Brad DeLong on the FTX Collapse and the South Sea Bubble

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, you know, the specifics of the FTX saga disaster collapse are still coming out. But one thing we do know is that, you know, there's nothing really that new about manias. There's nothing really new about bubbles. There's nothing really new about sort of like wildcat shadow banks that implode and lose a lot of money. Like, in a way, this story is as old as time.

Tracy Alloway (0:40)

Well, 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 nihilistic.

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 Levine 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 Frankus 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.

Joe Weisenthal (1:43)

No, but I think you make a really good point in homing in on this idea of running two bubbles as 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 a just for Twitter type of theory.

Tracy Alloway (2:03)

Do you have any other types of theories?

Joe Weisenthal (2:05)

Not really.

Tracy Alloway (2:06)

That was mean. Carmen, cut that.

Joe Weisenthal (2:08)

No, no, keep that in. Keep that in.

People getting to hear the real back and forth between us. But you know, just this idea of like in a period of economic precarity and so forth, if you don't feel like there's like tremendous economic opportunities for you, then you have to run towards bubbles because maybe a bubble will come around two or three, four times in your life, maybe. And if you don't strike it rich on one of them, like when are you going to make it?

Tracy Alloway (2:32)

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.

Joe Weisenthal (2:55)

You know, and there's another thing and you sort of touched on this, which is that, you know, yes, OK, there's always bubbles throughout history, but some bubbles in particular like really sell a vision of like changing the world.

Tracy Alloway (3:07)

Right.

Joe Weisenthal (3:08)

So it's like cryptocurrencies are like Beanie Babies, as I think people say. But I don't even think that at the very peak of like the Beanie Baby mania, that anyone actually believed like they were going to change the world, right? As far as I know. As far as I know, I don't think.

Tracy Alloway (3:22)

Yeah, 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.

Joe Weisenthal (3:36)

Yeah, I think you're right. I think that's exactly what happened. But no, like so that, you know, some of these manias and the.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 neo banks of sorts. I understand like neo bank might mean 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.