Not As Far to Fall - November 27, 2022



A pair of events dominated the news this week. The cryptocurrency exchange FTX was the caretaker of the wealth of a million customers. Each of these customers stand to lose $10,000 on average because of the hubris of someone who was anointed a boy genius that allowed him to shill his way to a fortune worth tens of billions of dollars for himself and then lose that much for a million others. At the same time, the recent global climate change conference has come to an end. A prevailing topic has been climate resiliency. 

It appears that corporate meltdowns and global warming share an aspect. They both show that resilience is not a luxury everyone can afford. 

Crypto is a strongly libertarian and self-made world run on the gospel of greed. Digital coins themselves have no intrinsic value, unlike gold or platinum that have alternative uses, or stocks that offer a flow of future income from commerce. A cryptocurrency rises in value only if it can muster more willing purchasers of the coin than there are sellers at a given time. Like any Ponzi scheme, the market rises in value if it is pumped up on a continuous basis, according to the greater fool theory, as I describe in The Bitcoin Dilemma. 

Of course, the industry cannot create the constant flow of interest it needs to grow if it tells the public that there’s no wizard behind the curtain. Instead, it shills boy or girl geniuses such as the CEO of FTX, or the CEO of its associated Alameda Research. A lot of hype, a little mystery, and the appearance that these individuals are motivated by some sort of higher set of values is enough to convince the unsophisticated to buy into the mirage. Some Superbowl ads, the naming of an arena, participation by a famous quarterback, and some ads by an equally famous and popular actor chiding us that fortune favors the brave was enough to cause explosive interest in FTX. 

These principals were so confident in their brilliance, despite no education in finance, economics, or business, that they felt they could not possibly fail. After all, it’s hard to argue that a mega billionaire does not know what he or she is doing. 

We all know now how that story ended. The CEO of FTX lent billions to Alameda, run by his on-and-off girlfriend, and Alameda lost its investments because it believed the only direction for cryptocurrency prices was up. Both CEOs wiped out the billions in wealth. The CEO of Theranos also cost her investors billions in the same way - by causing us to mistake unconventional risk-taking with brilliance. 

It was just a matter of time before highly speculative and outlandish schemes fail. But do those who do the damage fail to the same degree as the millions of innocent and naive investors who were wiped out? While sketchy markets are sometimes driven by the greater fools theory, participants in the market are not all of equal resilience. 

Will the CEOs of FTX, Alameda, and Theranos recover? Of course they will, but they may have to wait until they are eventually released from what I am sure will be a very well appointed prison. They have well-positioned parents, they came from top schools, and they still have business contacts. One recently stated, “there’s a thing about being fallen– there are people who know what that’s like, and who want to do for someone else what nobody did for them.” 

In other words, some people believe that they can take mammoth risks and still come out okay. The CEO of Alameda recently chided young people to take more risks. That advice is incredibly dependent on their original position. These individuals are conferred built-in resilience because of their positions in society. These positions were not because of their genius. In fact, their genius was an illusion partially constructed from their advantageous original position. 

Most people in our country could not successfully come back from a $150,000 loss, or a $100,000 medical bill, despite their innate intelligence and their strong work ethic. The median wealth in this country is $121,700. For those of age 30 or under, it is closer to $10,000. Most people in this country do not have the financial cushions to pull themselves up by their bootstraps after a failure. Their position is so precarious that even the slightest failure could culminate in homelessness and loss of a career. 

Those born to a better position may go to top schools, without any concern about a legacy of student debt. If they fail, and they likely won’t because of all those cushioning their fall, they will quickly recover. But one of modest means when facing uncertain returns from an investment in their human capital may instead opt for the safe choices in life, such as attending a less expensive school at a much lower financial risk but also without the extensive network of mutual support. 

A young person without these protections has to play life safe. It may mean not pursuit of their dream, but instead pursuit of something more practical. Differing original positions and hence resiliency becomes a self-perpetuating quality. To simply and glibly state to them that they could succeed if only they take more risks is equivalent to Marie Antoinette advising, “Well, let them eat cake.” 

We see this difference in resilience among nations as well. Wealthy nations can easily overcome the costs of global warming, and hence we can be quite nonchalant about the risk of climate change. But Tuvalu, with an average elevation of 15 feet, faces an existential threat from the combination of a strong storm and the sea level rise now expected in this century.

The human species will survive climate change, even if millions of members of our species will not. Other species will not be so fortunate. Species already driven to a barely sustainable level can be wiped out with one good shot. 

Resiliency is a measure of the distance between the position one enjoys and the crash point threshold beyond which recovery is almost impossible. Under such a measure, we are all not created equal and hence each of us differs in our ability to take risks or bounce back from failures. There is a cost to society in the Darwinistic marketplace, and it affects the most vulnerable most profoundly. 

If we want a society of creative risk takers, we need to be sure that people and nations have equal access to opportunities and equal resiliency from failures. Without that, the well positioned will always remain so and the least fortunate will remain mired in the conservatism that occurs when one is but one step away from ruin. The spectacular failure of a few wunderkinds is the headline. The real story, though, is the tidal waves they have created that have destroyed the resiliency of so many. These losses are far larger than the financial losses alone because they destroy the spirit of the least protected while those who often do the harm can come back as if nothing ever happened.