Earning your living in finance or the related co-dependent fields such as economics, business management, certain areas of law and, most especially, information technology, you quickly pick up on the cult mentality that pervades it.
When, like so many of us, you’re desperate to try to cling onto some semblance of middle class status, you’re an easy and, although I’d strongly qualify this statement, understandable, target for buying into the group-think. Or at least going along with it on the promise of continued employment. While I’m letting myself off the hook in the process, I think that’s forgivable. I and others like me need the money. Besides, in our spare time, we might try to atone for our misdeeds by using whatever means we have available, such as contributing to Naked Capitalism in whatever way we can, to try to set the record straight.
Not quite so easily forgivable, though, are the members of an altogether different cadre who don’t give the impression of having to live paycheck to paycheck. What is it that motivates them? Why do they willingly devise clever — and, I have to say it, some are exceptionally adept — ruses to defend and further the causes of our élites?
We have a line that stretches round the block of those in the credentialed classes who, even while they happily critique individual technology or design failings in one example of financial innovation, seemingly can’t help but to cling on to the toxic notion that the concept of financial innovation can never fail to be a good thing. Take, for example, blogger Mike Hearn, who did a grand job of itemising Bitcoin’s manifest shortcomings, in his (now infamous amongst finance technology industry watchers) diatribe, only to betray his underlying Silicon Valley allegiances by concluding:
“Bitcoin has no future whilst it’s controlled by fewer than 10 people. And there’s no solution in sight for this problem: nobody even has any suggestions. For a community that has always worried about the block chain being taken over by an oppressive government, it is a rich irony.
Still, all is not yet lost. Despite everything that has happened, in the past few weeks more members of the community have started picking things up from where I am putting them down. Where making an alternative to Core was once seen as renegade, there are now two more forks vying for attention (Bitcoin Classic and Bitcoin Unlimited). So far they’ve hit the same problems as XT but it’s possible a fresh set of faces could find a way to make progress.
There are many talented and energetic people working in the Bitcoin space, and in the past five years I’ve had the pleasure of getting to know many of them. Their entrepreneurial spirit and alternative perspectives on money, economics and politics were fascinating to experience, and despite how it’s all gone down I don’t regret my time with the project.”
I’ve added my emphasis to the most troubling parts of Mike’s worldview. At the top, we have classic libertarian codswallop, tapping into a Regan-esque framing of incompetent, overbearing big state fears. Then we get a thinly-disguised unicorn sighting, purporting to be the solution. Namely, “talented people” demonstrating “entrepreneurial spirit”, apparently freeing us from the ever-present constraints of conventional money.
It’s a very seductive fiction. And an unpleasant one, too. What, exactly, are the self-appointed “community” who are so sufficiently “worried” about a central authority that they came up with Bitcoin and Blockchain? Who are the “talented and energetic people” who will deliver the future for us, based on those “alternative perspectives”?
I’ll put you out of your misery — they are certainly not going to be you. More probably, they’ll be like Mike, they’re former Google employees or similar. It’s an appeal to technocracy, pure and simple. But wearing a populist disguise.
Mike Hearne unfortunately isn’t alone. I came across similar leanings while reading blogger the Streetwise Professor. Being a professional élite explainer and apologist is I think a spectrum disorder. At one end are hopelessly incurable sufferers like the Wall Street Journal’s Greg Ip. I can’t decide if Andrew Ross Sorkin is better or worse than Greg, but he’s also at that end of the curve. Then you get the likes of Matt Levine who, just when you think he’s on his way to becoming a reformed character, suffers a major relapse and, in terms of journalism’s propping up of our new corporate aristocracy, is back in the gutter drinking methanol from a plastic bottle.
But where to place the Streetwise Professor? Based on his recent Blockchain and Deutsche Bank articles, I would caution readers to consider putting at the same end as proven fifth columnists like Greg Ip and Andrew Ross Sorkin.
Why such harshness? Because with outlets like CNBC, the New York Times and the Wall Street Journal, readers or viewers automatically get a health-warning about what’s lurking between the pages or determinedly trying to make TV live up to its “idiot’s lantern” moniker. They, to be fair, never claim to be anything other than they are: mouthpieces for rich, powerful, embedded vested interests. They are bought and paid for by the élites and if I’m sufficiently gullible to hand over my $2.50 at the newsstand for the New York Times, I’ve only myself to blame for finding that I have trouble suppressing my gag reflex.
But if I take outlets which trade on their liberal brand equity at face value (the New York Review of Books is one example) but then discover that what’s contained in their articles is — even through rose-tinted spectacles — a neoliberal outlook, their dishonesty makes them more serious offenders. And if you can tear yourself away from succumbing to nostalgia, journals like New York Review of Books start to look nothing more than mere élite propaganda. Here at Naked Capitalism, we have rebuked them for this in the recent past.
Whether or not the Streetwise Professor is clandestinely peddling our new corporate overlords’ propaganda to intentionally further his own agenda, or is merely just plain-vanilla variety wrong, I’ll let readers decide. Let me present my evidence.
Exhibit A — Dissing Blockchain While Repeating Failed “Free-market” Economy Theories
There’s quite a lot to like in the Streetwise Professor’s critique of Blockchain and the naïve Blockchain boosters. Like a moth to a flame, I was drawn into this piece but by the time I realised it was defending discredited notions of so-called free-market economics — where “markets” are “free” for some participants but someone else i.e. the rest of us are imprisoned in the “economy” which they create — I’d got my proboscis singed.
The most serious offence in the Blockchain piece is defending Over the Counter (OTC):
In contrast, there is more play in traditional bilateral contracting. It is not nearly so tightly coupled. One party not making a margin call at the precise time does not threaten to bring down the entire system. Furthermore, in the bilateral world, the “FU Option” is often quite systemically stabilizing. During the lead up to the crisis, arguments over marks could stretch on for days and sometimes weeks, giving some breathing room to stump up the cash to meet margin calls, and to negotiate down the size of the calls.
One of the biggest problems in the Global Financial Crisis was the lack of a price discovery mechanism on illiquid assets and the subsequent inability for the Too Big to Fails (TBTFs) to be forced to recognise losses. But according to the Streetwise Professor’s logic, that’s a great feature, not a bug. Because assets which are only traded on an OTC-basis can be permitted to have a held-to-maturity valuation, they reduce tight coupling and thus promote systemic stability.
Well, that they may do. But by permitting mark-to-make-believe valuations, they permit the far worse behaviour whereby TBTFs can lie their way out of their insolvency. OTC trading is a gateway drug to Extend and Pretend. It, alongside regulatory indulgences, is among the most useful enablers of Too Big to Fail.
Who, exactly, were participating in those “arguments over marks” which “could stretch on for days and sometimes weeks,” and [gave] “some breathing room to stump up the cash to meet margin calls, and to negotiate down the size of the calls.” ? I’ll tell you exactly who — the TBTFs and their regulators, the governments which suddenly found out that their implicit support had turned into real, actual, support and taxpayers left as the last party standing when the banks’ games of risk pass-the-parcel ran out of people to pass it to.
When my TBTF finally collapsed it had for several weeks — just like the Streetwise Professor enthusiastically promotes — relied on illiquidity in the OTC market for the toxic stew of fixed interest assets on their balance sheet. Because the central bank could not find irrefutable evidence that these assets’ values were significantly impaired — they weren’t traded on an exchange so you couldn’t pick up, say, the Financial Times and read what they were worth — the TBTF was able to wind itself into a tighter and tighter death spiral. It was only when the central bank could make a reasonable case that some assets such as synthetic CDOs might be worth absolutely nothing whatsoever that the TBTF could be made — and took the full force of legal process to make them do it — to open its books and let the central bank see the true extent of the horror show its balance sheet had become.
The weeks and months this had been allowed to drag on for turned a bad but manageable problem into an overnight crisis. Literally, the TBTF had run out of money. It had no credible collateral to present to the central bank to be allowed to obtain cash — notes and coins — for its daily cash management operations. How did the TBTF go bankrupt? Gradually, then suddenly all at once. OTC trading and the — as the Streetwise Professor so delightfully put it — “FU Option” allowed that to happen.
There’s another piece of sleight-of-hand with the Streetwise Professor’s contextual skewing. When he says “Furthermore, in the bilateral world, the “FU Option” is often quite systemically stabilizing…” this is narrowly true. The seller doesn’t have to sell and the buyer doesn’t have to buy in an OTC transaction. No-one other than the buyer and seller know what has happened or is happening. But all transactions are not created equally. Some have a lot bigger implications than others. Only an economist can so easily fall into that kind of lazy, simplistic just-look-at-the-theory conclusion.
As readers with not-so-long memories will recall, in the run-up to the Global Financial Crisis, the TBTFs did indeed exercise the “FU Option“. As asset prices for the securities they held fell precipitously, they held more and more of those assets on their balance sheets, refusing to — or unable to — off-load them into a market that was shunning them. Eventually their capital cushions were so depleted because of this, they became insolvent. Staring catastrophe in the face, governments were put into a double-bind by the TBTFs: Rescue us through bail-outs or stand by and see our societies suffer major collateral damage (bank runs, a collapse of world trade, ruining of perfectly good and solvent businesses with the likelihood of mass unemployment and civil unrest).
In that situation, who was the “U” who was being “F“‘ed? It was governments and the public.
Faced with an asymmetry of power, in a reverse of the scenario painted by the Streetwise Professor for OTC trading (where a notional seller tells a theoretical buyer they can go to Hell if they don’t want to pay the price the seller is asking), governments — and us — found themselves on the buy-side of an “FU Option“. “F the-rest-of-us By Necessity” was a better description as we were turned into forced buyers of what no other “market participant” would touch.
My dear Professor, allow me to give you, if I may risk the label of being impudent, a lesson. If I am selling my prize Diana, Princess of Wales tea cups in a yard sale and you make me a offer for them, that — I’m sure we’d agree on this point — is an OTC transaction. There’s no exchange (mercifully) for Diana, Princess of Wales tea cups. I put a price sticker on them. If you want them, you pay the price I’m asking. Or else, you make me a different offer. If you don’t pay the price I want, or I don’t accept the price you’re offering, we do, indeed, have a genuine “FU Option” scenario. But if instead my mother-in-law threatens to saw your face off with her cheese grater if you don’t buy my Diana, Princess of Wales tea cups at the price shown on the sticker, then we no longer have an OTC transaction. We have extortion. See the difference?
That’s not all. The piece discusses the differences between a proposed smart-contract based settlement compared with a centralised counterparty which brings up some very valid points. But then it makes a serious blunder which is introduced with some subtly but is all the more dangerous because of it. I’ll highlight the problem:
So the proposal does some of the same things as a CCP, but not all of them, and in fact omits the most important bits that make central clearing central clearing. To the extent that these other CCP services add value–or regulation compels market participants to utilize a CCP that offers these services–market participants will choose to use a CCP, rather than this service. It is not a perfect substitute for central clearing, and will not disintermediate central clearing in cases where the services it does not offer and the functions it does not perform are demanded by market participants, or by regulators.
Did you catch what is the most troubling thing in that paragraph? The technicalities of it are fine, but the bigger framing is perilous. “Market participants” is given agency. And put on the same level as actions taken by regulators. This is at best unintentionally misleading and at worse an entirely deliberate falsehood.
The fallacious thinking which caused it is due to a traditional economist’s mind-set. But this mind-set is hopelessly wrong and every time we encounter it, we must challenge it. Regardless of what other progressive goodies it is being bundled up with.
“Markets” do not “demand” anything.
A regulator or central bank can demand that a bank hold more capital and open its books to check the underlying asset quality. The CFPB can demand that Wells Fargo stops opening fake accounts. Even I can demand a pony. The power structures, laws, enforcement and levels of trust (to name the main constraints) governing who is demanding what from whom determine how likely they will be to have their demands met.
But a “market” can — at the very most, through the use of pricing signals — induce actors to consider entering into a transaction. The pricing signal cannot make any potential actor participate in that transaction. Not, probably, that it would have helped her much, but Hillary Clinton could have created a market for left-wing bloggers to shill for Obamacare by offering Lambert $1million to start churning out pro-ACA posts on his blog. But that market which Hillary could create could not “demand” Lambert accept her offer. Lambert would not take that, or any other monetary amount, and would never enter such a transaction. Markets have limits.
Whether unintentionally or by design, we have a nice example of bait and switch in the Streetwise Professor’s Blockchain article. If you run a critique of Blockchain, you’ll likely attract an anti-libertarian audience. It’s a classic example of nudge theory. If you can lure readers in with the promise of taking a swipe at disruptive innovation nonsense but then lead them to being suckered into a reinforcement of failed conventional free-market hogwash, that can be a powerful propaganda tool.
But perhaps the Blockchain feature was an aberration, just a one-off? No.
Take, for example, this feature on Deutsche Bank from earlier this month which I’ll enter as Exhibit B — It’s not the TBTFs Fault, the Regulators / Governments / Some Guy / Made Us Do It
I’ll leave the worst ’til last, but for now let’s start with this little treasure:
… the pre-crisis political bargain was that banks would facilitate income redistribution policy by provide credit to low income individuals. This seeded the crisis (though like any complex event, there were myriad other contributing causal factors), the political aftershocks of which are being felt to this day. Banking became a pariah industry, as the very large legal settlements extracted by governments indicate.
No, Streetwise Professor, banks did not provide credit to low income individuals as part of some “political bargain”. They provided credit to low income customers because it was insanely profitable. The reason it was insanely profitable was that the loans to the low income customers could be securitised and the commissions the banks earned on the sale of those securities paid for massive bonus pools which directly benefitted bank employees.
Almost unimaginable wealth could be generated by individuals (the Naked Capitalism archive details the full sordid story of the likes of Magnetar). The fact that this would all blow up eventually was certainly predicable and even known by many actors in the prevailing milieu but they didn’t care. They knew they’d have already set themselves up for life financially even after just a few years in that “game”. Politics, for once, had nothing to do with it, save perhaps that regulators, which are the politicians’ responsibility, should have been better able to spot what was going on.
But the Streetwise Professor is only just getting started with the counterfactual misinformation:
It is definitely desirable to have mechanisms to hold financial malfeasors accountable, but the Deutsche episode illustrates several difficulties. The first is that even the biggest entities can be judgment proof, and imposing judgments on them can have disastrous economic externalities. Another is that there is a considerable degree of arbitrariness in the process, and the results of the process. There is little due process here, and the risks and costs of litigation mean that the outcome of attempts to hold bankers accountable is the result of a negotiation between the state and large financial institutions that is carried out in a highly politicized environment in which emotions and narratives are likely to trump facts. There is room for serious doubt about the quality of justice that results from this process.
A casual skim could leave the reader with the impression that the Streetwise Professor is lamenting, rightly, the persistency of the TBTF model. But there’s something really dastardly being concocted here — the notion that in our societies, the rule of law is always and inevitably fallible and not fit for the purpose of bringing errant TBTFs to justice. And that, if a case is brought against a TBTF like Deutsche, then it can’t help but become a political football.
Yes, I’d always be the first to agree with the proverb “In Heaven you get justice, here on Earth we have the law”. The law and our legal systems are not perfect. But they are not that shabby either. Any quick parse through the judgements which the U.S. Supreme Court, the U.K. Supreme Court or the European Court of Justice (to name only a few) hand down on complex cases — often running to hundreds or even a thousand pages — demonstrates that courts can and do consider fairly and justly the evidence that prosecutors present and make balanced rulings. And banks can utilise the same legal safeguards that the law provides — they’re not likely to be short of good legal advice options. Trying, as the Steetwise Professor does, to claim that the TBTFs can’t get justice is an insult to our judicial systems and acceptance of this notion followed by any routine repetition serves to undermine faith in the rule of law.
If it is regulatory interventions, rather than criminal indictments, that the Streetwise Professor is referring to, the banks can and do leave no political stone unturned in their efforts to water down, delay and neuter regulatory bodies. Look, if you can do so without wincing, at what has happened to the SEC.
It wasn’t a “pre-crisis political bargain” that caused the Global Financial Crisis. It was financial innovation that was supposed to “free” the financial services industry to allow it to soar to ever greater heights, heights that couldn’t be reached with cumbersome “legacy” thinking. If that sounds a lot like Mike Hearn’s Blockchain justifications, it’s because it is exactly the same thing.
In summary, when you throw brickbats at a fellow blogger, it seems to me that you have a moral obligation to put your cards on the table, to explain your motivations. I don’t have to write for a living (“just as well”, I hear forbearing readers shout back). I don’t take a penny from Naked Capitalism’s hard-wrung fundraisers, although Yves has generously offered a very modest stipend in line with other contributors, I cannot conscientiously take anything for what I submit. I write in the hope that I have some small insights that would help to undo some of the damage which big finance has done to our cultures, our shared values and our aspirations for what we hope the future will be for us and others.
That’s what motivates me, anyway. After reading his output, I’m really still not at all sure what is motivating the Streetwise Professor. Certainly there is nothing at all to suggest that he is interested in rebuking or revising any of the traditional thought-forms which pass for the so-called science of economics. Conventional economic theory is the ultimate in betrayal of the use of rational methodology to provide air-cover for élite power grabs. It’ll take more than a refutation of Blockchain spin to convince me that the Streetwise Professor is ready to kick away the more odious ladders — like being a professional economist — that have given him the leg-ups to the lofty perch he enjoys occupying.