It was never a question of if.
An energetic digital autopsy of the FTX implosion is well under way. Details have emerged and more will follow. So rather than duplicate those efforts here, let’s take out our macroscopes and have a look at the bigger picture.
The echoes of deja vu ring loudly. Enron, Global Crossing, WorldCom. Subprime and Bernie Madoff. What do they have in common?
They were overlooked. Regulators, the media, all the usual checks and balances failed, despite early warnings. There are always unmistakable signs of trouble well before any rickety scheme blows up. They are ignored in bubbles. Only when the bubble bursts does the fraud get exposed.
That’s how bubbles work. They breed corruption and fraud and as long as everybody’s making money they don’t want to see it. Then the bubble deflates and the rot becomes obvious.
The Enron-Global Crossing-WorldCom wrong-doing festered amid the dotcom bubble around the turn of the century. It was exposed as the bubble deflated in 2001. Bernie Madoff with billions while the mortgage and subprime bubble inflated. His arrest came as the bubble deflated on December 11, 2008.
Warren Buffett famously formulated it this way: Only when the tide goes out do you see who’s been swimming naked.
So it now appears we have a group centering on one Sam Bankman-Fried replaying the same script in a newer higher-tech setting. But to focus on only the details risks missing the bigger cause, the warm, moist environment in which such rot festers and that in which it is exposed and cleaned up.
Bubbles are fun while they’re inflating. Massive wealth appears to be created. But wealth was not created, only transferred. What products or services were produced that feed, house, heal or educate? Nada. Real wealth improves standards of living. It was obvious from the get go that this was vacant amusement, devoid of enduring value. But a bubble-addled system doesn’t want to see it.
According to economic historian Martin Hutchinson, fourteen years of reckless monetary profligacy did this:
So my angle isn’t to dissect, but to look for the larger causes, the macro policies that create the environment for fraud to flourish. And with that in mind, as the forensic investigation delves into the anatomy of this scandal, to encourage us to ask ourselves what other things we thought were true, but aren’t. Just to get us started:
Low interest rates support the economy?
Corporate buybacks return value to shareholders?
In parting, we might also ask what is the best way to deal with the aftermath of the cryptobubble? Wolf Richer of Wolf Street puts it eloquently: