This post was nearly complete yesterday when the MacBook on which I was writing it failed. I am told that when it is repaired, most of it will have been replaced. Apparently, it had tea or coffee in its workings, although I am very unsure as to how. Thankfully, it was insured for the risk of such eventualities arising.
The post remains relevant today, so here it is, a day late, and automatically saved during the crash that happened:
As the FT noted yesterday:
Jean Tirole, a Nobel Prize-winning economist, has warned about “insufficient supervision” of stablecoins and the possibility that governments will be forced into multibillion-dollar bailouts should the tokens unravel in a future financial crisis.
In an interview with the Financial Times, the winner of the 2014 Nobel Prize in economics said he was “very, very worried” about supervision of stablecoins and the possibility of a run by depositors if doubts materialised over the underlying reserve assets to which the digital tokens were pegged.
As he told the paper:
“If [stablecoians are] held by retail or institutional depositors who thought it was a perfectly safe deposit, then the government will be under a lot of pressure to rescue the depositors so they don't lose their money.”
That single sentence goes to the heart of the problem. Stablecoins pretend to be money — and yet, unlike real money, they are neither guaranteed by governments nor properly supervised. It didn't take an economics prize winner to notice that, but he is right for a number of reasons.
The issues
First, what is being created here is a shadow banking system. The promise is that these so-called coins are “backed” by assets such as US Treasury bonds. However, those bonds often yield low returns in real terms. The temptation, as Tirole notes, is in that case to chase higher returns to increase profits, and that, inevitably, means riskier assets. Once that happens, the promise of stability disappears. A single shock could, in that case, unravel the whole edifice in Tirole's opinion, as I have been saying for some time. That risk is real.
Second, there is the politics of this matter. Tirole is explicit that when members of the US administration, including Donald Trump and his family, have personal and ideological stakes in this business, already weak regulation may be deliberately compromised. That, of course, is a recipe for cronyism and, ultimately, disaster. The likelihood of that happening is high.
Third, the systemic consequences cannot be overstated. So-called stablecoin savings now amount to nearly $280 billion. That is not trivial. If even part of that unravels, retail and institutional holders will, as Tirole suggests, demand financial rescue from the state and politicians, fearing contagion and public anger, will almost certainly comply. What has begun as a “private innovation” might well end as a public bailout in that case.
Fourth, this is not just a financial stability issue. It is about sovereignty. A global system of dollar-linked private tokens undermines the ability of governments and central banks to conduct monetary policy. In effect, the private interests of supposed crypto entrepreneurs and the ideological obsessions of Trump could neuter the capacity of democratic states to manage their own economies.
The consequences are clear
First, we risk repeating the story of 2008: private actors chasing returns whilst regulators are asleep or looking the other way might create a crash, and the public will then be forced to pick up the bill when the inevitable collapse comes.
Second, the fiction that “innovation” in finance is always desirable is wrong: that is just a story told by those who make short-term gain. Stablecoins are nothing more than unregulated deposit-taking, dressed up in the language of technology.
Third, there is an issue for democracy here. If governments cede control of money creation and supervision to private actors with political patrons, then accountability in economic policy is lost. That makes the fight over the Fed look almost insignificant in comparison.
So what should be done?
First, regulators must end the pretence that stablecoins are harmless. They are not. They are systemic risks in the making.
Second, we should refuse the framing that this is “innovation”. It is not. It is the re-emergence of privately issued money, with all the instability that entails.
Third, governments must assert that money is, and must remain, a public good*. That means banning the effective private minting of supposed substitutes that pretend to be safe deposits but are nothing of the sort.
And finally, we must name the politics. This is not just a financial debate. It is about whether democracy retains control over money, or whether that control is handed to a network of oligarchs, speculators and opportunists, inclduing politicians with the power to manipulate regulation.
Jean Tirole is right to be “very, very worried”. We should be, too.
* A public good is usually something provided by a government without the aim of making a profit, which has two defining features. First, it is non-rivalrous, meaning one person's use does not reduce what is available to others, and, second, it is non-excludable, meaning it is difficult or impossible to stop people from benefiting once it exists. Street lighting, clean air regulation, or national defence illustrate the point: everyone benefits, and no one can sensibly be excluded. Money also meets this criterion, as does an effective progressive taxation system. These qualities create the free rider problem, since private providers cannot charge effectively for use. As a result, markets underprovide public goods, making government intervention essential if society is to function well.
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Corporations have taken over many of the fuctcions of the state (more turds in your river sir?) – health will soon follow and money is now in play.
Citizens/serfs have a choice – vote for a party that reverses much of what has happened, or………..vote Imbecile – Vote Deform & see the control of money move to the corps.
Noble Prize for economics (awarded by a Swedish Bank) – there fixed.
I did not know the Scots made computers; MacBook. Does it come in different tartans?
The government being involved in any sort of ‘crypto’ bailout is ludicrous, the responsibility is clearly on the company involved and the purchaser. Biggest example of crash so far ‘In May 2022, the Terra blockchain was temporarily halted after the collapse of the algorithmic stablecoin TerraUSD (UST) and the cryptocurrency LUNA, an event that wiped out almost $45 billion in market capitalization within a week’ – one of the founders Do Kwon is facing some sort of prison consequences.
I don’t understand why Governments would feel they would need to bail companies out. Can you please explain. Surely the majority would have other assets they would have recourse to. Individuals have made foolish investment decisions which they are responsible for.
The point is, they won’t have sufficient other assets.
If they do not have other assets then they should go bankrupt. They should read the contracts.
Small mindedness knows no limits in your case, does it not?
Slightly off message, but I wonder what will happen to crypto if the info I’m getting from various OSINT’s in the US is true: There’s a White House announcement due at 2pm. AND all roads to Walter Read Military Hospital (which is where they take Presidents who are ill) have been sealed off. See this link: https://x.com/YourAnonCentral/status/1962731924780405185
Just to add, that it’s a week today since Trump was last seen in public – even at the White House (any pics that appeared in this time are fake). And his social media account has been nearly silent.
The rumours are of mini-strokes, I think?
2pm Eastern Standard time? That is 7pm our time?
I understand that His Satanic Majesty is looking forward to meeting Mr Trump for very long & deep & “meaningful” “conversations”.
I meant to add, that an alternative explanation doing the rounds is that this is to deflect from the Epstein survivors press conference Wednesday morning, and Congress resuming, with an almost immediate vote to take control of all the Epstein files (including the infamous birthday book), and hold hearings with various figures central to the scandal. We shall see.
You may well be right
Stable coins, as privately issued money, will collapse at some point as as happened in the past with privately issued money.The whole point of stable coins, as far as I can see, is fraudulent. In principle they are backed, dollar for dollar, by government bonds. But then, what’s the point? Just use dollars instead. The underlying reason is to only partially cover the stable coins value, then the issuers can make profits. They may say they are fully covered but, being unregulated, this is unlikely. And if not fully covered they are liable to runs and collapse.
Fortunately there are relatively few stable coins pegged to the British pound (less than £1 million according to my search). So the issue is with dollar pegged stable coins.
One might say this is a US problem but of course, they tend to export their problems to the rest of the world.
My first reaction is, when the crash happens, to let people lose money. This is how capitalism is supposed to work. But, I guess, there may be some systemically important organisations who have “invested” in dollar backed stable coins (why on earth would they do that?). If they are UK organisations then, I guess, the UK government will have to bail them out. But please, if an organisation is insolvent as a result of poor commercial decisions, in this case buying stable coins, let the shareholders and bond holders of that organisation lose their shirts (as should happen with the nationalisation of Thames Water). That is, take them in to national ownership at a fair value for a company that is insolvent (£1?). Now investors in a failed company lossing their money may have a knock on effect on other organisations becoming insolvent. I would say let that happen. Then nationalise them too if they are systemically important. In my view this should have happened in 2008/9. Instead the banks were bailed out. But, for our system to work, investors (gamblers?) must be liable for the risks they take. The governments job is to support important organisations not to underwrite stupid risks taken by private individuals and organisations.
Whilst £280 billion is significant, it’s a lot less than the losses in the great financial crash.
Perhaps a crash in the US might have a silver lining in damaging Trump. One can hope.
Richard
About 40 years ago we had an issue with a computer – ok Green Screen terminal at work.
Mr IT comes over, plays about with it, replaces the keyboard and it works.
Picks up old keyboard by one corner to go back to his office and I promptly crack up as tea pours out of it……….
Apparently that is what I did….
But I have no recall of it
Hey, ho: the insurance excess is £200+
Back when interest rates were 1%, 0.5% and the like then the risk you mention was a real concern, yes. Now they’re 4 and 5%. A stablecon pays no interest to holders. It receives that 4 or 5% on Treasuries. Most profitable business in the world at present in fact.