Here to Protect Us - July 10, 2022

Today I stopped at a stop sign. Oh, and I stopped at the red light too. 

I guess I didn’t have to. Certainly, had I not, and a police car was nearby, I would’ve certainly received a ticket (or worse). But, even if there were no coppers nearby, I would still have stopped. And, I also drive on the right hand side of two lane roads. 

Why? Because these traffic conventions are there to protect me and provide order. 

Now, I am as libertarian as the next person when it comes to any activity I might enjoy that does no harm to others. I don’t use libertarianism as a justification to do things that harm others out of some sort of self-serving sense of freedom, but if I can enjoy something and not hurt anybody, well, the world becomes a better place. 

But, I also realize that staying in my lane and stopping at red lights are good ideas - both for me and for everybody else around me. 

That is what good public policy and laws ought to do - enhance efficiency and protect us from ourselves. Well written, they can do all this without imposing much pain on me. 

We are grateful that our deposits at the bank are protected in a number of ways. First, we are confident that Federal Reserve and Office of the Comptroller of the Currency oversight ensures our bank remains liquid enough to allow me to withdraw my money whenever I want. Second, should that fail, my deposits are insured. 

When I make deposits to a brokerage account, I am warned that my deposits are not insured in that same sort of way, but I still have faith that brokers have oversight by the Securities and Exchange Commission, state regulators, and, perhaps also the Fed and OCC. This gives me enough confidence that my deposits are secure and liquid. 

I am also glad that the companies in which I invest are scrutinized by the SEC and that any major corporate actions or events are reported to me and the other shareholders. These companies are also audited, which gives me another layer of comfort. 

There are some speculations and investments that are not scrutinized so closely. Commodities were once boring securities that allowed a farmer to pre-sell her wheat in the Fall so that she can have some income to buy seed the previous spring. The farmer and the processor usually know each other, and these are commercial exchanges that follow generations of convention and exchange to mutual advantage. Cheating or dishonesty would be very bad for these long term relationships. 

Likewise, other securities like titles to future delivery of oil or foreign exchange are typically between the same parties, each side very accustomed to these markets, and with neither side willing to jeopardize long term relationships. In these various commodity markets, regulation and oversight can be streamlined because of the sophistication of and relationship between the various participants. 

Crypto is different. Much of the brokering of exchanges are done by a handful of monopolistic exchanges or brokers, and a multitude of “investors” do not really understand the industry - except that prices seem to rise quickly, until they don’t. 

And, unlike other securities, there is really no security in most crypto coins. They don’t represent a barrel of oil, a bushel of wheat, a pork belly, or an ounce of gold. All that is propping them up is, according to the “greater fool theory”, confidence that some new “investor” is willing to come in if I want out. 

Even those coins that claim to be backed by something of value are often just backed by other coins. If there is a broad downturn in the entire sector, as we have witnessed over the last couple of months, there is absolutely nothing supporting these many coins that have failed, and have taken down investment houses and myriad small investors with them. 

This is a very new industry, which created the perfect storm for failure. 

First, the industry is new, so new in fact that regulators have not yet figured out how to regulate them. 

Second, the nature of crypto is baffling to many. Unlike most all legitimate investments we make, they have no tangible assets to back them up - no factories, inventory, physical assets, or strong and sensible expectations of future profits through the production of tangible goods or services. In other words, their value is as elusive and invisible as the wind. 

Third, those who sell and shill and design these crypto products appear to be financial geniuses because they amassed huge wealth through clever marketing in an industry for which prices rose consistently for half a dozen years. If one gets on the bandwagon early enough, it is not hard to amass huge wealth. 

But, let’s not conflate wealth with wisdom. Some of these digital alchemists gave the sense of financial brilliance in their development of coins that were linked or backed by other coins, or which promised stability by offering warrants for the purchase of additional and equally financially flimsy coins should the primary coin’s price falter. 

It turns out that these financial geniuses were not particularly smart at all, even if they were or are consummate salespeople. Their idiosyncratic and flamboyant ways were not a sign of genius or a confidence they knew something nobody else knew. Instead, they were simply cocky, perhaps the other less flattering side of the same coin, no pun intended. 

We now see the dramatic downfall of an industry built upon flamboyance, with a dash of charlatanism, that peddled something bright and shiny, but perhaps was fools’ gold, with essentially no regulation and oversight that allowed them to get away with practices that would have landed others in jail. 

Now, even the Wall Street Journal is suggesting that regulation is necessary. Unfortunately, even a small fraction of a large fortune is still a lot of money that has been spread around to lobby politicians and make sizeable campaign donations to those willing to argue that somehow crypto is different and new Initial Coin Offerings, for instance, ought not be regulated in the same ways as Initial Public Offerings of new companies. 

We need to be protected from ourselves and our own naivety at times. If there ever was a time, the dramatic fall from grace of crypto suggests its time has come. When these many crypto firms go bankrupt, they take just too many unsophisticated “investors” along with them. We can ill-afford a generation of people afraid to invest again and forced to live with their parents for far too ling because we failed to post a stop sign.