Odd Lots - Brad DeLong on the FTX Collapse and the South Sea Bubble

Episode Date: December 5, 2022

We're in the aftermath of an extraordinary bubble in cryptocurrencies and the collapse of FTX is a defining chapter of the industry's turmoil. But what does history tells us about the cycle of bubbles and busts? Which past manias are the most similar to what we've just seen? In this episode, we speak with Brad DeLong, an economic historian at the University of California at Berkeley, who is also the author of the new book, "Slouching Towards Utopia: An Economic History of the Twentieth Century." He explains how the FTX saga shares shocking similarities with the story of the South Sea Company, a British endeavor that was at the center of a massive mania of speculation in the early 1700s.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, you know, the specifics of the FTX saga, disaster collapse are still coming out. But one thing we do know is that, you know, there's nothing really that new about manias. There's nothing really knew about bubbles. There's nothing really new about sort of like wildcat shadow banks that implode and lose a lot of money. Like in a way, this story is as old as time. Well, I broadly agree with that. Like every speculative bubble is going to have some

similarities. But I feel like, I don't know, I feel like when it comes to crypto, there is something about it specifically that just feels like really, really trying to think of the right word, maybe cynical or nihilistic. Like, it's hard to tell how many true believers are out there versus people who are basically just gambling on digital tokens who want to get rich quickly. But I do feel like, and I wrote this after we recorded that episode with Sam Bankman Fried and Matt Levine where he described yield farming as, you know, the magic money box. But it feels like people kind of run two bubbles nowadays. And Lily Frankis talked to us about this as well, but she was saying people sort of. have this compressed timeline where they just see an opportunity to get rich quick and the idea is to

get out before everyone else. But as you say, there have been bubbles throughout history where people have tried to do the exact same thing. No, but I think you make a really good point and homing in on this idea of running two bubbles is sort of like this strategy that a lot of people employ. Like, I've always sort of had this theory and I don't know if it's really true because I've never looked at it empirically. So it's like a just for Twitter type of theory that, you know, it's like, I don't have to do. Do you have any other types of theories? Not really.

That was mean. Carmen, cut that. No, no, keep that in. Keep that in. People getting to hear the real back and forth between us. But, you know, just this idea of, like, in a period of economic precarity and so forth, if you don't feel like there's, like, tremendous, like, economic opportunities for you, then you have to run towards bubbles because maybe a bubble will come around.

Right. Two or three, four times in your life, maybe. and if you don't strike it rich on one of them, like when are you going to make it? Well, this is exactly it. If you don't see the possibility of getting rich or even, you know, reasonably comfortable in your day-to-day job, then why wouldn't you look at something like crypto as basically a lottery ticket, right? You could get lucky if you put enough money into this investment and if enough people do the same thing. So I think that's how a lot of people were viewing it, this sort of lottery ticket. You know, and there's another thing and you sort of touched on this.

which is that, you know, yes, okay, there's always bubbles throughout history. But some bubbles in particular, like really sell a vision of, like, changing the world. Right. So it's like cryptocurrencies are like beanie babies, as I think people say. But I don't even think that at the very peak of like the Beanie Baby mania, that anyone actually believe like they were going to change the world, right? As far as I know, as far as I know, I don't think. No, we're going to have the Beanie Baby-based economy and everyone is going to have their own Beanie Baby Wallet.

and we'll have financial independence and we won't have to go through, you know, middlemen like the banks. It'll be great. We'll just trade beanie babies with each other. Yeah, I think you're right. I think that's exactly what happened. But no, like, so, you know, some of these manias

and the dot-com one, of course, too, is like the world is going to change. And they were kind of right about that because the internet did change the world. But, you know, I do want to understand more about not only like the history of bubbles, not only what the FTX and crypto implosion is similar to, but like what history

he says also about this sort of like what I perceive is like this cat and mouse game that regulators play with different kinds of neobanks of sorts. I understand like neobank might meet something else, but I mean like new attempts to recreate the financial system and the endless sort of chase and sort of attempt to regulate them and the the hot money flows out of the regulated system. Totally. I think looking into the similarities and the differences with past bubbles is definitely something that we need to do. The other thing that I find striking about crypto, and I know there have been private money projects throughout history, but it does feel like crypto was almost like the apex of that effort. Like we are going to create a financial bubble out of pure like money that we

have created. I don't know. It feels like the financial like speculative mania kind of reached almost its purest form when it comes to crypto. Like, this is about making money with pretend money that we have created. Like, that's what it feels like to me. Yeah, we could go down to this rabbit hole, but like this idea of like the complete separation of a new financial system from the existing regulated legal financial system is like a fascinating angle. Anyway, you and I, we could chat for hours, but should we talk?

Should we bring in an action? Should we bring it again? Yeah, yeah, we should. Okay, so I'm very excited about our guests. We've never had him on the show before, I don't think, but we have been reading him forever for as long as like the financial or eco blogosphere and Twitter sphere has existed. One of the true originals, we're going to be speaking to Brad DeLong. He's a professor of economics at the University of California at Berkeley.

He's proudly been too online since 1995. And he is the author of a new book called Slouching Towards Utopia, an economic history of the 20th century. This is a true specialty economic history. So how does FTX and crypto fit into history? Brad, thank you so much for coming on the podcast. I can't believe it's taken us this long to have you on. Well, thank you very, very much for inviting me. Now, it's true that I actually have been in the same room when Joe with the past,

and I have actually spoken words out of my mouth that have caused vibration to the air that have gone into his ears. And he has talked back, although that was a decade ago. Yeah. But overwhelmingly, over the past three, well, five years or so, as long as odd lots been running, it's been very much a parasyal relationship in which I listen to Joe and Tracy and then I argue with them volubly in my shower until my wife tells them to shut up. And so it's great to be here, great to be here actually for reals here in the metaverse. We are definitely. We're glad to have you, Brad. We're definitely clipping that, Kerman, and putting that out as an audiogram on Twitter as soon as.

Is it possible? What is a... If there is still a Twitter. If there is still a Twitter by the time this episode comes out, which I hope. Brad, FTX, I say those letters to you. And as an economic historian, what comes to mind first? What are those words conjure up for you? First, it conjures up the South Sea bubble of the early 1700s.

You see, Great Britain had gone all in in its wars with France starting in 1689 and had issued many, many metric F tons of debt during it. It was a country of six million fighting a country of 20 million and winning, you know, and piling up debt issue after debt issue after debt issue. But all of them were on different terms. None of them were tradable. And along comes the South Sea Corporation with the idea that we are going to create a different form of money. We are going to buy up all of the British national debt. We are going to consolidate it. We are going to take all the different securities and mesh them together. And then we are going to sell equal identical shares of all of the consolidated debts.

And because we're selling one product, it's going to be tradable. It's going to be clear what it is because it's just a particular slice of the total debt. And the proprietors of the South Sea Company said, we're going to get fabulously rich here because we're going to create this enormous liquidity premium in the British national debt, which has not previously existed. And we're going to skim off a third of that liquidity value for us and our finances. And for you, Mr. Member of Parliament, if you will help grease our bills go through the House of Commons so we can actually do this. Enormous bubble followed by enormous crash.

You know, source of the Sir Isaac Newton, quote, I can calculate the motions of heavenly bodies, but I cannot calculate the madness of crowds. So talk to us a little bit more. What exactly is the parallel here other than the South Sea bubble involved creating a new type of money? Like, are there other ways in the way that the bubble built, in the way that people sort of marketed that idea to investors? Yes, indeed. Yes, indeed. That it's not just the original Bitcoin and Ethereum people saying we're going to have a whole. new form of money. It's also that you're getting in on the ground floor of what's going to be a truly

remarkable financial transformation. It's also going to be that we understand how to work the political system to make it work for us. And it's also a huge number of copycats with all kinds of things, some of which are public, some of which are not, some of which are promises that we will have a business model at some point in the future, some of which are totally blue sky and incapable of realization in less than a century. And some of them are ideas that actually worked out in the very long run, like the South Sea bubble company that wanted to send out an expedition to establish a trading post at the closest place where the Great Lakes meet the Mississippi River, where you just have to kind of drag a canoe across three miles. The Mississippi River turned out to

important. Yes. And, you know, where's the place where you drag a canoe across three miles to get from the Mississippi to the Great Lakes? You know what that's now called? Chicago. Oh. I should know that too. That was embarrassing on our part. But alas, 160 years too early for anyone to actually want to live in Chicago where the wind comes howling in from Lake Michigan and where I was last weekend, where it was 15 degrees. You know, going back to just the South Sea company, like buying up all of the non-fungible British debt and all of these different, like, sort of like random illiquid cusips and turning it into something that's liquid and fungible on every share. It seems like a pretty good idea. It is a very good idea. In the end, it was actually executed, but it was executed by the Bank of England and not

by the South Sea company, which is one reason why the Bank of England still has its very large financial temple on thread needle street, while there is no physical sign of the South Sea company anywhere in this fallen sublunary sphere. Brad, what was the trigger for the South Sea bubble actually collapsing? And are there any parallels there with what we're seeing now in crypto? It's very hard to tell what the trigger is. John Kenneth Galbraith used to say that there's this thing called the bezel, which is the money that the early adopters who have now sold out have known they've won, but the money that the

people, the greater fools, do not yet know that they have lost. It looks like the trigger was the South Sea Company actually attempting to flex its political muscles and get Parliament to push out some of its competitors, to rule that some of its competitors would in fact be illegal in order to concentrate demand for bubble-like assets in the shares of the South Sea Company, which were still trading on a when issued basis and wanting to push them up to the sky. But that that caused enough selling and enough loss of value elsewhere that people began to question the value of the South Sea company stock as well. And once people start saying maybe this isn't actually as good, maybe I am the greatest fool, then the thing is over.

Joe, I cannot tell you how many columns I have both written and read over my lifetime in finance that start with Galbraiths, the Bezzle. It's like the perfect analogy for so many things. It's a bit of a cliche, but it also is perfect. I'm also kind of struck by this politics point because there's, again, you know, thinking about parallels, A, is you had SBF who had attempted to become extremely influential within politics. And not only that, to your point, even, you know, this idea of politics of the idea of like pushing out others. And literally just like in the weeks before the FTX collapse, he was advocating for a certain type of defy regulation that many people in defy believe is targeting them. And so this is actually maybe more parallels than maybe we would have guessed. Yes, yes, yes, yes. And there's a very nice South Sea bubble book by Tom Levinson called Money for Nothing,

which I think everyone should read along with Sequoia Capitals, pieces on why we're investing so much in Sam Bankman-Fried and why you should invest in them too, that everyone should read this month. I'm June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest quarter. cases, the latest actions from Congress and regulators, and the legal moves driving the markets, from corporate law to constitutional law and from state courts to the Supreme Court.

At Bloomberg Law, we go beyond the day's headlines. We speak with top attorneys, judges, scholars, and policy experts to break down what the rulings really mean. We do this every weekday, then bring you the best conversations in our daily podcast. Search for Bloomberg Law YouTube, Apple, Spotify, or anywhere else you listen. On the East Coast, listen as you start your day. And on the West Coast, catch up in the evening. That's the Bloomberg Law podcast with me, June Grosso. Subscribe today wherever you get your podcast. So one of the things when it comes to bubbles, and Joe kind of touched on this in the intro, but almost every big bubble actually does tell some sort of compelling story. And obviously,

In hindsight, you think, well, this was blown completely out of proportion or parts of this were true, but not all of it, like in the dot-com bubble. Talk to us a little bit more about that psychological aspect of bubbles. And how do people actually differentiate between, you know, life, world-changing technology versus a speculative asset? Well, mostly there is a story about a life-changing and very profitable. technology underneath there. That is in the end driving the thing, right?

That we are going to build a railroad from New York to Chicago. And then we are going to collect a huge amount of money because we own the railroad from New York to Chicago. But then it turns out that there actually is a lot of money that wants to do this. And there is not one railroad, but there are three railroads from New York to Chicago. And each of them has high fixed. but very low variable costs. So each of them has an incentive to undercut the others.

And so none of the railroads can ever make any money, because whenever anyone jacks up their rates, one of the other two undercuts it. And so all the railroads go smash with their equity going to zero and their bonds going to very steep discounts. But at the end, the United States has three railroads

from New York to Chicago, and everyone who wants to move goods or people from New York to Chicago and back, is enormously, blessed by this. Joe Stiglitt says something similar about the dot-com bubble, right? That MCI Worldcom was saying it was making huge amounts of fortunes by building out fiber everywhere. It was lying in its accounting, but lots of other people followed it. And then we had a decade of dark fiber in which transferring bits across the United States was essentially free, and that

nourished the growth of the internet. That is, the collective losses of investors in telecom during the dot-com bubble was a social gift in terms that it produced a huge amount of telecommunications infrastructure, that all of us in the first decade of the 21st century benefited from massively. In the case of the South Sea bubble, you got the British bond mark that rich British people could move their money from land to commercial enterprises into government debt and out again swiftly and easily, and so have more options and more peace of mind. But in the crypto bubble? What do you get?

I wanted to bid on the Financial Times, NFT, FTX Tombstone, but could not connect my wallet to the FT's site, so I never bid on it at all. But you get a particular number that says it gives you some kind of special claim on a particular picture of a monkey

that everyone has on their desktop. It's very unclear. Usually there is real money there. There is actually a pot of gold at the end of the rainbow, but it was never too clear what the pot of gold was supposed to be in crypto. You know, just setting aside this question of, like, has any productive infrastructure been laid that we will benefit from this? Because I do, I don't know what the answer. It is also striking your point about, you know, you have the railroad boom, but no one can make money operating a railroad. And again, kind of an interesting

parallel here with crypto where you have like this insane bull market for 2020, 2021. It's hard to find actually the entities who accrued a lot of profits even during the boom, especially FTX, people are like, how'd you lose money? It's the biggest boom of all time and you were trading it and you were mostly long crypto and still you manage to lose money. So I find that to be fascinating. You know, another question I want to ask about the South Sea company, you know, whenever whenever anyone goes bust, right?

There's a question of like, well, were they fraudsters from the beginning? Was it a fraud? Was it just a wrong way bet which can happen in finance and people lose money? But it doesn't necessarily mean anything nefarious. The people operating the South Sea company, how did they see it? Did they see us, oh, we have a chance to take everyone's money? Or did they really believe they were building something important? Oh, they said we have bonds that are currently yielding 6%.

in the market. We can issue consuls that will yield 4%. We can earn 50% on the value of the British government debt. If we manage to get this deal done and cream off at least a third of that from themselves, they were really, really true believers. But of course, once they have salted the market, lots and lots and lots of other people come in with other opportunities, people who are significantly less true believer-ish and sufficiently more. People are willing to give other people money for badly thought-out business plans. I too can come up with a badly thought-out business plan, and then I'll be off to France before anyone actually asks for their money back. This is a related question, but do you think once you start having those types of speculators

or I guess hangers-on come into an industry, does it start? to affect the behavior of like even legitimate players within that speculative industry. And the reason I ask is because in the course of prepping for this episode, I found this quote from Vitalik Buterin from 2017 that I thought was fascinating in retrospect. But the quote is, in the case of Ethereum, if somehow 80% of Ethereum's users just end up being cryptocurrency speculators, would we then have a social responsibility to, to start optimizing for that constituency because that would end up being our constituency. Like, that to me is interesting. Is there a reflexivity between the industry, the speculative industry, and the speculators? Great question. The fact you mean that the existence of speculators deranges people. Exactly.

Like, does it change their own behavior? So maybe I was growing tulips because I love tulips. But now that I have all these people speculating, you know, like the calculation starts to change. Yeah. The old teacher, Charlie Kindleberger, had a very nice line about this. You know, there's nothing that deranges you more than watching a friend to become rich. I like that. You know, and as the late Richard Blum says, after a while, if you see lots of people around you who have become fabulously rich by making stupid investments,

he begin to think making stupid investments is a good business model. You know, it really does unhinge everyone, especially because, you know, economists are always wrong in always thinking that bubbles and such will crash before they do. Right. And so it hangs on and it hangs on and it hangs on far beyond the point at which the sober economists have been saying this will certainly not going to be sustained for this long. Right. And then there comes the point when economists began saying, well, maybe. this time it is different, at which case you'd better sell quickly. So just on the topic of bubbles actually crashing, I mean, you can get different types of mania crashes. So you can get relatively

small ones that don't seem to have a broader impact on the economy or the financial system. I mean, Beanie babies might have been painful for some individuals, but I don't think it actually led to like a credit crisis or anything like that. But you can also have these big bubble that crash and have enormous consequences for the economy. Talk to us about how those effects play out. Yeah. And I was about to ask you what the key is leverage. Yeah. Yes. The dot com bubble crashed. When the dot com bubble crashed, it took down four trillion dollars of wealth that people thought they had. But because it had all been equity and the investors of the dot com bubble who went broke weren't highly leveraged,

the unemployment rate only goes up by one percentage point and comes back down fairly quickly. By contrast, you know, I remember March of 2008 and we were doing our rough back of the envelope calculations about the subprime collapse, and we concluded that there was about $500 billion of mortgages that weren't going to be paid off. And, you know, that's one-eighth, the size of the dot-com.

crash. And yet that one-eighth as large loss created a crisis that pushed the unemployment up by 6% and it took us a full decade to get back to full employment after that for lots of reasons. But the huge difference was that the people who had been investing in subprime when they shouldn't be were the major money center banks who were saying, aha, here's a chance for us to do some regulatory arbitrage. These derivatives are rated AAA so we can use them as our core reserves, and they're paying us 15 basis points more than real AAA assets are. And it was the fact that that was held by guys who were leveraged 40 to 1, you know, as their core reserves that made a simple crash of an asset into an enormous interlinked chain of bankruptcies where at the bottom, no one is sure

is their solvent because everyone has so much counterparty risk they do not understand, that everyone pulls into their shells and sells what they can and otherwise hunkers down. We don't think that's going to happen outside the cryptosphere right now. We really do not think so. A lot of short daily news podcasts focus on just one story. But right now, you probably need more. On Up First from NPR, we bring you three of the world's top headlines every day in under 15 minutes because no one's story can capture all that's happening in this big, crazy world

of ours on any given morning. Listen now to the Up First podcast from NPR. So another question, you know, sort of how these patterns work out. And again, it seems like one possibility with the FTX story is that it started off as like a sort of, you know, let's build an online crypto futures exchange, let's build a crypto hedge fund and maybe it started out working well and it grew. And then at some point as it started to collapse, what maybe started as sort of like, let's attempt to build a business. And we don't know. And so this is, you know, maybe it'd be, you know, edged more towards bad business practices like moving FTC's customer money to Alameda or other things that someone might allege as fraud or lying to the public about the safety of the reserves.

You pointed out that, you know, in a boom, in a bubble, you can have this sort of like derangement of behavior. So if Tracy is a tulip farmer who just likes the flowers and then suddenly gets into it for money or I think baby babies are cute and suddenly I'm a speculator, you know, do you have a similar phenomenon where people can start an entity and have sort of like genuine good faith intentions of building a business? But as it all tips over and collapses, essentially, the fraud becomes the attempt to keep the real business going. Well, first there's one stage in which you think, well, gee, there's a hiccup, but we can recover. Yeah. And then, gee, that didn't work. Now the question is, do we start doing something that we really shouldn't? Thinking that we will probably recover and then we can paper it over.

And then there comes a stage where this is going down and do we try to grab for everything we can at the moment in order to flee to France or to kind of position ourselves better for future negotiations. That's rarely an immediate once and for all decision. It's something that happens gradually and then suddenly, right? that I'm sure that Sam Bankman-Fried did not set out to steal $8 billion from FTCS and lose some of it in trading in Alameda and perhaps secrete some of it someplace else in places we do not know since the accountant's some messed up. But he did start out thinking that money from FTX could be very useful in getting Alameda over this particular bad patch and then things kind of snowball after that.

If you want to be a rich person and live a rich person, life, you moderate your bets according to what's called the Kelly criteria, right? You value, you won't take a bet that involves a 50% chance of losing half your money unless the upside more than doubles gives you a 50% chance of more than doubling your money. And the problem with Sam Bankman Fried and company is that they've been listening to these philosophers who were telling them that they should make any positive net present value bet whatsoever. And if you do that, if you make much riskier bets than the Kelly criterion, then you wind up bankrupt with very high probability and extraordinarily filthy rich with very low probability. But still, positive expected value.

And then the question is, what do you have the moral fiber to do or not do in all those cases where bankruptcy is staring you in the face? You know, since you've mentioned Fleet of France, is there a pretty long history in these stories of someone winding up in another country's borders after it uploads? Is that a common through line throughout financial collapses? It's a common story. I don't exactly know how common it actually is

in terms of how much money actually gets taken up and gets wound up someplace else relatively far away where other people cannot reach you. In Britain in the 1800s and before when they actually had debtors prison,

it was significantly more common than since. And it's not clear to what extent it's we're getting away with our ill-gotten gains. And of what extent it's simply that we do not want to have to spend our lives incarcerated in the Marshall C. prison because we're never getting out of this. Brad, you mentioned Kindleberger earlier. And of course, he wrote a sort of seminal piece about financial manias and bubbles. But a big part of Kindleberger is talking about what should actually be done when it comes to bubbles.

And he talks a lot about a lender of Last Resort. There are other options, too. You know, he talks about, like, maybe you can do nothing or you can declare a bank holiday or have some sort of central bank rescue, that sort of thing. But when it comes to crypto, are any of those options on the table? What should be done about a speculative mania like crypto? Well, the lender of last resort is mostly Kindleberger wearing his Keynesian macroeconomist hat. and it's very much lend freely at a penalty rate on collateral that is good in normal times to systemically, right,

to systemically important institutions in order to build a firewall between what's going on in finance and, you know, the real economy of people kind of with jobs, you know, making things. As to what should be actually done with the speculative assets themselves, you know, I mean, the money was gone. The money was never really there in some sense. Wealth is trust that there is going to be an enterprise there in the future that is going to be doing something of value. And once the crash is over, there's no such thing. All you can do is hope to get back, whatever some of the money that the people who bailed

out relatively early managed to squirrel away. When they said, I've been a fool, but here comes a greater fool, let me hand this risk off to them. with things like the housing crisis of 2008 and 2010, there were lots of things you could do in terms of settling who is actually going to bear the debts, who is going to eat the losses as fast as possible, so that then the economy can get going again. And people don't find themselves hindered by the fact that you worry that if you make a loan to them, your loan will then be grabbed and given away to one of their creditors and not actually be part of a bit,

ongoing forward-looking business. That is where there are things to be done. In addition, they are kind of clearing the financial rubble away so that, you know, the financial system of loaning and borrowing and enterprising can start again. But as I see it, there's no system of loaning and borrowing. There's no enterprising underneath the loaning and borrowing. You know, there are computer programmers looking for Web3 use cases. but they don't really need crypto assets to do this.

And it's unclear how trading crypto assets helps discover those Web 3 use cases. What about as the speculative mania builds, is there something that regulators should do? Like if they see something risky happening, should they immediately crack down on it or should they allow the free market to operate as long as it isn't fraud or necessarily illegal? And again, when it comes to crypto, we could have a whole other conversation about whether or not it's legal or not. But I do get the impression that regulators themselves or policymakers themselves are sort of caught up in the narrative or at the very least, they themselves are uncertain about whether or not they should believe this story about this brand new technology that's going to change the world or if it's actually just a Ponzi scheme. Like there seems to be a tension there within the minds of regulators. Oh, this is the probably mythical story about what Alan Greenspan told Fed governed, the late, Fed governor of the late Ned Gramlick in the early 2000s when Gramlick said,

you need to do something about subprime. And Greenspan is supposed to be said, there are lenders who want to lend, there are borrowers who want to borrow. All of them have their congressman on speed dial. I'm going to get in the middle of them and tell them you can't do this deal and then get ground into absolute dust up on Capitol Hill, you know, I can't do that. I have to sit back and then try to clean up the mess afterwards, you know, and hope that I can. That that's definitely a piece of it. But also, regulators are likely to be grabbed by the same currents of thought that make

them think this is the next new big thing as anyone else, you know, and are unlikely to get in the way. But if you do have regulators, right, cutting down on leverage, you know, making leverage really difficult is, I think, a very important thing to do. And also, it's nice to not be in the free money business. That if someone running a Ponzi scheme has to show someone 5% of real profits every year, or actually pay out 5% on values every year, it's much harder to keep it going than if the treasury rate is zero and you don't have to pay out anything.

every year, but just send them a statement saying their balance has grown. I think the problem, on the other hand, is that raising interest rates puts a lot of real people out of work. I think that's really important or interesting about like the sort of dilemma of regulators. And it's like, you know, you hear this all the time with crypto. It's like, oh, like, don't tamp down on innovation. And it's really important. There's going to be some innovation coming.

And I, you sort of get that, you know, that sort of conflict. among regulators, like, I don't want to be the regulator who, like, stamped out some innovation, and then it flourishes elsewhere and makes finance more efficient. But this idea of, like, well, just take care of the leverage channel. And then, okay, do whatever you want. Just hive it off. Like, it seems like that is like a way to think about it. It's like, all right, do we want to, like, completely kill crypto because of it?

I don't know. Maybe, maybe not. But maybe it's just the better way to think about it is just hive it off from any entity that could have, like, systemic leverage. like a FDIC insured retail bank account. And a bunch of people pointing out that, you know, if you gamble on the stock market, there are actual companies you're gambling on that have actual profits. And that the S&P earnings yield is, what, four and a half percent now?

So there are four and a half cents coming into the system every year for each dollar that's in the system. as opposed to crypto, where nothing's coming in. And where there are hopes for the future, it's that someday when someone actually finds a Web3 use case, they're going to want to build their Web3 use case on top of this particular blockchain coin that you happen to own today.

And no one has ever explained to me why anyone in the future would ever, who has a Web3 use case, would ever want to give away a lot of the value to today's holders of business. Bitcoin or ethere. Yeah, that's a great point. So just going back to some of our discussion at the intro, and it does feel to me like with crypto, there was a sense of nihilism about it. And I'm sure some people are true believers. In fact, I know some people are true believers.

Because they yell at me on Twitter all the time whenever, you know, I'm sure they're out there. But there is... If they're true believers rather than bots programmed by non-true believers. That's a good point. I've probably just been emotionally abused by a bunch of robots for the past three years. But anyway, this lottery ticket idea, I wonder if you could talk about whether... And, you know, this is kind of what your new book is all about, slouching towards utopia, this idea that even though we've had a great improvement in human well-being and lifestyle. that a lot of people still feel like they're being left behind or they feel poor relative to

other people. So in that environment, in an environment where you're upset because it feels like you are not getting ahead compared to your neighbor or compared to a billionaire, does that lend itself to more opportunities for speculative manias to build? It certainly seems to, right? It certainly seems to situations in which people thinking they're not getting what they deserve, while other people around them are getting much more than they deserve because they are managing to work the system in some way. It makes people think working the system somehow has got to be a successful strategy because look at all these other people who are managing to do it. And that makes people rather easy prey for a whole bunch of social engineering projects.

I just have one last question. Actually, once again, I sort of want to go back to the South Sea bubble, but this idea of copycats, this idea that, okay, actually, maybe there was some soundness to this idea of consolidating all this British debt and creating one fungible security that anyone can trade. Sounds pretty good. And, of course, copycats abound in crypto all over the place. What did those copycats do, though? What were the other entities that saw the South Sea bubble? They say, we want to get in on this action. What were the sort of, I don't know, bastardizations, distortions, whatever, that's sort of like that they glommed on to or that they, that was their approach as the sort of number of entities doing this sort of multiplied?

Well, it's called the South Sea bubble because, Beaud the South Sea Company originally was supposed to be a trading company sending out ships to the South Seas. and they only switch to their, you know, bank to their British government debt business model later on. I don't want to say it's everything. I do want to say that in the South Sea bubble, it's a lot of commercial and colonization enterprises as rather than purely financial manipulation, although I'd say making the British government debt fungible and marketable is a little bit more than a financial manipulation. But yes, it's that the South Sea company had a story. And once it becomes clear that stories attract money, then the returns to having a story

are quite high. And lots of people will say, I can make up a story too. Brad DeLong, thank you so much for coming on, Oddlod. I can't believe it's the first time we've had you, but definitely hope to have you back at some point. And everyone should check out the book. Welcome me back and keep doing what you're doing because you've been an amazing, You've been actually killing it. Two kind. We didn't just have you on to say that, but we would have.

Had we known. This was a condition of Brad coming on. Had we known you were going to say that? We would have had you on much earlier. But thank you so much. Plus, I hope the listeners to odd thoughts can push my book above 20,000 all-format sales over the course of the next week. We can do this.

Go out by slouching tours in Tokyo. Yeah. We can make this happen. All right. Take care, Brad. Thank you very, very much. Thanks, Brad. That was great.

Tracy, I love talking to Brad. I think probably my favorite part was all the great things he said about odd lots. That was, no. Yes. No, I thought the leverage point was, I mean, that stood out because I do think, you know, a politician, I mean, you know, we could take Eric Adams as an example, the mayor of New York because he said he was going to, he believed in crypto so much, he was going to take a portion of his salary in cryptocurrency. currencies. But like, a regulator, a politician might not be the best placed person to decide whether a new industry is legitimate or not. And I think there can be a lot of confusion. And obviously regulators don't want to stamp out something new and innovative just because they're

unfamiliar with it and they think it might be risky. At the same time, you would assume that they don't want to let speculative bubbles grow. And so it's really interesting to me, this idea of having them focus on the leverage channel instead. So don't crack down on the thing itself, but maybe try to police the credit aspect of it, the leverage that's allowing it to grow unreasonably quickly. Yeah, the linkages between these entities and the financial infrastructure that it's really important to protect. So, right, like that seems to me that they, right, let it do what it's going to do, but, you know, make sure that Citigroup is not providing major funding. to FTCX or whoever else, it seems like a very, like, reasonable way to think about it so that it's not about, like, that, because, yeah, regulators aren't equipped to know what the technology of the future is, right? And there are some innovations that are going to come and some innovations that might even involve a lot of money that may become extremely important. Maybe crypto is even going to be among them, I don't know. But rather than having to make that decision, just like, well, how do you hive it off? Right. And the other thing that stood out to me, and I know, you know, the podcast

was sort of talking about parallels with historical financial bubbles. But I really think like a couple of things stood out about crypto or stand out about crypto. And one is this idea of the story. So every bubble has a compelling story. But crypto and especially Bitcoin didn't have just one compelling story. It had like, I can't even count them all, probably dozens. And they're constantly changing, right? So, you know, it was going to change the financial system. It's going to be an inflation hedge, a store of value, a payment mechanism, like all these things rolled up into one. And that narrative flexibility, I think is probably the thing that's kept a lot of crypto going for a long time. And now I should just mention the new narrative for Bitcoin, of course, is that it isn't crypto. It's the polar

opposite of all the alt coins and all the sketchy things and all of that. But then secondly, the other thing that stands out to me about crypto, and you know, you asked this in your last question about copycats, crypto is perfect for copycats, right? Because there's no limit on the amount of new digital tokens or assets that you can create. You don't even have to pretend to put together some capital to go buy some tulip bulbs and grow them or go buy a bunch of beanie babies. You just sort of like create them out of thin air and just put them into the ecosystem and hope that they attract inflows. Those two things, the narrative flexibility and the copycat potential, like,

Like, that to me is probably what stood out about this whole thing. 100% on that. You literally, like, you and I could literally copy and paste the Bitcoin or Ethereum source code and make the most minor tweaks. And some people have made a lot of money doing that. I mean, like, I think Lightcoin, like, that guy made a ton of money. That was one of the criticism to Lightcoin. Just that, like, they took the Bitcoin code, and I think they changed the block time. And that is probably, like, two numbers or something like that.

and then that was a new coin that was created. You know, the other thing that I thought was really interesting, and again, like sort of spooky parallels with FTCS specifically, is this idea of like the politics and what he was talking about, the South Sea company trying to become very influential politically, but also to the point of like going after political competitors. And it really was, it was the end of October that SPF was in the news a lot for pushing these regulations that many and the sort of crypto defunders. community perceived as being harmful to them. So there really isn't much news sometimes. I mean, as you say, there's some very, crypto has its own novelty, but some of these patterns, man, boy, did they repeat. Yeah. Like, history doesn't necessarily repeat, but it definitely rhymes. It comes close to repeating. Yeah. Yeah, it does. It does. But I do think there are some idiosyncrasies that kind of like make this one special. And that just, you know, on this point too, and I totally feel

this, which is that economists always, everyone underestimates how long these things can go on. And then the longer you go on, you start questioning your own sanity because you're like, I mean. Oh, totally. And so you're like, oh, maybe there's something here. I don't know. And so, yeah, totally. Can I tell you, like, I'm pretty sure I've written like two obituaries on crypto in my career. You're probably on that page. One of them was in 2011. There's like a Bitcoin obituaries page where they, where they list all of the Oh, probably. So we got to go find it. But I do think that's another thing that, like, confused a lot of people this time around.

It's just like, you know, you have something that people were calling a Ponzi scheme as early as 2010. Yeah. Yeah. And it just keeps going. And you're like, am I the crazy one here? Like, are all the bots yelling at me on the internet? Are they right? Like, it's difficult.

Anyway, I do think talking about other historical bubbles and sort of pulling out what similar. and what's different, I find that very helpful and cathartic. Well, you know, we don't, we're not like trading. Like, you know, thankfully we're not money managers whose job is to like, oh, tell clients. But I do think on the way everyone does feel like they had to take on crypto specifically. They had to take aside, right? Or a lot of people felt that pressure to sort of like cast their lot on one side of the other. And if you had this view for many years, like, I don't really see how this sustainable.

I don't really see how defy is actually finance, whatever. Like, you can go a long time and look really dumb and suffer. for it, even if you hadn't like made a literal money bet. Oh, totally. And it also goes back to the momentum idea, right? Like sometimes the way to make money and to make alpha is to jump on the thing that is getting a lot of interest and a lot of inflows. And even if you think it's stupid, you just kind of ride with it and hope you can get out before everyone else. But again, as Brad pointed out, this has been a sort of defining feature of bubbles throughout history. Yeah. Shall we leave it there? Let's leave it down. All right. This has been

another episode of the Oddlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart. Follow our guest, Brad DeLong. He's at DeLong on Twitter and check out his book slouching towards Utopia. Follow our producer, Carmen Rodriguez, at Carmen Armin. And check out all of the podcasts at Bloomberg under the handle at podcasts. And for more OddLod's content, go to Bloomberg.com slash OdLodogs, where we post episode transcripts, Tracy and I blog, and we even write a weekly newsletter on these topics that you should subscribe to. Thanks for listening. The news doesn't stop on the weekends.

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