FTX Exposed — Wall Street Not so Much

Let’s not dwell on this too long.

It simply isn’t that important in itself. Cryptocurrencies have never been a serious solution to a problem in the real world. They were, and still are, strange outcomes of a paranoia born well back in time, but which burst forth in current from as a consequence of the great financial crisis. They were, in short, a libertarian response to both the emergence of too heavy an emphasis on finance in modern economies and the almost inevitable instability that such an emphasis produced. Notwithstanding the critique of our right wing friends the great crisis in 2008 was a product of over zealous and borderline unethical finical practices being built on a view of the world that was more hubris than analysis.

Borderline unethical?

OK. Unethical throughout.

And this is where we draw comparisons with the demise of FTX.

Just look at the haste with which US authorities have launched legal proceedings against the founder of FTX. The reason we are given is that his scheme and laughably inept [dare I say childish?] management have hurt “millions of people”. He needs, therefore, to be brought to justice.

Of course.

This righteousness is in sharp contrast to the reaction back in 2008. How many of the schemers and laughably inept [dare I say childish] managers back then were subject to such rapid legal jeopardy? How many bank executives were rounded up and herded off to jail?

Are there two standards in operation here? Why?

FTX lurks in the shadows of crypto. It isn’t within the domain of any particular regulator. No bureaucrat is responsible for having gone along with the scam. Indeed, the financial press is regularly filled with bureaucrats bemoaning their apparent inability — because of the lack of legislative authority — to act to protect unsuspecting investors. Said bureaucrats are thus untainted and more likely to pile on in haste to demonstrate their regulatory significance. There is no risk of public approbation for laxity in the past. There is no ideological basis for having encouraged crypto that might, subsequently, slow down a reaction to an exposed scam.

This was manifestly not the case back in 2008. The regulatory authorities, all having been captured by the neoliberal deregulatory wave of the 1980s and 1990s were implicated in the rise of the financial sector. They had failed to rein in the non-bank financial world. They had connived in the deregulation of the traditional banking sector. They had welcomed the supposed superiority of the so-called marketplace as a disciplinary force. They had become supine and inert. They had overlooked the long success of the New Deal era legislation that had brought stability to banking for several long decades. The deregulatory instincts of the likes of Greenspan, Summers, and Rubin [plus others], with their Wall Street and academic reputations suitably burnished within the network of acolytes all of whom benefitted from the bubble economy they oversaw, provided a perfect context for the unsupervised and childish gambling that swept through Wall Street and then out into the real world hinterland.

And that’s the big difference. That’s the source of the haste now and the lethargy then.

Back then the entire economics and financial profession was culpable. Nowadays its just a few Silicon Valley libertarian “bros”, who, as we all know, are a privileged, pampered, and isolated bunch of self proclaimed “disruptors” all trying to be the best or biggest student of Schumpeter on the block. Back then no one spoke of “business school bros” filled with the silliness of capital asset pricing models, Black-Scholes, beta, alpha, and all sorts of other trickery. No one spoke of the revolutionary upheaval being unleashed by the novelty we know as shareholder value. No. All that was acceptable within the rubric of the neoliberal wave. It was all good. How could a good regulator seek retribution if the scheme was based on accepted knowledge. Any cost to millions of investors has to be — just had to be — a consequence of bad luck. It couldn’t possibly be malpractice or rotten knowledge. Goodness no!

At the other end of that road, the one travelled by the blind led by the likes of Greenspan et al, we ended up with a miasma of CDOs and all their oddball brethren. Finance had become a world within itself. Just like crypto is today. Dangerous products were invented in the bowels of leading banks like JP Morgan Chase and Goldman Sachs instead of in the shadows of a distant blockchain. They were solutions to imagined problems. Their real purpose was to create profit where there was none. They did so in the guise of shifting risk.

But, and let me repeat, the big difference between then and now was the acceptance of that risk shift. It was all within the drapery of authority and widespread accepted practice. The regulators rode along inside the same tide of intellectual delusion. It all had the imprimatur of impeccable academic bloodlines. These weren’t goofball libertarians — well maybe Greenspan was — they were Ivy League denizens whose ideas all had a heritage within the domain of the sort of finance and economics taught in all the best schools. What could go wrong?

Crypto doesn’t benefit from such ordination. Its groupthink flows from more subterranean sources and is thus more easily seen as subversive. It has too few friends in the right places to slow the reaction when its scams are exposed. It has too few sympathizers within the gates of established practice. Crypto, despite its ridiculous hype and manifest failure as a solution [to what, we might reasonably ask?], is a people’s reaction to the regime of financiers that laid us low back in 2008. That it is paying the price for its various weaknesses and poor leadership simply makes the transgressions of the “proper” financiers more egregious.

Poor crypto hasn’t had time to buy the right Congressional support. It hasn’t had time to “influence” enough regulators. So there will be no bail out. But there will be swift accounting and retribution on behalf of those few million investors who were fooled by the nonsense and hype.

FTX must pay the price for being an outsider.

Wall Street? Well that’s not an outsider. It’s essential to the smooth operation of our economy. So we are told.

Justice?

Ethics?

It depends on where you stand. Sometimes it depends on where you were born. And it definitely seems to depend upon where you are employed.

Do I care about crypto? Not at all. FTX was shambles and the plaything of a group of privileged kids lacking the discipline of the streets. Its collapse has hurt plenty of innocent people. The perpetrators need punishment.

Then again, I said the same thing back in 2008 about Wall Street.

That didn’t quite work that way, did it.

Oligarchs don’t suffer upstarts easily.