Suspected 5th Columnist Streetwise Professor Knocks Blockchain… But Defends Elites

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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 whothe 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.

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  1. vlade

    I disagree on the first bit. Even at this blog, Yves mentiones not quite rarely the dangers of tight coupling. The central exchanges create exactly that.

    Yes, the FU option of OTC is dangerous. But then, everything is dangerous, and if I have to choose between tight coupling dangerous option and loose coupling one, I’ll chose the lose coupling one.

    The problem is that the regulators refused to recognise that the institutions gamed the regulations – moving stuff from trading to banking books. It is recognised now, under the new regulation, although I still have some doubts about its effectivness.

    To me all the para says is: markets demand services, and CCP don’t offer them – and don’t have to. Regulators demand services (to be offered by CCP), and CCP deliver.

    And sorry, I also disagree with your “markets participants demand”. The text says “services […] are demanded [by potential clients and by regulators]”. I can’t honestly see what’s the problem with that. Of course, regulatory demand, and a client demand are two different things – the former you ignore at your peril, the second you can ignore to your heart’s content.

    But markets (or, I’d say agents that want to purchase – or sell) _always_ demand something, and always offer something – otherwise there would not be any market or exchange of services (it doesn’t have to be there even with offer and demand, but in the absence of one it definitely won’t be there).

    You could happily change the word to “require” “want” etc. and the meaning of the para would remain unchanged.

    1. Clive Post author

      The problem I had with the notion that OTC reduces tight coupling is that it gives the appearance of reducing tight couple but doesn’t actually do this. While “the market” is functioning within its expected parameters, OTC is less tightly coupled than an Exchange. But as we saw first-hand in the GFC, those markets function, right up until the point where they don’t. By continuing to function, or certainly giving the appearances of continuing to be functioning, they hide the stresses which are building up within them but no-one can see. Unless you are deeply plumbed in to the day-to-day operational activities of the OTC market and can spot signs — and that’s all they are, signs, you don’t get to take a view of the whole edifice — you simply don’t have a clue. There were, at most, only a couple of dozen people in the organisation itself and outside it who knew that my TBTF was a day away from being unable to open for business. That was entirely down to information asymmetry and that asymmetry was 100% down to OTC prevalence.

      And all the while TBTF isn’t fixed, then as soon as the OTC market(s) fall off a cliff, the public provision backstops can be forced to kick in. Yes, everything is dangerous. I don’t mind people doing dangerous things. But I do mind an awful lot being asked to pick up the pieces when their dangerous things blow up in their faces and they expect me to sort the mess out. If that is the dynamic, and to me, it most definitely is, then I want the actors who are engaged in the dangerous things to be highly visible, I want them right where I can see them. Not hiding their high-risk activities in an OTC venue that I’m not privy to.

      And I stick by my objection to the — what I can’t see how it isn’t being deliberate — fuzziness or obfuscation about who gets to “demand” and who is merely allowed “invite” parties to a transaction to either perform or not perform of their own volition. This isn’t an incidental semantic about vocabulary. It goes to the heart of what’s wrong with the Streetwise Professor’s assessment of innovation.

      Innovation must never be viewed only through separate, disconnected lenses of “technology”, “politics”, “ethics”, “economics”, “power relationships” and “morality”. Each specific innovation is subject to and either lives or dies by the interplay between these forces. My biggest lambaste of the Streetwise Professor’s commentaries is that he examines them only in terms of “technology” and “economics”. In doing so, he reaches partial and inaccurate conclusions.

      A 10 year old child might “demand”, “require”, “ask for”, “insist”, “claim a right to have” (use whatever word or phrase you like there) a gun and live ammunition. But they are not, and should not be, permitted to enter into a transaction to obtain the said gun and ammo based only on the availability of the technology and the economics that would allow them to satisfy the seller’s market clearing sale price if they saved their pocket money for a sufficient amount of time. The other forces I listed in my above paragraph are also involved, and just as well.

      1. Ulysses

        “Innovation must never be viewed only through separate, disconnected lenses of “technology”, “politics”, “ethics”, “economics”, “power relationships” and “morality”. Each specific innovation is subject to and either lives or dies by the interplay between these forces.”

        Very well said. I would argue further that “power relationships” structure how all the other lenses actually operate. In the early sixteenth century the power relationship between the Church, and Martin Luther, was such that the latter had an opening to redefine “morality”– in such a way that the Pope’s moral opinion was eventually no longer dispositive for Protestants.

        In other words, the French invasion of Italy, late in the fifteenth century, weakened the papal states enough to allow for defiance.

        1. Ulysses

          That last sentence, is of course a gross over-simplification! Anyone wishing to know the nitty-gritty details of how foreign domination over the Italian peninsula was established by the middle of the sixteenth century should read Machiavelli and Guicciardini.

          The latter author’s appeal to skepticism, when interpreting the actions and motivations of powerful people, rings very true five centuries later:

          ” perché di accidenti tanto memorabili si intendino i consigli e i fondamenti; i quali spesso sono occulti, e divulgati il più delle volte in modo molto lontano da quell che è vero.”

          (Storia d’Italia, XVI, vi)

      2. animalogic

        “Yes, everything is dangerous. I don’t mind people doing dangerous things. But I do mind an awful lot being asked to pick up the pieces when their dangerous things blow up in their faces”.
        I agree — however, “I don’t mind people doing dangerous things” should require a little elucidation. What you likely meant to say was you don’t mind people doing dangerous things, WITHIN REASON.
        And let’s face it, much of the prior GFC behaviour was unreasonably dangerous. As it turned out, not that dangerous to its perpetrators….
        Danger, like risk, is a cost-benefit calculation. When that calculation ONLY includes benefits for its originator & suppresses any (real & calculatable) cost for the community it’s already looking suspiciously like an unreasonable danger….

    2. Uahsenaa

      The problem is that the regulators refused to recognise that the institutions gamed the regulations – moving stuff from trading to banking books. It is recognised now, under the new regulation, although I still have some doubts about its effectivness.

      Also, there is the rank unwillingness on the part of regulators to, you know, actually do their jobs. I can no longer count the number of times Yellen has sat in front of the Senate banking committee like a deer in headlights as Warren tries to get her to give anything like a straight answer as to why, to this day, many if not most TBTFs have no rapid selloff/solvency plan (which is required by the Dodd-Frank law) or why those banks that fail their stress tests (again and again) suffer no consequences as a result.

      How is any of this supposed to work when so many are clearly acting in bad faith?

  2. bmeisen

    Bravo bravo encore encore! Especially the characterization of Sorkin and the account of the crisis at the start of exhibit B. Clive for President!

  3. Synoia

    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.

    If you do not subscribe to the “cult mentality,” although I’d prefer to call it a dogma, because it is a unswerving belief in an unproven fact in the face of evidence the fact is not only unproven, but wrong, one is “not a team player” and then penalized.

    If these libertarian want “open markets” and innovation they have to shed the human response to proof. In their behavior they are no better than the medieval pope, and his court, who did not want to believe a the earth travels around the sun.

    1. WJ

      Medieval popes were probably more open to Pythagorean/Copernican cosmologies than early 17th century Jesuits (i.e. Bellarmine); the opposition of the latter to Galileo had nothing to do with science and everything to do with Protestantism and Protestant biblical interpretation. Bellarmine was wrong and what happened to Galileo was shameful. But many of the best astronomers of the time were in fact Jesuits, and the traditional way the story is told is inaccurate on almost every level (and a product of late 19th century Italian nationalism).

  4. susan the other

    this was very interesting stuff. Since a lot of things were coming together in the 90s and 2000s that were all connected in a mess too big to understand simply as immoral banking (freeing up capital like that was crazy but there must have been a reason to try it besides windfall profiteering and flat-out gambling), I imagine the following: Greenspan and the TBTFs knew returns were diminishing and set out to do something about it. Because growth and expanding markets were the only thing that could keep up with a demand by pension funds (and then little Bush’s idiotic war) for a minimum 8% return. But growth was slowing down so the situation required clever manipulations and incomprehensible things like financial derivatives. Makes sense to me. And if this is even partially true then there was a political mandate all mixed up with the GFC. The banks really did crazy stuff, but with the blessing of the Fed. Later when Bernanke said about QE and nirp: “now we are in uncharted territory” he was fibbing – the Fed had been in uncharted territory, trying to make things work, for almost 20 years. And failing.

    1. madame de farge

      Excellent points, I thought that the Bush Wars were initiated to alleviate an oncoming recession as well as ensure W’s reelection…

      It did take them a while to get the pieces in place, the Banksters Real Estate Fraud Appraisals were identified as early as 2000, then the Banksters Fraudulent Loans peaked in 2006, and then we had the Banksters Fraudulent Reps and Warranties….

      WORSE then a bunch of Used Car Salesman, but what else would you expect from people who KEEP the State Income taxes withheld from their employees checks…

  5. OpenThePodBayDoorsHAL

    Our team started in 2013 on blockchain because we suspected there might be something there, our conclusion is that there is, but in the distant future.
    We concluded that blockchain will be really cool if they can just solve a few things: architecture, governance, security, legal, regulatory, compliance, tax, liquidity, and price discovery. Other than that it’s great.
    Start with “indorsement” because legal ownership of an asset relies on this concept, ownership of that pile of wheat is legally represented by this piece of paper (or this entry on a distributed ledger). Not solved for blockchain “assets”, nowhere close, and it won’t be until a series of men in black robes with wooden hammers have had their say. In multiple countries. Right now one judge in the US says Bitcoin is “property”, another has said it’s “money”, Stanford law is convinced it’s a “security” because it satisfies all four of the “Howey” tests.

    Then there’s IT security. These “innovations” all rely on one algorithm or another, I asked our Head of Security (8 patents in cybersecurity in financial services, 7 pending) what it takes before a new algorithm is considered “safe” for commercial use. He said it must be pounded on by the best academics in places like Tel Aviv University and MIT to see if there are flaws. I asked “how long does that take” and he said “minimum of ten years, 15 is better”. Only one major distributed ledger company (Hyperledger) took this to heart and used the Practical Byzantine Fault Tolerant (PBFT) algo, the rest rely on the concoctions of amateur “cryptographers”.

    The second part of good cryptography is using very random numbers, if a hacker can guess your number then your asset goes “poof”. Random number generators (RNGs) fail all the time, the one in Google Android died about two years ago (also the Tel Aviv guys are required). Random numbers from proven algos generated in dedicated, tamper-proof boxes locked in cages at data centers are OK. Generate a good one one and use it safely on your desktop or (LOL) your phone? Unlikely. Remember that someone cracking it does not just get access to your email or your bank login (and must then defeat bank fraud checks), they get the actual funds. The best way we arrived at to generate numbers with good “entropy” (randomness) was to roll dice 100 times in a shoebox, really far from being practical.

    Next thing is a blockchain “asset” or ledger entry versus “smart contracts” that describe a multi-step transaction (derivative trade, cotton futures contract, insurance policy, etc.) “Assets” have a fairly binary set of conditions (you own it or you don’t) but as soon as you use a “Turing complete” computer language to describe a complex transaction you multiply the attack surface area 100X, it becomes a hacker’s paradise as the recent Ethereum theft shows. Actually it wasn’t a theft at all, the hacker just used the tools provided and executed a perfectly OK transaction that worked as advertised and he slipped away with a cool $30M.

    I won’t go into “compliance” because the identity and AML failures are too numerous to name. You can’t get there from here.

    So in conclusion, Yves is right: blockchain is just another term for “litigation futures”. Our kids will probably use them in their everyday lives but that’s 3 or 5 or 20 years away. IMO.

    1. Lambert Strether

      > “how long does that take” and he said “minimum of ten years, 15 is better”

      Via Extra, Extra – Read All About It: Nearly All Binary Searches and Mergesorts are Broken Google Research, 2006:

      This bug can manifest itself for arrays whose length (in elements) is 230 or greater (roughly a billion elements). This was inconceivable back in the ’80s, when Programming Pearls was written, but it is common these days at Google and other places. In Programming Pearls, Bentley says “While the first binary search was published in 1946, the first binary search that works correctly for all values of n did not appear until 1962.” The truth is, very few correct versions have ever been published, at least in mainstream programming languages.

      Sorting is, or ought to be, basic blocking and tackling. Very smart, not corrupt people worked on this. And yet, 2006 – 1946 = 60 years later, bugs are still being discovered.

      The nice thing about putting your cash in a coffee can in the back yard is that it won’t evaporate because some hacker gets clever about big numbers.

  6. flora

    Ah, the neo-liberals and the libertarians make their arguments by redefining terms and eliding facts. Once the audience agrees that up is down, why then their arguments are reasonable, dispassionate, and offered in dulcet tones of humble sincerity and objectivity.

    What a pleasure, then, to read your cold water smack-down of their confidence game. Perhaps they believed their own nonsense. Who knows.

    1. flora

      What is the Streetwise Professor’s (note the word “professor”) real view? Has he thought much about it or simply imbibed his “owners’” views, making him a useful tool. I don’t know.

      From the book “Listen, Liberal.”

      “A third consequence of modern-day liberals’ unquestioning, reflexive respect for expertise is their blindness to predatory behavior if it comes cloaked in the signifiers of professionalism. Take the sort of complexity we saw in the financial instruments that drove the last financial crisis. For old-school regulators, I am told, undue financial complexity was an indication of likely fraud. But for the liberal class, it is the opposite: an indicator of sophistication. Complexity is admirable in its own right. The difference in interpretation carries enormous consequences: Did Wall Street commit epic fraud, or are they highly advanced professionals who fell victim to epic misfortune? …modern day liberals pretty much insist on the later view…. Wall Street’s veneer of professionalism is further buttressed by its technical jargon, which…the financial industry uses to protect itself from the scrutiny of the public.”
      -Thomas Frank

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