Greg Ip Profile picture
Nov 24 12 tweets 4 min read
The crypto meltdown did us a favor. Crypto became a $3 trillion asset class with bank-like intermediaries but few connections to actual banking. So its implosion has had no spillovers. My column explores:…
2/ Like banking, crypto is highly leveraged and interconnected; fire sales, contagion, caused one failure to ripple through to others. Crypto companies listed "customers" and other crypto companies as major creditors; no banks, as far as we can tell.
3/ This diagram from the federal Financial Stability Oversight Council nicely illustrates the web of connections with bankrupt hedge fund Three Arrows Capital at center…
4/ Crypto didn't have strong links to real finance because, unlike bonds, mortgages, loans, derivatives, it had no real economic value; unused in payments except ransomware, money laundering. Stablecoins, DeFi used primarily to speculate in crypto.…
5/ So major banks, regulators kept it at arm's length. But in time, the speculative profits and rents percolating through the crypto ecosystem would have inexorably expanded the linkages. 2022 meltdown has halted that, may have prevented a more damaging crisis later on.
6/ Having completely failed as an alternative to the dollar, crypto had been seeking to become an alternative to equities with less regulation, investor protection. This year's meltdown disrupts that, too; for how long is unclear.…
7/ To be sure some banks have exposure; private equity investment, payment services, some loans. Smaller banks that catered to crypto are being buffeted by deposit outflows…
8/ But this is qualitatively different from the sort of exposure that threatens the capital & health of major lending institutions & broader financial system.
9/ Crypto this year resembles free banking in the early 1800s. Banking was saved by introduction of a single national currency, lender of last resort, deposit insurance, comprehensive regulation. But I don't think that recipe works for crypto ...
10/ Bank-like regulation would negate the efficiency, anonymity that supposedly makes crypto superior to fiat. U.S. needed banks, currency & thus had to find a regulatory solution to banking instability. It doesn't need crypto; fiat currency, regular banks are working just fine.
11/ Thank you to my terrific colleagues @pkwsj @mccabe_caitlin and @vlajournaliste for their advice and help in my reporting and their cutting edge coverage of crypto. The contents of the column & this thread are my responsibility.
A correspondent points me to this NY Times report of FTX's investment in a tiny one-branch bank. This looks like too small a connection to create a systemic issue. But whether similar links exist elsewhere bears watching - esp by regulators.…

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More from @greg_ip

Nov 9
All politics are local, but incumbents this year are being cashiered by a global problem: inflation. Republicans tied inflation to Biden's $1.9T stimulus, but Biden isn't why core inflation is just as high in Canada, UK, Sweden, Australia. My latest:… Image
2/ Biden isn't why Australia's center right government got turfed out in May over cost of living concerns, or why French, Italian and Swedish governing parties/coalitions all lost seats, or power, also over energy/inflation.
3/ True, US stimulus did spill over to others' inflation via traded good prices; strong dollar also played a part. But that can only explain a small part of their inflation, and it can't explain service prices, or why labor markets are tight everywhere.
Read 7 tweets
Nov 4
Americans inclined to blame their economic problems on American policies should check out how other countries are experiencing much the same thing.
From @RBAInfo's monetary policy statement: "Inflation is ... very high and broadly based ... After initially being predominantly driven by supply shocks, inflation is now spreading to more persistent non-discretionary items..."
"Measures of underlying inflation are also high, with trimmed mean inflation at 6.1 per cent ...Prices for newly built dwellings continue to rise rapidly, with the annual rate above 20 per cent."
Read 6 tweets
Nov 2
Milton Friedman said inflation was always and everywhere a monetary phenomenon. No, said Thomas Sargent: it's always and everywhere a fiscal phenomenon. With deficits and inflation both too high, the fiscal theory of the price level is making a comeback.…
2/ FTPL bears a more than passing resemblance to MMT, in that both treat fiscal and monetary policy as indivisible. But whereas MMT says that justifies unlimited deficit spending until inflation erupts, FTPL says unlimited deficit spending guarantees inflation will erupt.
3/ Indeed, to those who regard surprise inflation as economically equivalent to default (either way, creditors suffer a real loss of wealth), FTPL refutes the central policy recommendation of MMT: monetary sovereignty does not, in the end, create unlimited fiscal space.
Read 7 tweets
Oct 11
1/ I wrote about Ben Bernanke's Nobel today.… I have followed him since he joined the Fed in 2002. Bernanke had a rare combination of intellectual heft and accessibility. Every paper had a narrative that shone through the math. Every speech was a Ted talk.
2/ In one, in Nov 2002, he apologized to Milton Friedman (turning 90) for the Great Depression. "But thanks to you, we won't do it again." A few weeks later I attended his "Deflation: making sure 'it' doesn't happen here" speech at a Chinatown restaurant.
3/ In part because of his focus on depression and deflation I read a lot of Irving Fisher. I read Bernanke's Great Depression essays. When he was nominated to the Fed I wrote how his depression fascination would shape his chairmanship...…
Read 13 tweets
Oct 8
In today's @WSJecon newsletter I answer 3 questions about the Fed and financial stability. 1) Why do tightening cycles trigger crises? A: Easy money encourages risky practices. When it ends, those positions come undone - like in 82, 87, 94, 2007-09...…
2) Will a financial crisis prompt Fed to pivot? A: Only if a financial accident tightens financial conditions enough to affect inflation or growth as in 2008. The bar today is higher because inflation was under control then, but isn’t now...
3) Can the Fed, as lender of last resort, respond to a crisis while still tightening monetary policy? A) In theory yes, in practice it's hard because lending to banks/ buying assets is a form of easing and crises might be a sign monetary policy has tightened enough/too much.
Read 4 tweets
Aug 24
The Inflation Reduction Act's emission reductions by 2030 are overblown. The real impact comes after 2030 when the flywheel of frontier technologies like green hydrogen and carbon removal kicks in. My column explains the economics of learning curves. /1…
2/ First, emissions were due to drop 25%+ by 2030 without IRA. IRA adds another 6% to 15%. That's 1% to 3% of global emissions - a drop in the bucket. & that's mostly by increasing takeup of maturing technologies: solar, wind, batteries...
3/ ... whose costs plummeted in the last few decades thanks to Wright's Law, as described by @ramez, i.e. costs fall at a constant rate for each doubling in deployment. Image
Read 6 tweets

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