Whither Keynesianism?

A second problem with the Keynesian recommendations is that governments did not do enough to build up surpluses in good times. Many governments therefore are running out of fiscal space, or at least markets perceive that to be the case. Even if Keynesian theory says they ought to be expanding with their fiscal policy, they can’t always do so with impunity.

The recent history of the UK government is a paradigmatic example. Under Prime Minister Liz Truss, the plan was to boost spending on energy subsidies and cut some taxes. Whatever else you might say about the details of those policies, they did fit the Keynesian recipe for fiscal expansion in tough times (though it is noteworthy that many leading Keynesian economists strongly opposed them).

The problem is that markets didn’t like the policies, and the British pound fell and borrowing rates on government bonds rose. Financial markets were roiled, and now the Truss days are over.

Now Rishi Sunak is prime minister. What exactly is he supposed to do? He might try the opposite of the Truss plan, namely raise some taxes and cut some spending, or at least bend downwards the trajectories for future spending. In Keynesian terms, however, that policy is ill-advised. The UK is likely entering a recession, and the Bank of England has declared it may be the longest recession on record. Is it really wise to engage in austerity when times are turning bad?

Furthermore, the extant numbers do not indicate that the UK has to engage in austerity. Its debt-to-GDP ratio is about 80%, which is not astronomical. For a while economists Carmen Reinhart and Kenneth Rogoff tried to convince the profession that debt levels are dangerously high at 90% of GDP, but those arguments were shot down for having data errors and now those claims are discredited. It is not easy to now argue that a debt-to-GDP of 80% requires austerity.

Here is the remainder of my Bloomberg column on the topic.

What rises and falls in status through the FTX story?

More than one MR reader has requested this post, so here goes:


  • Common-sense morality
  • Common-sense investing rules
  • American corporate governance
    • Boards, and nervousness about related-party transactions
  • Coinbase
    • Seen as stodgy and bloated for much of the past year. But run in the US, listed in the US, and properly segregating customer funds.
  • Elon Musk’s ability to judge character
  • Vitalik and Ethereum
  • Circle, Kraken, and Binance
  • Anthony Trollope, Herman Melville, and the 19th century novel.  Books more generally.
  • U.S. regulation of domestic exchanges – it is one of the things we seem to do best, and they created little trouble during 2008-2009, or for that matter during the pandemic
  • CBDC, and sadly so
  • Crypto forensics
  • Twitter and weird anon accounts
    • When would the trouble have been exposed if not for Twitter? And much of the best coverage came from accounts with names like Autism Capital.
    • Some critics (like Aaron Levie), too.
  • Bitcoin
    • After a cataclysm for the crypto sector, it’s down about 15% over the past month. That’s less than the S&P 500 lost during the worst month of the GFC.


  • Effective Altruism
    • A totalizing worldview that has enabled some undesirable weirdness in different places.
    • Valorizing “scope sensitivity” and expected value leads people violently astray.
  • Being unmarried (and male) above the age of 30
  • Being on the cover of magazines
  • Appearing with blonde models
  • Buying Super Bowl ads and sponsoring sports and putting your name on arenas
  • “Earn to give” as both a concept and a phrase
  • Mrs. Jellyby
  • The concept of self-custody
  • Weird locations for corporate offices
  • Venture capital
  • Our ability to see crazes for what they are in the moment
    • This is not just, or even mainly, about crypto
  • Drugs
    • Adderall and modafinil, perhaps stronger stuff also played a role.
  • The children of influential faculty
    • Do they grow up witnessing low-accountability systems and personality behaviors?

What else?  I thank several individuals for their assistance with this post.

Motivating Creativity

I am interested in Danil Dmitriev’s job market paper from UCSD:

How should one incentivize creativity when being creative is costly? We analyze a model of delegated bandit experimentation where the principal desires the agent to constantly switch to new arms to maximize the chance of success. The agent faces a fixed cost of switching. We show that the principal’s optimal reward scheme is maximally uncertain—the agent receives transfers for success, but their distribution has an extreme variance. Despite being stationary, the optimal reward scheme achieves the principal’s first-best outcome provided that the agent’s outside option is sufficiently valuable. Our results shed light on the non-transparent incentives used by online platforms, such as YouTube, and guide how to design incentives for creativity in such applications.

One feature of this model is that extreme uncertainty about rewards motivates project-switching, which is what the principle wants.  Most projects should offer low rewards, but a small percentage of winners should offer very high rewards.  In this model it is also the case that opaque bonus schemes perform better than transparent ones.  As I understand this result, the principal wants the agent to keep on switching and thus does not want to offer any kind of “safe haven” where the agent can rest securely.

*Edible Economics*

The author is Ha-Joon Chang, and the subtitle is A Hungry Economist Explains the World.  This is an economics of food book with a Korean emphasis, and arguing in favor of protectionism and industrial policy, in line with the author’s earlier works.  Here is one excerpt:

South Koreans went through a staggering 7.5kg of garlic per person per year between 2010 and 2017.  We hit a high in 2013 of 8.9kg.  That’s over ten times what the Italians consume (720g in 2013).  When it comes to garlic consumption, we Koreans make the Italians look like ‘dabblers’.  The French, ‘the’ garlic eaters to the British and the Americans, only manage a paltry 200g per year (in 2017) — not even 3% of that of the Koreans.

Chang does note that the Korean figure also includes a lot of garlic used to make stocks and then (in part) not consumed.

How to process the FTX news — a test

Here is one MR comment that illustrates my point:

How noble—stealing people’s life savings to increase African birth rates, navel-gaze about AI risk, make cows happier, and all the other nonsense.

Mostly a bunch of lost, hideous people with terrible moral intuitions proclaiming themselves the most holy tribe in existence.

Not a single worthwhile cause in there.

From MR commentator Ineffective Grifterism.

I would say if the FTX debacle first leads you to increase your condemnation of EA, utilitarianism, philosophy, crypto, and so on that is a kind of red flag for your thought processes.  They probably could stand some improvement, even if your particular conclusion might be correct.  As I’ve argued lately, it is easier to carry and amplify damning sympathies when you can channel your negative emotions through the symbolism of a particular individual.  Especially when others are doing the same — do not forget Girard!

It is better to simply file the data point away and add it to your mental regressions, but not right now to get too emotional or condemnatory about it.

If you would like, here are a few better questions for occupying your time:

1. Which 19th century novel does this story most resemble?

2. If you had to flee the Bahamas, and sought out a locale with no extradition treaty, which one would you choose?  (Indonesia, for me, not Dubai.)

3. What kind of love story exactly is that of Sam and Caroline?  I mean this query seriously and I am not looking for a hostile or sarcastic answer.

4. Which parts of the SBF worldview remain correct and will end up undervalued?

5. What does the scenario look like where this is good for crypto as a whole?

6. How should remaining EA philanthropists rethink their giving and also their PR?

7. How will this affect economic development in the Bahamas?

You can work yourself on completing this list.  My claim is that, over time, you will end up much smarter if you focus on questions like these rather than “reliving” collective condemnations like those of Ineffective Grifterism.  Nominative determinism occasionally does hold!

A simple point about existential risk

Hardly anyone associated with Future Fund saw the existential risk to…Future Fund, even though they were as close to it as one could possibly be.

I am thus skeptical about their ability to predict existential risk more generally, and for systems that are far more complex and also far more distant.  And, it turns out, many of the real sources of existential risk boil down to hubris and human frailty and imperfections (the humanities remain underrated).  When it comes to existential risk, I generally prefer to invest in talent and good institutions, rather than trying to fine-tune predictions about existential risk itself.

If EA is going to do some lesson-taking, I would not want this point to be neglected.

Is the EA movement dead?


To be clear, I am not “an EA person,” though I do have sympathies with considerable parts of the movement.  Most of all it has struck me, as I have remarked in the past, just how much young talent the movement has attracted.  Money enabled the attracting of that talent, but I never had the sense that the money was the reason why the talent was showing up at EA events.  So a less well-funded EA movement still will be potent, at least assuming it gets over the immediate trauma.  That trauma may even help to drive away some of the less serious poseurs who thought EA was the easiest path to polyamory, or whatever..

Intellectual movements can be quite influential on small sums of money.  What exactly was the budget for the Apostles?  Or take libertarianism, which arguably saw peak influence in the last 1970s and early 1980s, when it was much less well funded than in later times.

How much money did the Benthamites have?  Nonetheless they influenced policy a great deal.

As a side note, Open Philanthropy spent over $400 million in 2021.  I know zero about their plans, but I don’t see any reason to think they will be unimportant in the future.  That is plenty of funding right there.

A mere month ago, I witnessed the game of young people sitting around, speculating how many future billionaires will be attracted to EA.  Probably that number has fallen, for reasons related to the current bad publicity, but I don’t see why it has to have fallen to zero.  The next set of billionaires might simply choose a different set of labels.

I do anticipate a boring short-run trend, where most of the EA people scurry to signal their personal association with virtue ethics.  Fine, I understand the reasons for doing that, but at the same time grandma, in her attachment to common sense morality, is not telling you to fly to Africa to save the starving children (though you should finish everything on your plate).  Nor would she sign off on Singer (1972).  While I disagree with the sharper forms of EA, I also find them more useful and interesting than the namby-pamby versions.

Tyrone knocks at the door: “Tyler, you are failing to state the truth about SBF!  He did maximize social welfare!  And sacrificed himself to that end.  What indeed is Christ without Judas?  Judas sacrificed his reputation.  So did SBF.  Now the jump-started EA ideas will live on for eternity.  And those who hold crypto through Caribbean exchanges are about the most deserving losers you can think of.  Those assets did not represent social value anyway.  And isn’t discouraging crypto investment exactly what we should be doing?  (SBF is good for the environment!)  And you need a celebrity example of wrongdoing for that lesson to stick, not just a few random price drops for bitcoin.  He is surely a true angel…”  At which point I had to ask Tyrone to leave the penthouse and shut his dirty mouth…he is not a valid boy!

Why is the New World so dangerous?

I’ve been asking people that question for years, here is the best answer I have found so far:

We argue that cross-national variability in homicide rates is strongly influenced by state history. Populations living within a state are habituated, over time, to settling conflicts through regularized, institutional channels rather than personal violence. Because these are gradual and long-term processes, present-day countries composed of citizens whose ancestors experienced a degree of “state-ness” in previous centuries should experience fewer homicides today. To test this proposition, we adopt an ancestry-adjusted measure of state history that extends back to 0 CE. Cross-country analyses show a sizeable and robust relationship between this index and lower homicide rates. The result holds when using various measures of state history and homicide rates, sets of controls, samples, and estimators. We also find indicative evidence that state history relates to present levels of other forms of personal violence. Tests of plausible mechanisms suggest state history is linked to homicide rates via the law-abidingness of citizens. We find less support for alternative channels such as economic development or current state capacity.

That is from a new paper by John Gerring and Carl Henrik Knutsen.  It is also consistent with so much of East Asia having very low murder rates.  Via the excellent Kevin Lewis.

How will crypto clearinghouses evolve?

That is the topic of my latest Bloomberg column, here is one excerpt:

The upshot is that there is a tendency for members of a clearinghouse to either a) fail to meet standards and go bust, or b) join or least collude with a dominant coalition.


You could also argue that a dominant clearinghouse might be good for crypto. The history of banking includes dominant or semi-dominant clearinghouses stabilizing markets and helping to introduce innovations, for instance of timeliness and transparency. The collusive monopoly might take too big a share of the market surplus for itself, but it has an incentive to keep the market up and running and profitable. That is hardly the worst arrangement crypto might stumble upon.

It is also true that a dominant clearinghouse is much easier to regulate, and indeed modern central banks often sprung out of these earlier clearinghouse arrangements. Sooner or later, there is a tendency for the law to intervene and turn the dominant private clearinghouse into part of a more formalized central bank. It is no accident that member banks of the Fed are still called “stockholders.”

One complication is that Binance is not a US firm; incorporated in China, it is now based in Dubai. Regulators might hope an American or at least Western version of Binance comes along, perhaps to create a new market duopoly. Arguably that is what regulators were hoping all along for FTX, so at least one version of the previous plan now has a huge hole in it. All the more pressure will be placed on Coinbase (a US firm), which may gain business but face a heavier regulatory burden and be expected to play a more specific role in the system.

When guessing at the future of crypto, keep in mind that the future of crypto exchanges and the future of crypto assets are very different things. For many pure crypto bugs, the exchanges are a sellout and a concession to older methods of finance and settlement. The exchanges can be regulated, controlled and co-opted, even turned against the notion of individual monetary sovereignty. Instead, the pure crypto vision stresses the notion of “every person their own bank,” through the medium of a personal wallet and beyond easy purview of the central authorities.

We should all be rereading Charles Goodhart…

Redux, my CWT with SBF

I won’t indent:

COWEN: I have some crypto questions for you. Is there, in fact, any way to coherently regulate stablecoins? I see what the proposals say: It’s all about capital requirements, deposit insurance, treat it as a bank account, like a new kind of money market fund. Can that possibly work? Doesn’t it end up having to be applied to all of crypto, all payments companies, PayPal, whatever else? What’s really there that they can do?

BANKMAN-FRIED: That’s a really interesting question. First of all, I will say, I think there is something that does work compared to the current environment, but I’ll get to your point — it’s actually a good one. If you just said, “Look, all stablecoins have to be fully backed by the dollar and have to have audits to confirm that they are in a bank account,” that would get a pretty safe product that was well understood, well regulated, and frankly would be, from a product perspective, just as good as current stablecoins. That’s what all the stablecoins are doing today.

It’s a mess because there’s no clear regulatory framework for them to fit into and to have oversight of that. So, part of my answer there is, basically, yes, I think that framework would solve the current problems that people have in a pretty clean way. But you have a good point there, which is, how about PayPal? There are all these things that we don’t call stablecoins right now, that we call something else.

COWEN: PayPal promises me a dollar, and they give it to me. I’m happy, right?

BANKMAN-FRIED: Exactly. In fact, a lot of these look a lot like stablecoins when you drill into it. When you really dig into it, what is the difference between PayPal and USDC? I guess there’s some differences, but I think there are more similarities than there are differences, to be honest. What does that imply for PayPal? You can just say, whatever it implies, stablecoin is not PayPal — it’s how it is.

I think there would be a big improvement over the current world, where it’s the same thing but without regulatory oversight and with a lot of random drama because of this. But I do think that it gets to this question of, “Wait, but banks are allowed to rehypothecate dollars. Banks are allowed to do all manner of wacky things with their deposits.” Are stablecoin companies allowed to? If not, is it obvious they shouldn’t be allowed to? And how should that be governed and regulated?

Maybe the answer is, whatever: The banks will do that on their behalf, the banks where they hold their assets, and then pay them interest for the right to do that — although, of course, right now banks aren’t actually paying interest, really . . .

COWEN: Not to me. Also, how stable does a stablecoin have to be to be regulated as such? If there’s any regulatory definition, won’t a lot of people just camp their crypto assets to be just slightly more volatile than wherever the line is drawn, or you’d just end up regulating all of crypto? How does that work?

BANKMAN-FRIED: This could go in a few ways. Is your thought that people will attempt to get just barely into the regulatory system or just barely out of it?

COWEN: Maybe both, but a lot of people will go out of it. So I’ll issue something. I’ll call it a “not stablecoin,” but de facto, it will be very stable. But also, “Oh, it’s just sort of an accident. Oh, who knows what the markets going to do today?” It’s just stable for decades. How do you regulate that?

BANKMAN-FRIED: Oh, that’s a really good question. Of course, what it gets you is this question of, what if a stablecoin didn’t promise to be a stablecoin? Is it bad that it’s backed by the dollar? Does it somehow make it worse from a regulatory perspective? Why is it being held to a higher standard?

COWEN: Exactly.

BANKMAN-FRIED: I do think there’s a little bit of an answer here, although I also think that this is getting at another point, which is, you could reasonably say, “Look, are consumers doing what they’re doing with their eyes wide open?” If there’s sufficient disclosures and transparency, shouldn’t people be allowed to use stablecoins with some risk in them?

I think that’d be a reasonable thing to think, but if you put that aside for a second, you say, “No, absolutely not.” Here’s one difference between that and the stablecoin, which I think is relevant, is that a stablecoin is not just stable in one direction. It’s stable in both directions. In particular, if you’re an investor, and you buy a stablecoin, you have downside risk but not upside. If somehow the stablecoin company makes money, you’re probably not going to get any of that, but if it loses money, somehow, you’re probably on the hook for that.

So, there is something a little asymmetric going on here for the consumer. I think it wouldn’t be crazy from that perspective to think that there should be some protection here and that maybe there should be regulation if consumers are only given one side of exposure, but I don’t think that’s obviously true. I think you’re making a decent point.

COWEN: Now, if we look at DeFi, there are some forms of obvious, explicit leverage, like people borrow money to participate in the system. But those aside, I’ve learned over my life, if you look at any system, any institution, typically there are forms of hidden implicit leverage in those institutions. Might be good, might be bad, but it’s there, and in a sense, you don’t understand the institution until you understand where’s the implicit leverage in this game. In DeFi, where is the implicit leverage? Is it rehypothecation, or where is it? What is it?

BANKMAN-FRIED: Ignoring the explicit leverage of borrow-lending protocols —

COWEN: Yes, which is easy to see, right?

BANKMAN-FRIED: Which is easy to see, yes. So, what happened in 2008? What caused the collapse in a lot of things? That’s sort of a dumb question, but one of the things that led to this is that no one knew how much leverage there was, really, in the system. As you said, there’s always implicit leverage, and in this case, it was all of these bespoke OTC swaps between banks that basically didn’t get reported anywhere. In fact, those got rehypothecated again and again and again. No one was keeping track of the total notional fees. It was impossible to — they weren’t public.

One thing you could do is look for a similar thing in crypto. You could look for OTC transactions. You could look for OTC swaps that live on. You could look at OTC borrow-lending. Those are in crypto. Are they in DeFi? It’s sort of ambiguous — they touch all areas of the crypto ecosystem.

But that’s an area where I think there’s some dubiously accounted-for leverage. I think that’s one answer to that question. Where else is there leverage that sort of is implicit? Rehypothecation sometimes, although in DeFi, because it’s all on-chain, it has to be pretty explicit if it’s going to be rehypothecated, but you’re not . . .

COWEN: But it’s hard to see, right? If you traced everything, you could find it, but no one’s actually watching it. Or are they?

BANKMAN-FRIED: Well, they’re halfheartedly watching it maybe, is how I’d put it, which is not great. Maybe full-heartedly watching it. I could imagine arguing for people full-heartedly watching it, and that would be a reasonable thing for them to be arguing for. In particular, if someone releases a protocol, there’s a question of, well, is that protocol rehypothecating? You just look at the code and see if it can rehypothecate, right?

In general, people actually often do know whether each protocol individually can rehypothecate, which is a separate question from whether they, as a group, can or whether they are or something. But in fact, most of these aren’t. Most DeFi protocols are not doing things beyond what they literally say they’re doing, and so the amount of leverage they introduce into the system mostly is what they say they are.

But here are some hidden things. First of all, you take one leverage thing, you put in another leverage thing, so DAI. DAI is an algorithmic stablecoin. Like other algorithmic stablecoins, it is not perfectly stable. It’s not perfectly stable because it’s not backed by the US dollar. It’s backed by crypto assets that could have price movements. It’s very overcollateralized. DAI can then be used as collateral on some borrow-lending protocols in crypto. That’s one form of rehypothecation in DeFi markets that you can trace through. It is, in theory, public, but it’s not super easy, necessarily, to trace through.

COWEN: Now, for mathematical finance, as you know, we at least pretend we can rationally price equities and bonds. People started with CAPM. It’s much more complicated than that now. But based on similar kinds of ideas — ultimately arbitrage, right? — if you think of crypto assets, do we even have a pretense that we have a rational theory of how they’re priced?

BANKMAN-FRIED: With a few of them, not with most. In particular, let’s talk about Dogecoin for a second, which I think is the purest of a type of coin, of the meme coin. I think the whole thing with Dogecoin is that it does away with that pretense. There is no sense in which any reasonable person could look at Dogecoin and be like, “Yes, discounted cash flow.” I think that there’s something bizarre and wacky and dangerous, but also powerful about that, about getting rid of the pretense.

I think that’s one example of a place where there is no pretense anymore that there is any real sense of how do you price this thing other than supply and demand, like memes versus — I don’t know — anti-memes? I think that more generally, though, that’s happened to a lot of assets. It’s just less explicit in a lot of them.

What is Elon Musk’s greatest product ever, or what’s his most successful product ever? I don’t think it’s an electric car. I don’t think it’s a rocket ship. I think one product of his has outperformed all of his other products in demand, and that’s TSLA, the ticker. That is his masterpiece. How is that priced? I don’t know, it’s worth Tesla. It’s a product people want, Tesla stock.

COWEN: But the prevalence of memes, Dogecoin, your point about Musk — which I would all accept — does that then make you go back and revisit how everything else is priced? The stuff that was supposed to be more rational in the first place — is that actually now quite general, and you’ve seen it through crypto? Or not?

BANKMAN-FRIED: Absolutely. It absolutely forces you to go back and say, “Well, okay, that’s how cryptocurrencies are priced. Is it really just crypto that’s priced that way?” Or maybe, are there other asset classes that may claim to have some pricing, or purport to, or people may often assume it does, but which in practice is not exactly that? I think the answer to that is a pretty straightforward yes.

It’s a pretty straightforward answer that you look at Tesla, you look at a lot of stocks right now, you think about what determines their market cap — the discounted cash flow? Yeah, sort of, that plays a role in it. That’s 30 percent of the answer. It’s when we look at the meme stocks and the meme coins that we feel like we can see the answer for ourselves for the first time, but it was always there in the other stocks as well, and social media has been amplifying this all over the place.

COWEN: Is this a new account of how your background as a gamer with memes has made you the appropriate person for pricing and arbitrage in crypto?

BANKMAN-FRIED: Yeah, there’s probably some truth to that. [laughs]

Here is the full dialogue.

The wisdom of David Brooks

Performative populism has begun to ebb. Twitter doesn’t have the hold on the media class it had two years ago. Peak wokeness has passed. There seem to be fewer cancellations recently, and less intellectual intimidation. I was a skeptic of the Jan. 6 committee at first, but I now recognize it’s played an important cultural role. That committee forced America to look into the abyss, to see the nihilistic violence that lay at the heart of Trumpian populism.

Here is the full NYT column.  Wise throughout.

Friday assorted links

1. New Enceladus results.  What is the “p” of life there?  0.7?

2. Russia’s grinding mobilization.

3. Does walking help you generate ideas? (speculative)

4. What next for the Federalist Society?

5. Bahamas coverage, from the Bahamas, for the curious.  We kind of, sort of have this Woke media, but at the same time…no one seems to give a damn about the Caribbean perspectives.

6. Glenn Ellison on equilibrium obfuscation.