Speaker 1: all the time whenever you know, I'm sure they're out there.
Speaker 1: But there is they're true believers rather than butts programmed
Speaker 1: by non true believers. Yes, that's a good point. I've
Speaker 1: probably just been been emotionally abused by a bunch of
Speaker 1: robots for the past three years. But anyway, UM, this
Speaker 1: lottery ticket idea, I wonder if you could talk about whether,
Speaker 1: and you know, this is kind of what your your
Speaker 1: new book is all about, slouching towards utopia. This idea
Speaker 1: that even though we've had a great improvement in human
Speaker 1: well being and lifestyle, that a lot of people still
Speaker 1: feel like they're being left behind or they feel poor
Speaker 1: relative to other people. So in that environment, in an
Speaker 1: environment where you're upset because it feels like you are
Speaker 1: not getting ahead compared to your neighbor or compared to
Speaker 1: a billionaire, to that lend itself to more opportunities for
Speaker 1: speculative manias to build um. It certainly seems to right.
Speaker 1: It certainly seems to situations in which people thinking they're
Speaker 1: not getting what they deserve while other people around them
Speaker 1: are getting much more than they deserve because they are
Speaker 1: managing to work the system in some way makes people
Speaker 1: think working the system somehow has got to be a
Speaker 1: successful strategy because look at all these other people who
Speaker 1: are managing to do it um and that makes people
Speaker 1: rather easy prey for a whole bunch of social engineering projects.
Speaker 1: I just have a one last question. Actually, once again,
Speaker 1: I sort of want to go back to the south
Speaker 1: Sea bubble. But this idea of copycats, this idea that okay,
Speaker 1: actually maybe there was some soundness to this idea of
Speaker 1: consolidating all this British debt and creating one fungible security
Speaker 1: that anyone can treat. It sounds pretty good, And of
Speaker 1: course copycats abound in crypto all over the place. What
Speaker 1: if those copy cans do, though, what were the other
Speaker 1: entities that saw the south Sea bubble and they say
Speaker 1: we want to get in on get in on this action.
Speaker 1: What were the sort of I don't know, bastardizations, distortions whatever.
Speaker 1: That's sort of like that they glommed onto or that
Speaker 1: they that that was their approach. As the sort of
Speaker 1: number of entities doing this sort of multiplied. Well, It's
Speaker 1: called the south Sea Bubble because bo the south Sea
Speaker 1: Company originally was supposed to be a trading company sending
Speaker 1: out ships to the South Seas, and I only switched
Speaker 1: to their you know, bank, to their British government debt
Speaker 1: business model later on. I don't want to say it's everything, um,
Speaker 1: I do want to say that in the south Sea
Speaker 1: Bubble it's a lot of commercial and colonization enterprises as
Speaker 1: rather than purely financial manipulation, although I'd say making the
Speaker 1: British government debt bungible and marketable is a little bit
Speaker 1: more than a financial manipulation. But yes, it's that the
Speaker 1: south Sea Company had a story, and once it becomes
Speaker 1: clear that stories attract money, then the returns to having
Speaker 1: a story are quite high, and lots of people will
Speaker 1: say I can make up a story too, Bred DeLong,
Speaker 1: Thank you so much for coming on been uh. I
Speaker 1: can't believe it's the first time we've had you, but
Speaker 1: definitely I hope to have you back at some point
Speaker 1: and everything should check out the book Welcome me back
Speaker 1: and keep doing what you're doing, because you've been an
Speaker 1: amazingly you've been actually killing it. We didn't just have
Speaker 1: you on to say that what we would have had
Speaker 1: we know this is a condition of coming out. We
Speaker 1: know you were gonna say that, would have had you
Speaker 1: on much earlier. But thank you so much. Plus plus,
Speaker 1: I hope the listeners to Odd Thoughts can push my
Speaker 1: book above all format sales. All right for the course
Speaker 1: of the next week. We could do this go out
Speaker 1: by Yeah, we can. We can make this happen, all right,
Speaker 1: take care of bread. Thank you very very much. Thanks Brad.
Speaker 1: That was great, Tracy. I love talking to Brad. I
Speaker 1: think probably my favorite part was all the great things
Speaker 1: he said about odd Lots. Yes, for real, I thought
Speaker 1: the leverage point was. I mean that stood out because
Speaker 1: I do think you know, a politician, I mean, you know,
Speaker 1: we could take Eric Adams as an example, the mayor
Speaker 1: of New York, because he said he was gonna he
Speaker 1: believed in crypto so much he was going to take
Speaker 1: a portion of his salary in cryptocurrencies. But like a regulator,
Speaker 1: a politician might not be the best placed person to
Speaker 1: decide whether a new industry is legitimate or not, and
Speaker 1: I think there can be a lot of confusion. And
Speaker 1: obviously regulators don't want to stamp out something new and
Speaker 1: innovative just because they're unfamiliar with it and they think
Speaker 1: it might be risky. At the same time, you would
Speaker 1: assume that they don't want to let speculative bubbles grow.
Speaker 1: And so it's really interesting to me this idea of
Speaker 1: having them focus on the leverage channel instead, So don't
Speaker 1: crack down on the thing itself, but maybe try to
Speaker 1: police the credit aspect of it, the leverage that's allowing
Speaker 1: it to grow unreasonably quickly. Yeah, the linkages between these
Speaker 1: entities and the financial infrastructure that it's really important to protect.
Speaker 1: So right like that seems to me that they write,
Speaker 1: let it do what it's gonna do, but you know,
Speaker 1: make sure that city group is not providing major funding
Speaker 1: two ft X or whoever else. It seems like a
Speaker 1: very reasonable way to think about it, so that it's
Speaker 1: not about like that, because regulators aren't equipped to know
Speaker 1: what the technology of the future is, right, and there
Speaker 1: are some innovations that are going to come, and some
Speaker 1: innovations that might even involve a lot of money that
Speaker 1: may become extremely important. Maybe crypto is even gonna be
Speaker 1: among them. I don't know. But rather than having to
Speaker 1: make that decision, just like, well how do you hive
Speaker 1: it off? Right? And the other thing that stood out
Speaker 1: to me, and I know, you know, the podcast was
Speaker 1: sort of talking about parallels with historical financial bubbles, but
Speaker 1: I really think like a couple of things stood out
Speaker 1: about crypto, or stand out about crypto, And one is
Speaker 1: this idea of the story. So every bubble has a
Speaker 1: compelling story, but crypto and especially bitcoin didn't have just
Speaker 1: one compelling story. It had like I can't even count
Speaker 1: them all, probably dozens, and they're constantly changing, right, so
Speaker 1: you know it was going to change the financial system.
Speaker 1: It's gonna be an inflation head, a store of value,
Speaker 1: a payment mechanism, like all these things rolled up into one.
Speaker 1: And that narrative flexibility, I think is probably the thing
Speaker 1: that's kept a lot of crypto going for a long time.
Speaker 1: And now I should just mention the new narrative for bitcoin,
Speaker 1: of course, is that it isn't crypto. It's the polar
Speaker 1: opposite of all the coins and all the sketchy things
Speaker 1: and all of that. But then secondly, The other thing
Speaker 1: that stands out to me about crypto, and you know
Speaker 1: you asked this in your last question about copycats. Crypto
Speaker 1: is perfect for copycats, right because there's no limit on
Speaker 1: the amount of new digital tokens or assets that you
Speaker 1: can create. You don't even have to pretend to like
Speaker 1: put together some capital to go buy some tulip bulbs
Speaker 1: and grow them, or go buy a bunch of beanie babies.
Speaker 1: You just sort of like create them out of thin
Speaker 1: air and just put them into the ecosystem and hope
Speaker 1: that they attract inflows. Those two things, the narrative flexibility
Speaker 1: and the copycat potential, like that to me is probably
Speaker 1: what stood out about this whole that you literally, like
Speaker 1: you and I could literally copy and paste the big
Speaker 1: coin or ethereum source code and make the most minor tweaks,
Speaker 1: and some people have made a lot of money doing that.
Speaker 1: I mean, like I think light Coin, like that guy
Speaker 1: made a ton of money, and I was basically that
Speaker 1: like they took the bitcoin code and I think they
Speaker 1: changed the block time and that is probably like two
Speaker 1: numbers or something like that, and then that was a
Speaker 1: new coin that was created. You know. The other thing
Speaker 1: that I thought was really interesting and again like sort
Speaker 1: of spooky parallels with FTX specifically, is this idea of
Speaker 1: like the politics and what a he was talking about
Speaker 1: the south Sea Company trying to become very influential politically
Speaker 1: but also to the point of like going after political competitors.
Speaker 1: And it really was. It was the end of October
Speaker 1: that SPF was in the news a lot for pushing
Speaker 1: these regulations that many in the sort of crypto defied
Speaker 1: community perceived as being harmful to them. So there really
Speaker 1: isn't much news sometimes. I mean, as you say, there's
Speaker 1: some very crypto Hesitan novelty. But it's one of some
Speaker 1: of these patterns. Man, boy, did they repeat? Yeah, like
Speaker 1: history doesn't necessarily repeat, but it definitely rhymes. It comes
Speaker 1: close to it, does it does. But I do think
Speaker 1: there are some idiosyncrasies that kind of like make this
Speaker 1: one inpecial and that just you know on this point too,
Speaker 1: And I totally feel this, which is the economists always
Speaker 1: everyone underestimates how long these things can go on. And
Speaker 1: then the longer you go on, you started questioning your
Speaker 1: own sanity because you're like, I mean totally and so
Speaker 1: you're like, oh, maybe there's something here I don't know,
Speaker 1: and so yeah, totally can I tell you, Like, I'm
Speaker 1: pretty sure I've written like two obituaries on crypto, probably career.
Speaker 1: You're probably one of them. There's yeah, there's like a
Speaker 1: bitcoin obituaries page where they where they list all of
Speaker 1: the failed so we we gotta go find it. But
Speaker 1: I do think that's another thing that like confused a
Speaker 1: lot of people this time around. It's just like, you know,
Speaker 1: you have something that people were calling a Ponzi scheme
Speaker 1: as early as and it just keeps going and you're like,
Speaker 1: am I the crazy one here? Like are all the
Speaker 1: bots yelling at me on the internet? Are they right? Like?
Speaker 1: It's the cool anyway. I do think talking about other
Speaker 1: historical bubbles and sort of pulling out what's similar and
Speaker 1: what's different. I find that very helpful and cathartic. Well,
Speaker 1: you know, we don't we're not like trading like you know,
Speaker 1: it's thankfully we're not money managers whose job is to
Speaker 1: tell clients. But I do think in the way everyone
Speaker 1: does feel like they had to take on crypto specifically,
Speaker 1: they had to take a side, right or a lot
Speaker 1: of people felt that pressure to sort of like cast
Speaker 1: their lot on one side of the other. And if
Speaker 1: you had this view for many years, like, I don't
Speaker 1: really see how this sustainable. I don't see how defies
Speaker 1: actually find as whatever, Like you can go a long
Speaker 1: time and look really dumb and suffer for it even
Speaker 1: if you hadn't like made a literal money. Bet Oh, totally.
Speaker 1: And it also goes back to the momentum idea, right, like,
Speaker 1: sometimes the way to make money and to make alpha
Speaker 1: is to jump on the thing that is getting a
Speaker 1: lot of interest and a lot of inflows. And even
Speaker 1: if you think it's stupid, you just kind of ride
Speaker 1: with it and hope you can get out before everyone else.
Speaker 1: But again, as Brad pointed out, this has been a
Speaker 1: sort of defining feature of bubbles through about history. Shall
Speaker 1: we leave it there? Let's leave it there, all right?
Speaker 1: This has been another episode of the All Thoughts podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Isn't Though. You can follow
Speaker 1: me on Twitter at the Stalwart. Follow our guest Bred DeLong.
Speaker 1: He's at DeLong on Twitter, and check out his book
Speaker 1: Slouching towards Utopia. Follow our producer Carmen Rodriguez at Carmen
Speaker 1: armand and check out all of the podcasts at Bloomberg
Speaker 1: unto the handle at podcasts and for more Odd Lots content,
Speaker 1: go to Bloomberg dot com slash odd Blogged, where we
Speaker 1: post episode transcripts Tracy and I plug and we even
Speaker 1: write a weekly newsletter on these topics that you should subscribe.
Speaker 1: Thanks for listening to it. E