> whether Tether is fully collateralized ultimately doesn't matter. As long as there are well-capitalized parties (Bitfinex, other exchanges) that want to prop up Tether, it will be fine
This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.
“Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.”
LOL yes I am assuming some sarcasm here. Sticking ones finger up to the man by.. holding cash equivalents in forms not eligible for FDIC insurance, yes!!
Or potentially like putting money into British Pounds or Swedish Crowns in early nineties - just waiting for someone with a bigger wallet to come around and break the capitalization by shorting.
It depends on your jurisdiction, of course, but I (as an American) wouldn't feel confident in the legality of buying Venezuelan government securities given https://www.state.gov/venezuela-related-sanctions/
Even if buying a bond issued by an unfriendly nation isn't illegal at a given moment, you might find yourself forced to divest if relations between your country and the issuer sour. I'm sure a few people who held Russian sovereign bonds lost their shirts when sanctions were levied and they had no choice but to dump their assets.
In the absolute worst case (e.g., if you held Japanese sovereign debt in December 1941 or Afghan sovereign debt in 2001), holding a bond might be grounds for you to be charged with treason or sponsoring terrorism.
>This is true for every pile of toxic crap that's ever been financially engineered.
I have a radical idea that I'm fairly sure would get me killed if I ever stood a chance of implementing it: A complete ban on all non-productive financial schemes. We have an entire parasite class that grown unfathomably wealthy while providing no real value to the rest of society.
The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
> complete ban on all non-productive financial schemes
I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
> "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more
Great example. In 1958, the Congress banned "the trading of futures contracts on onions" [1]. By the 2000s, increased price volatility--which had to be borne solely by farmers and distributors--prompted "the son of a farmer who initially lobbied for the ban to advocate a return to onion futures trading" [2].
There is a middle ground between banning and a free for all. In the former, useful financial products and innovation is suppressed. Finance is about allocating real resources in our economy. Bad finance is bad. But on the other end, everyone steals everything, and investor self-interest gives way to the animal spirits we saw leading up to the Panic of 1907, the Great Depression, the S&L crisis, the Financial Crisis and whatever we'll call crypto.
Right. I used to sit on a trading floor next to a commodities sales desk. If the GP's mental model is that people who are involved in futures are, by definition, involved in speculation, then that is a wrong model: a lot of "real economy" manufacturers hedge their exposure to price changes for their inputs or outputs through the futures market.
Precisely. A friend of mine trades futures for a non-profit made up of growers as members. It is more efficient insurance than the federal government offers them and saves them millions.
Exactly. The problem is that “good/useful” is in the eye of the beholder.
For example, bank prop trading bans went into effect but really how does one differentiate prop from “customer facilitation” or heding. Its a sliding scale of grays.
So instead of Citi having a trader going “I think I’ll buy some S&P calls today and bet on the index” he instead can only do that if 1) a client wants to sell some & he takes the other side, or 2) there is some other exposures accumulated do to customer facilitation such that he can justify buying S&P as a hedge.
The same risk is being put on, but for different reasons. Or you could say the only thing that is changed is who has initiated the risk - customer, instead of bank.
Futures of course exist for very good, historical reasons. How do people think their home heating oil company offers you fixed price contracts for the season, etc?
Reducing the number of players in a market usually only increases volatility, transaction costs and illiquidity.
> I surprised myself by how sympathetic I am to this proposal, given I've made a career in finance. The problem, however, is separating productive from unproductive schemes ex ante.
This is just the finance sector subset of the larger problem of bullshit jobs. We know a substantial fraction of jobs are bullshit (non-value-creating), but which ones? I have a strong suspicion this is unsolvable because any metric you start using to decide which jobs are bullshit will instantly be gamed. The system will work as hard as it can to prevent you from figuring it out, and since it's made of people it is at least as intelligent as you are.
The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession, but unfortunately that also takes a ton of fragile but very innovative and promising things down with it. Recession is a bit like extreme chemotherapy. It might kill some cancer cells but it also kills a shitload of healthy ones and sometimes the treatment ultimately fails because it doesn't kill enough of the former to justify the latter.
Similar principles exist in other areas like advertising. There's a saying in the ad business: "I know I'm wasting 80% of my ad spend. I just don't know which 80%."
>The only foolproof way we know of to reduce the number of bullshit jobs is brutal recession,
That is a very convoluted way of implementing negative yields.
Because people want to avoid losses associated with negative interests they instead do the inflation thing and pretend there are no losses, the discrepancy between book value and real world value grows ever bigger as the book value is not representing losses in the real economy. The moment sentiment even dares to look at a downward trend poof reality has come back from its slumber. Negative yield is coming out of hiding, all at once.
> There is a middle ground between banning and a free for all.
Providing basic banking as a public utility so most deposits by individuals, local governments, and small businesses are not stored with investment banks engaged in speculation. Public banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel and prohibited from originating loans on security of state property such as money (which might be obtained via leveraged loan from another lender) or on security of common property such as excess real estate values attributable to land scarcity.
> banks can be limited to originating loans on 100% security of material personal property such as crops, livestock, cheese, gold, lumber, steel
The problem isn't getting loans on one's crops. It's transferring the price risk to someone better able to bear it.
Farmers want a guaranteed profit when they plant. Loans don't address that. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.) The only real alternative is government guarantees. Those bring their own host of problems.
futures don't guarantee a profit, only a price. it's up to the farmer to decide whether the price is worth the planting (regardless of profit). and the pricing function only works well in an uncorrupt market.
the problem isn't the existence of the futures markets, but the same kind of over-consolidation that corrupts every laissez faire market, making them inefficient and brittle in the long-run. if regulation encouraged primarily mid-sized firms, rather than a few large ones, we'd have better informed and more efficient markets, albeit less lucrative since the firms wouldn't have undue (read: corrupting) influence.
note that insurance is another alternative to futures or gov guarantees, though i'd question the need to externalize risk, which manifests a critical market-shaping signal.
You mean growth dependence. When you are forced to grow every year and you can't grow by getting new customers you must steal existing customers from other companies by acquiring them.
'growth dependence' is just a symptom of greed, which is also the root driver of over-consolidation/corruption in markets. that's why a thoughtful regulatory stance is essential to high-functioning markets (e.g., anti-trust, not price controls), rather than the slapdash shit we have now, where parts of markets are highly over-regulated to ensure regulatory capture, while other parts are highly under-regulated to externalize risk.
> The problem isn't getting loans on one's crops. It's transferring the price risk to someone else. When a farmer plants, they want a guaranteed profit. Loans don't address that problem. Futures do. (It's why they were invented, in the 17th century, by the Dutch and Japanese.)
The problem is excess credit available to financial firms engaging in leveraged speculation and financial services investment, resulting in financial sector employment and compensation that is super-proportionate to any real savings generated for non-financial producers. This leverage is enhanced by the lack of free (zero-fee) public alternative for basic banking services. It is not necessary for public banks providing basic banking services to guarantee profits for farmers. Provide savings, transfers, and liquidity loans at present values at what an option to sell existing previously planted crops would be worth might be sufficient to reduce deposits held by banks engaging in leveraged speculation. Providing basic banking as a public utility is the middle way the parent commenter advocated because it does not require banning anything.
"The "futures trader" extracting value from the system buying/selling futures has done no "real" work"
Small farmers hedging next years crop would like a word with you ...
... and there are one hundred examples just like that.
Did you ever convert foreign currencies in advance of an international trip when you saw the currency pair move favorably ? Have you ever bought an ETF ? Do you have a mortgage in the United States ?
All of these things are possible because of a highly liquid, regulated market with diverse participants ...
... which brings us to the obligatory Margin Call[1] quote:
"Jesus, Seth. Listen, if you really wanna do this with your life you have to believe you're necessary and you are. People wanna live like this in their cars and big fuckin' houses they can't even pay for, then you're necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin' fair really fuckin' quickly and nobody actually wants that. They say they do but they don't. They want what we have to give them but they also wanna, you know, play innocent and pretend they have no idea where it came from."
"The bank in Margin Call was packaging MBS out of mortgages, not speculating on the price of commodities using derivatives to gain leverage."
Correct. That's my point.
It's not merely that you can't have one without the other ... it's that you very likely wouldn't want to eliminate the (margin call guys) even if you could.
Speculating on futures and other derivatives is basically what those rich guy's sons are doing in their hedge funds. Most hedge funds get worse returns than the S&P 500.
As a non sarcastic response I would note that financial intermediation exists for the purposes of transforming types and durations of risks between people/firms trying to offload from / take on that risk.
This is how things like 30 year fixed rate mortgages, low fee index ETFs, target date retirement funds, fixed price home heating oil contracts, every form of insurance, etc can exist in the consumer space.
In the B2B space you have all the companies with needs to lock in prices for future inputs in order to control costs & plan their own output pricing, etc.
All of this has greatly reduced the boom-bust cycle of the pre-Fed economy. As bad as 2000 or 2008 may have felt, they were nothing like the great depression of numerous 19th century recessions & depressions.
I propose a ban on all non-productive trips by car. Only good people should be allowed to emit carbon unless for productive reasons that pass the carbon threshhold for the amount of carbon the trips will emit.
Good people as defined by a social credit system.
I will decide what is a productive reason & what is the carbon threshhold!
People totally have the option of living under this type of government - it exists in top down centralized places like China.
This is a great idea! We could break ones social credit down into units. What to call them ... Rallods, maybe? Everyone could earn Rallods for doing productive, pro-social things. People could even send some of the Rallods to each other, in exchange for taking on productive, pro-social task they'd prefer not to do. Rallods could even be exchanged for goods!
A lot of rich people want more money not because they need it but rather because they want money to act as social credit and therefore they want to maximize this number even though other people need the money more.
There are a class of people for which money is more of a scoreboard which I think is what you are getting at here.
I think for most rich people, having a lot of money means, as ironic as it sounds, not having to think about money.
Growing up fairly middle class and eventually making a lot of money once I made it out on my own, the types of tortured price comparison shopping & concerns that my parents made (and I did my first 5 years of career) are just not something I worry about.
Being able to just go to a grocery store and fill the basket/cart until I have everything I want (NOT need, and without checking every items price and cross checking every price option for every items competitors), and then pay whatever it rings up to.
Doing weird as it sounds things like - cross shopping a $40k & $120k car because, well, they both sort of hit different parts of my interest lists.. and maybe I just keep my current car + add the $40k, vs trading in towards the $120k.. or really.. who cares, just buy the $120k car anyway.
Being able to knowingly overpay for home repair/renovation contractors because they give you a much higher level of confidence, communication and convenience. We got 3 bids, the guy who was 2x the price of the other guys was just such a professional we decided to go with him. He was like dealing with a professional tech/bank project manager rather than a squirrel guy you can't get hold of.. He started on time, finished days early, went not a penny over budget and gave us start&end of day updates with plans of attack for the next day.
Meanwhile some of our friends who did not have budget to pick the highest bidder had contractors disappearing to do work on other houses, had to call their contractor daily to force him to show up, had guy starting the work day at 2pm and then taking an hour lunch break, and every other crazy home renovation story you hear where 2 weeks of work takes 3 months.
So for those outside the billionaire class, being rich mostly means not having to deal with the inconveniences of being on a budget.
This is one of the benefits of the federal / state divide in the US too.
If you are worried about the other side being crazy, you can live in a state that solidly on your side of the aisle, and be insulated from when the other side is in power at the federal level.
There is a counterparty to every financial transaction. Presumably, both sides are happy if they agree to trade with each other. All of what you call "unproductive financial schemes" are mostly about exchanging risks, just like insurance.
Any conman worth his salt can sell a lemon, a toxic financial product or snake oil.
In UK naive homebuyers bought leaseholds where service charge and ground rent increased EXPONENTIALLY every 10 years. They even had lawyers, and those greenlit the deal.
Or when banks handed loans to strippers and then sold the loan to 'investors' causing subprime mortgage loan crisis of 2008. S&P were meant to do due dilligence, the 'sophisticated investors' were meant to do due dilligence, but here we are
>The "futures trader" extracting value from the system buying/selling futures has done no "real" work, their profit comes exclusively from making others pay more. The financial world is full of middle-men parasites like this.
If I am a farmer and I want to lock in a price for my crops right now, who am I supposed to sell that future to?
Sure, a small percentage of the time, I can sell to someone who knows that they need my crops on exactly that date of delivery, but a lot of the time there simply won't be anyone who knows at that exact moment that they need exactly what I am selling.
Having traders in the system means that I always have a buyer when I want to sell (and similarly when a user of the item wants to buy).
>They love to use the "making the market more efficient" and "price discovery" BS, but I believe they know what they're doing is solely about enriching themselves.
So what? If, through the trader solely enriching themselves, we get something useful from it, why does their motivation matter?
A baker bakes solely to enrich themselves as well - this is the nature of capitalism. The end result is what I care about.
why stop there? lets ban all activity that doesn't produce tangible goods. the number of parasites, i.e. people who consume tangible goods but don't produce them, is probably higher than the number of people who do
fields, mines and factories. we don't need anything else
Material production still requires accounting, installation, transportation, delivery, disposition, optimization. Financial parasitism more clearly occurs when someone pledges something to lenders which they do not actually own. For example in the 19th century when JP Morgan lent to planters on security of chattel slaves, the planters pledged the bodies of other people as collateral. Arguably loans should only be issued on security of personal property which does not deny the personal property rights of others. This might exclude leveraged lending of money on security of money (arguably lending on security of state property) and excess real values due to land scarcity (arguably lending on security of common property).
One day, people who think like you will come to power and decide that under their administration, [activity your livelihood is based on] constitutes “extracting value from the system” and is no longer permitted.
Maybe you are a golfer, or a restaurateur. But “what you’re doing is solely about enriching yourself.” Your fine cuisine is not feeding the poor. It is immoral to play golf while children go hungry. You have clearly become wealthy while doing nothing for the greater good.
They will come to you holding guns and demand that you cease your activity, and hand over your “wealth” - maybe your house, your savings, the food in your pantry, the clothes on your bank, maybe your wife or your daughter.
“We will take back for the People what is theirs” they will say. If you refuse, you will starve in prison, and they will take your life anyway. If you accept, you will starve in the street.
This is like the Christian ban on charging interest in theory it is doing it for a worthy cause but in practice just banning something isn't the answer because it doesn't address the source of the problem.
In efficient markets profits trend toward zero so having more traders will accomplish that goal better than banning traders. It is the same with interest, interest goes to 0% if there is enough saved capital to fund all investments banning interest makes it harder for the interest rate to go down.
It would be better if we built an economy that can handle low amounts or even zero profit by eliminating the dependency on yearly growth.
I would really like to know what would happen if—in a wave of international solidarity between all the workers in the world—workers would take their profits in their own hands and away from any shareholder and overpaid non-contributing CEOs. What would happen to all these markets.
Would a company controlled by their own workers choice to funnel parts of their profits to wall street traders? Probably not. Would there be any money to be gained on the stock market in such an environment? Probably not.
So a natural question to ask then is. What value is there in the stock market which does not rely on money being siphoned away from workers?
Eventually most of those companies controlled by their own workers would need to raise capital again, and then we'd quickly end up back where we started. Plus employee control hasn't worked well in most of the companies where it was tried. Look what happened to United Airlines. They were majority employee owned for a while, but the different groups of employees never agreed on how to run the company.
This is true for every pile of toxic crap that's ever been financially engineered.
The problem is the entangled financial health of the backer (in this case, Bitfinex and other crypto exchanges) with the backee (Tether). If creditors to the system (in this case, lenders to and customers of the exchanges together with holders of Tether) don't have transparency into the health of the nodes, a small crisis of confidence can prompt a run. (How do you know the parties are "well capitalized"?)
Critically, this can occur even if the original impetus was survivable. The opacity causes people to doubt the system's survivability, which avalanches into a run that no system can survive. Perversely, everyone knows this pattern, which increases the chances of small perturbations careening out of control. Add in that a crisis in any part of this system creates a systemic risk and the outcome becomes, as it's been across history, inevitable.
Holding Tether is putting money into a 19th century free bank, except instead of interest you get to stick a finger to the Man.