Altruism Wrap

The California ideology meets the boiler room

I have generally avoided getting into discussions about cryptocurrencies, because I am a perennial late-adopter who never understands how the big new thing is supposed to work or why anyone would even be interested in it. Aware of that bias, the fact that crypto always struck me as an elaborate Ponzi scheme wasn’t quite enough for me to be sure that it was an elaborate Ponzi scheme. Besides, even if I was sure, that wouldn’t be reason enough to confidently predict collapse; flim-flam operations sometimes get bought by companies with real businesses—or may even monetize their hype into real currency that they use to buy real companies—and thereby achieve something like an enduring presence in the business landscape that they might not have been able to achieve on their own merits. Crypto isn’t a company, but the mere fact that it attracted so much capital might sustain it for long enough to figure out what it is actually for, and thereby bootstrap it into something like real existence. If I found most of the suggestions of what it was actually for extremely implausible, that didn’t foreclose the possibility that, given enough time and money, someone would eventually come up with something plausible that nobody had thought of yet. So I didn’t buy in, but I also didn’t talk about it much.

The collapse of FTX isn’t the end of crypto, and in many ways the story of FTX doesn’t even strike me as particularly interesting in its own right. A largely unregulated offshore company made its money by facilitating dubious trades, leveraged itself overmuch, misappropriated customer funds to keep it and its sister investment fund afloat—this is boiler room stuff. The OG financial crisis story of AIG—the largest company in a heavily-regulated industry that was felled by its involvement in sub-prime mortgage securitization and was bailed out in a way that suspiciously benefitted key investment banks like Goldman Sachs—struck me as far more interesting, with far more complex implications for financial regulation. Even Enron, which was quite sophisticated about hoodwinking regulators, is a more interesting fraud. The collapse of FTX just proves that trying to do finance without regulation is predictably catastrophic, something anyone with the slightest knowledge of history could have foreseen.

So what interests me primarily about the collapse of FTX is that this business could ever have been idealized. The premise behind FTX is that, even though nobody is totally sure what crypto is ultimately good for, people love to trade it, and to concoct ever more elaborate schemes for leveraging waves of investor enthusiasm. Someone in a position to feed that beast could make a whole lot of money, and FTX aimed to be that someone. Which is to say, FTX’s business model depended on crypto being ripe for bubbles, and even for scammers. If you read or saw The Big Short, you may recall the point where the “heroes” of the story meet one of the guys who is one of their biggest counterparties, who has been taking exposure via derivatives to the most toxic mortgages, and securitizing them for investors who care only about yield. Through sheer transaction volume, he’s been making them more liquid, and therefore more attractive, than less-toxic stuff, and thereby driving the market to greater and greater heights of insanity, making a killing all along. That’s akin to what FTX’s legitimate business was, and who SBF was, before he drove himself to bankruptcy and the possibility of prosecution for fraud. There have always been guys like this, but how did this one become any kind of culture hero?

The answer, I think, lies in the marriage of post-2008 disgust with traditional finance with the California ideology. Because regulation failed in the subprime mortgage crisis—mortgage originators ignored regulatory requirements, ratings agencies ignored that their processes were being arbitraged, bank regulators relied on capital rules that ignored fat tails, etc.—there arose, perversely, a new constituency for the mirage of a financial system that is self-regulating. And once you cross over to that perspective, everything turns upside down: lax or nonexistent oversight becomes not a reason to run but a reason to invest, and whether you know it or not you become a risk-seeking machine and a ripe mark. In a climate animated by that ethos, I can just see how a business like FTX could seem like it was building the future, which it probably wouldn’t if it were, say, building a massive sports-betting operation in an unregulated offshore jurisdiction.

The remaining element in winning over the kinds of people who don’t normally lionize Masters of the Universe, of course, is Effective Altruism, the ideology that SBF himself professed loudly and passionately. If I understand correctly how SBF planned to live his life, his goal was to become as rich as humanly possible so that he could give it all away in the most effective manner possible. Leaving aside all the difficulties with the second half of that equation—it is a very good idea to try to measure the effectiveness of one’s giving, but it is much more difficult to construct anything like a single objective hierarchy of need, as just a few moments of serious thinking about the question should readily demonstrate—the assumption that the first objective is presumptively morally neutral is what I find so astonishing. What are the parameters here? Forget about the fraud; FTX made its legitimate money facilitating highly questionable transactions of various kinds. Would it have been ok instead to run an outright casino that made its money off gambling addicts? What about selling addictive drugs?

You might believe that you, yourself, are doing good by amassing a fortune by somewhat dubious means—after all, if you didn't do it, someone else likely would, so the utilitarian case isn’t that hard to make. But this is also an iterative game in which your example teaches lots of other people that the best thing they can do with their intelligence is make as much money as possible, however they can. It’s a short step from there—and SBF absolutely took that step—to a comprehensive value inversion whereby devoting yourself to anything but amassing obscene wealth is unethical. And SBF was not just teaching by example; a large percentage of SBF’s philanthropy went to EA proselytization outfits—which is entirely rational if you have bought into the philosophy’s premises, but, nonetheless, we have a word for organizations that target wealthy people and convince them that the only ethical way to live their lives involves donating most of their money to the organization.

What does society look like at the end of that iterative process? I think that’s a question you can only ask intelligently from inside a philosophical framework that acknowledges society as a thing, which EA fundamentally doesn’t. This is why I increasingly think EA is just Objectivism for progressives.

I’m not a neutral observer in all this; I bring my own life history to the table. I worked in finance for sixteen years, a career I had never planned to enter but found attractive, once I found myself in it, precisely because it presented lots of opportunities to solve novel puzzles, and provided instant gratification for success in the form of profits. My final years in that business were spent working in structured products; I wasn’t quite in the heart of darkness, but, as I’ve often put it, perhaps in the aorta of darkness. So I understand the visceral appeal, even to someone not primarily motivated by greed, and I understand how one can nonetheless wind up in an ethically ambiguous place. I tried, in that place, to be someone attentive to the ethics of the business, but ethics are always relative to the competition, and in retrospect I’ve had to ask myself why I was doing what I was doing—whether it was enough to say: I’m following the law, I’m being personally honest, and I’m being paid well for my efforts. Ultimately, I don’t think it is.

That period of my life coincided with an increased attention to religiosity, and I don’t think that’s an accident; I was in part motivated by a search for both an ethical anchor and a sense of belonging to a community organized around something other than self-interest—for a proper society. There’s nothing wrong with that, but it’s also not a substitute for believing in what you are doing, for itself and not just as a means to some imagined end. I also devoted significant time and energy to donating money in an effective manner, supporting organizations that I thought were doing important work and measuring their impact intelligently. The biggest recipient of my largesse back then was a brand new charter school (later a network of such schools), whose founder convinced me that he was attentive to the criticisms leveled at many charters (for example, that they try to avoid taking on students with IEPs) and aimed to demonstrate that his school was different—which in many ways I still believe it was. But he was another hard-charging founder with a savior complex, and, well, that’s not where the comparison to SBF ends. I don’t think that’s an accident either.

There’s no legitimate place for fraudsters and charlatans; they’re just bad actors. But there is a place in the world for monomaniacs who want to sleep at the office and devote themselves single-mindedly to something they are creating. There is a place in the world for people whose vision of creation is oriented around building a profitable business, including world-beating ones. Heck, there’s a place in the world for financiers and traders and founders of exchanges; I believe wholeheartedly in free enterprise. But everyone has to own what they do, because that defines who you are. It takes a particular kind of moral impoverishment to convince oneself that a properly consequentialist ethics implies something like the opposite.

On Here

My only post On Here this week was about the recent elections in Brazil, Israel and America. Since I wrote it, the Democrats’ fortunes have continued to improve, to the point where they have already won the Senate and still have a chance of winning the House if late-counted ballots in California break their way. I probably didn’t give enough due in that piece to just how extraordinary a result that is for a midterm election with an unpopular president. It’s even more extraordinary given that it looks like the GOP won a substantial majority in the popular vote. In other words, under a system of proportional representation, they probably would have won more seats in the House. And yet, I haven’t heard anyone notable decrying the election as in some way illegitimate on those grounds.

For a long time, I’ve felt our problem was less the imperfect majoritarianism of our electoral system (which I do think is a problem, just not our primary one) than the increasing unwillingness to accept the legitimacy of opposition, and therefore of defeat. That this trend seems to have receded some in the reactions by the defeated—even Doug Mastriano appears to have accepted reality—continues to be my most important basis for optimism about our immediate political future.