Brad DeLong on the FTX Collapse and the South Sea Bubble

story is as old as time. Well, I 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 I'm trying to think of the right word, maybe cynical or nileistic. 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 Levin 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 just for twitter type of theory, you know, it's like I don't have to do you have any other types of theory? Not really, that was mean Carmen cut that. No, No, keep that and keep that in people getting to hear the real, the real back and

forth between us. But you know, just this like idea of like in a period of economic procarity 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 round two or three, four times in your life maybe, And if you don't strike it rich on one of them, like when you're

gonna 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 know, yes, okay, there's always bubbles throughout history, but some bubbles in particular like really cellvision of like changing the world. Right, So it's like cryptocurrencies are like beanie babies, is 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. So 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. 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 says also about this sort of like what I perceive is like this cat and mouse game that regulators play with different kinds of neil banks

of swords. I understand like neil bank 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 hot money flows out of the regulated system totally. I think looking into the similarities and the differences with pass bubbles is definitely something

that we need to do. The other thing that I find striking about crypto and I know there have been you know, 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 financial fascinating angle. Anyway, you and I we could chat for hours, but should we should we talk? Should we bring it in an action? Should we bring it in? Yeah? Yeah, we should, 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 blogg Is fhere and twitter sphere has existed. One of the true originals we're gonna be speaking to Brad DeLong. He's a professor of economics at the University

of California at Berkeley. He's probably been two online since and he is the author of a new book called Slouching Towards Utopia and Economic History of the twentieth Century. This is a true specialty economic history. So how does FTX and crypto it 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. Now, 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, um, But overwhelmingly over the past three well five years or so, and as long as odd Lots been running, it's been very much a paras social relationship in which I listened 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 possible. What is uh if there is still a Twitter? If there is still a Twitter by the time this episode and comes out, which I hope f t X. 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

seventeen hundreds. You see, Great Britain had gone all in and its wars with France starting in six nine, and had issued many, many metric f tons of debt during it. It was a country of six million fighting a country of twenty million and winning, you know, and piling up dead issue after debt issue after debt issue. But all of them were on different terms. None of them were tradeable. 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're 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 tradeable, 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 going we're going to create this enormous liquidity premium in the British National debt which is not previously unexisted, and we're going to skim off a third of that liquidity value for us and our financers, and for you, Mr Member of Parliament, if you will help Greece 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 craps. So talk to us a little bit more like, what exactly is the parallel here other than the south Sea Bubble, you know, 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? Um, Yes, indeed, yes, indeed that it's not just what 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, right 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 cut it drag a canoe across three miles. The Mississippi

River turned out to be 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. I was thinking that was embarrassing on our part, but alas a hundred and sixty 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's

fifteen degrees. So 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 liquid que SIPs and turning it into something that's liquid and fungible on every shared where 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. M hm 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 selled 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 we're still trading on a win issued basis, and wanting

to push them up to the sky um. But that that caused enough selling and enough loss of value elsewhere that people began to question the value of the south Sea Company's stock as well. You know, 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 galper It's the bezel. 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 in because 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 ft X collapsed, he was advocating for a certain type of defy regulation

that many people in defy believe its 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 and Sam Bankman read and why you should invest in

them too. Um that everyone should read this much 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. Like 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 mostly there is a story about a life changing and very profitable technology underneath there.

You know, that is 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 you know, 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, you know. Joe Stiglett says something similar about the dot com bubble right that m c I World Calm was saying it was making huge amounts of fortunes by building out fiber everywhere it

was lying in its account thing. 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 twenty

first century benefited from massively. In the case of the south Sea bubble, you've 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, um, what do you get right? I wanted to bid on the Financial Times n f T M f t X Tombstone, but could not connect by wall by Slanto wallet to the f T S site,

so I never bit 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 real road boom, but no one can make money operating a real road. And again kind of an interesting parallel here with crypto, where you have like this insane bowl market for it's hard to find actually the entity to accrued a lot of profits even during the boom, you know, and especially f TX, and people are like, how did you lose money?

Is the biggest boom of the time and you were trading it and you're mostly long cryptone is still you managed 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 fraud stirs

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 so we have a chance to take everyone's money? Or do they really believe they were building something important? Oh? They said, we have bonds that are currently yielding six percent in the market.

We can issue consoles that will yield four percent um, we can earn fifty on the value of the British government debt if we managed to get this deal done and cream off at least a third of that from themselves.

They were really, really true believes um. 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.

M hmm. This is a related question, but do you think once 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 Vitalic Peuterin from that I thought was fascinating in retrospe But the quote is in the case of ethereum, if somehow eight percent of Ethereum's

users just end up being cryptocurrency speculators. Would we then have a social responsibility 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 um? The fact you mean that the existence of speculators deranges people exactly? Like

does it? Does it change their own behavior? So maybe I was growing two lips because I love two lips, But now that I have all these people speculating, you know, like the calculation starts to change. Yeah. The old teacher Charlie Kimdlberger 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, you begin to think making

stupid investments is a good business model. You know, it really does unhinge everyone, especially because 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 g this time it is different, at which case you 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 to like a credit crisis or anything like that. But you can also have these big bubbles that crash

and have enormous consequences for the economy. Talk to us about how how those effects play out. Yeah, and I was about to ask you what the key is leverage. 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 high. They 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 two thousand and eight and we were doing our rough back of the envelope calculations about the subprime collapse, and we concluded that there was about five billion dollars of more ages 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 six percent, 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 triple A, so we can use them as our core reserves, and they're paying us fifteen basis points more than real triple A assets are. And it was the fact that that was held by guys who were leveraged forty to one, you know, as their core reserves that made a simple crash of an asset into an enormous, interlinked chain of

bankruptcies were at the them. No one is sure is they're they're solving 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. Now, we don't think that's going to happen outside the crypto sphere

right now, We really do not think so. So another question in a 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, um, 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 lapse, 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 you know, edge more towards bad business practices like moving FTX customer money to ALAMT or other things that someone might allege his fraud or lying to the public about the safety of the reserves. You pointed out that, you know, in a boom, at a bubble, you can have this sort of like the 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 the as it all tips over and collapses, essentially the fraud becomes the attempt to keep the real business going. Well. Then first there's one stage in which you think, well, g there's a hiccup, but we can recover, and then G 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, you know, 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 Freed did not set out to steal eight billion dollars from ft X 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 accountants messed up. But he did start out thinking that money from f t X could be very useful in getting Alameda over this particular bad patch, and

then things it a snowball after that. If you want to be a rich person and live a rich 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 fifty chance of losing half your money unless the upside more than doubles gives you a fifty 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 are telling them that they should make

any positive net present value value bet whatsoever. And if you do that, if you make much risk your bets than the Kelly criterion. Then you wind up bankrupt with very high probability and extraordinarily filthy rich with very low probability, you know, 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 mentioned fleet of France, is there a pretty long history in these stories of someone winding up in another country's borders after it implodes? Is that is that a common through line threat financial collaption. It's a common story. I don't exactly know how common it actually is in terms of how much 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 eighteen hundreds 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 to what extent it's simply that we do not want to have to spend our lives incarcerated in the Marshall Sea prison because we're never getting out of this. M um Brad you mentioned kindle Burger earlier, and of course he wrote a sort of seminal piece

about financial manias and bubbles. But a big part of kindle Burger is talking about what should actually be when it comes to bubbles, and he talks a lot about a lender of last resort. There are other options to 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? Um, Well, the lender of last resort is mostly Kindleburger wearing his canesie and macro economist 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 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 ever 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 two thousand and eight and two thousand and ten, 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 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. You know, that is where there are things to be done there. In the 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 and enterprise. There's no enterprising

underneath the loaning and borrowing. You know, there are computer programmers looking for Web three use cases, but they don't really need crypto assets to do this um and it's unclear how trading crypto assets helps discover those Web three use cases. M 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 attention there within the minds of regulators. This is the the probably mythical story about what Alan Greenspan told FED governed, the late FED governor, the late and Ed Gramleck in the early two thousands when Graham Lick said you need to do something about subcrime, and green Span is supposed to be said, there are lenders who want to lend, There are borrowers who want to borrow.

All of them have their congressmen 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 um grabbed by the same currents of thought that makes 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, 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, right that if someone running a Ponzi scheme has to show someone five of real profits every year, or actually pay out five percent 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 um every year, but just send

them a statement saying their balance has grown. M I think the problem, on the other hand, is that raising interest rates puts a lot of real people out of work. I think there's really important or interesting about like this sort of dilemma of regulators. And it's like, you know, you hear this all the time with crypto. It's like like, don't don't tamp down on innovation, and it's really important

there's gonna be some innovation coming. And I said, 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 on some innovation and then it flourishes elsewhere and makes finance more efficient. But this idea of like, well, just 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'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 an f d C in shirt 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 SNP earnings yield is

what four and a half percent? Now, you know, 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 Web three use case, they're going to want to build their Web three 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 Web three use case would ever want to give away a lot of the value to today's holders of bitcoin of it, or if they're that's a great point. So just going back to some of our discussion UM 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 because they yell at me on Twitter all the time whenever you know, I'm sure they're out there. But there is they're true believers rather than butts programmed by non true believers. Yes, that's a good point. I've probably just been been emotionally abused by a bunch of

robots for the past three years. But anyway, UM, this lottery ticket idea, I wonder if you could talk about whether, and you know, this is kind of what your 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, to that lend itself to more opportunities for speculative manias to build um. 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 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 um and that makes people rather easy prey for a whole bunch of social engineering projects.

I just have a 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 treat. It sounds pretty good, And of

course copycats abound in crypto all over the place. What if those copy cans do, though, what were the other entities that saw the south Sea bubble and they say we want to get in on 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 onto or that they that 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 bo the south Sea Company originally was supposed to be a trading company sending out ships to the South Seas, and I only switched to their you know, bank, to their British government debt

business model later on. I don't want to say it's everything, um, 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 bungible 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, Bred DeLong,

Thank you so much for coming on been uh. I can't believe it's the first time we've had you, but definitely I hope to have you back at some point and everything should check out the book Welcome me back and keep doing what you're doing, because you've been an amazingly you've been actually killing it. We didn't just have you on to say that what we would have had we know this is a condition of coming out. We know you were gonna say that, would have had you

on much earlier. But thank you so much. Plus plus, I hope the listeners to Odd Thoughts can push my book above all format sales. All right for the course of the next week. We could do this go out by Yeah, we can. We can make this happen, all right, take care of bread. 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. Yes, for real, 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 gonna he believed in crypto so much he was going to take a portion of his salary in cryptocurrencies. 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 write, let it do what it's gonna do, but you know, make sure that city group is not providing major funding two ft X or whoever else. It seems like a very reasonable way to think about it, so that it's not about like that, because 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 gonna 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 gonna be an inflation head, 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 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 like 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 that to me is probably what stood out about this whole that you literally, like you and I could literally copy and paste the big coin 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 light Coin, like that guy made a ton of money, and I was basically 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 FTX specifically, is this idea of like the politics and what a 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 in the sort of crypto defied

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 Hesitan novelty. But it's one of some of these patterns. Man, boy, did they repeat? Yeah, like history doesn't necessarily repeat, but it definitely rhymes. It comes

close to it, does it does. But I do think there are some idiosyncrasies that kind of like make this one inpecial and that just you know on this point too, And I totally feel this, which is the economists always

everyone underestimates how long these things can go on. And then the longer you go on, you started questioning your own sanity because you're like, I mean 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, probably career. You're probably one of them. There's yeah, there's like a bitcoin obituaries page where they where they list all of

the failed so we we gotta 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 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 the cool anyway. I do think talking about other historical bubbles and sort of pulling out what's 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, it's thankfully we're not money managers whose job is to tell clients. But I do think in the way everyone does feel like they had to take on crypto specifically, they had to take a side, 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 see how defies actually find as 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 through about history. Shall we leave it there? Let's leave it there, all right? This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Isn't Though. You can follow

me on Twitter at the Stalwart. Follow our guest Bred DeLong. He's at DeLong on Twitter, and check out his book Slouching towards Utopia. Follow our producer Carmen Rodriguez at Carmen armand and check out all of the podcasts at Bloomberg unto the handle at podcasts and for more Odd Lots content, go to Bloomberg dot com slash odd Blogged, where we post episode transcripts Tracy and I plug and we even write a weekly newsletter on these topics that you should subscribe.

Thanks for listening to it. E