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Comment by aniforprez | Hacker News Reader

While I could say banks are equally guilty of doing shady stuff, the truth is banking is hundreds of years old and as such, has regulations and insurance behind it. Not regulating is how we get messes like the Housing Bubble in the 2000s in the US culminating in the crash in 2011. Crypto being a completely new space has no regulation and no checks and balances which leads to messes like this with companies playing around with their assets and unable to repay their customers when they collapse. I suppose the draw of crypto is inherently that it is a wild, freeform space free from government interference for some people I guess

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"US culminating in the crash in 2011"

The official date given by NBER says that the recession began in December of 2007, which put the economy into a fragile state, which was intelligently managed for another 9 months, before circumstances went beyond anything that could be managed. Then the financial meltdown began in September of 2008.

And to amend a bit, to give the whole perspective: And one of the triggers started when around 2005 the FED started raising interest rates.

Which it had lowered more dramatically due to 9/11.

https://www.bankrate.com/banking/federal-reserve/history-of-...

Let that sync in, is my 2c.

(Extra:The FED interest rates takes 2 years to kick in to Adjustable Rate Mortgages which where the first to fall.)

Back then large percent of mortgages were adjustable rate, the amount of those now is a single digit.

https://i2.wp.com/financialsamurai.com/wp-content/uploads/20...

It was even worse than that. I worked for Wells Fargo doing credit checks at the time. The entire system was set up to rubber stamp loans without looking too closely. That'd be a problem for whatever downstream sucker bought it. At the time I had a bit of a robin hood attitude about it: if it's not illegal and follows policy that these subprime folks historically discriminated against get a bigger loan so be it. Now I have a more complex view on it, and see it as much more brazenly predatory.

Interesting.

Question, though, and coming back on topic: Did the rising interest rates trigger this (FXT)? There might be a path here, and it would not have the two-year delay of adjustable rate mortgages.

Rising rates usually ends up showing us who was swimming naked.

The business models that relied on a perpetual supply of new capital, & other overly risky gambles become less attractive to investors when you can go get 5-7% on some boring bond with no risk.

You also have liquidation spirals as speculative investors need to sell asset X because of margin calls on asset Y. Which then causes a margin call on customer2 who owns asset X which has now gone down so they go sell some asset Z.. and so on.

Cause, no. Make it more likely, along with the world situation we are in and the supply dysrhythmia, yes.

Recall FTX used a bunch of cash to save failing companies which would create systemic shock (ironic), acquire and invest lately, including in the Silicon Valley. My guess here: "1-2/3-4 Billion" is enough for liquidity, nobody is going to run on us, we are trusted, especially after us saving the world.

There was "bad event rolls" in the system and when they came, nobody can/will/would give them that amount of money.

I am sure in great times, they would also find liquidity/loans more easily -- which is what they are still trying to do. ("Everyone" is keeping cash to the chest, waiting to see what happens right now.)

> And one of the triggers started when around 2005 the FED started raising interest rates

The fed did not cause the crypto crash. It didn't force people to gamble on cryptocurrencies. It didn't force them to not sell, at the top of the naked ponzi schemes they participated in.

Unfortunaely the draw for many isn't that they want a libertarian dream society with no rules, but rather they think they can get rich quick. The "banks are bad" is part of the appeal also. I have a cousin who works in the food service industry (think something like managing a Chipotle) and has put all his liquid assets into crypto and still thinks they will "pay off so he can retire".

As for banks - as soon as these crypto scams fail, everyone will find out just why the SEC and FDIC are there. They were not created just because some politician had an idea for more bureaucracy.

My "hot take" if you will:

SEC and FDIC aren't usually, to the general public, negatively seen due to their mission. Its the fact they don't prevent criminal / unethical behaviors beforehand, and banks get away with alot before anyone intervenes.

I actually don't think the average US citizen is "anti regulation" with this. I think - and I include myself in this - that we see agencies like the SEC (more so than the FDIC) don't act fast enough or often enough, and when they do, the fines are a slap on the wrist vs the profit made by the bad behavior.

In a nutshell, they just aren't acting effectively, and thats why they get a bad wrap.

> Its the fact they don't prevent criminal / unethical behaviors beforehand, and banks get away with alot before anyone intervenes.

A better example is the IRS with a double standard of overzealous enforcement against individuals and small business who cannot defend themselves and complete non-enforcement against higher tiers of wealthy.

In the case of the SEC or FDIC, this has resulted in the near elimination of smaller fish aside from protective carveouts like the Durbin Exempt Interchange.

Yeah, people like effective regulation, it's just regulatory capture is worse than no regulation.

Unfortunately for your cousin, he's the bag holder that the people getting rich quick are going to take for a ride.

As far as I can tell.

yes - he absolutely is. I'm not sure he knows that though.

a) They are similar products banks/certain financial institutions utilize right now, just with corporate debt -- oh what can go wrong in a recession, right?

b) Bank runs happened in 2008 (U.S.), 2010-12 etc. A lot of crypto companies buy insurance similar to what the government says, but lacking regulation and the government behind you makes it as you said problematic.

But: banks are years old and keep making the same mistakes and failures. Big banks (not your corner side community bank that acts as intermediate and its job is community welfare and good relations) haven't changed. I'd be surprised if we avoid another bank related incident, if we enter a recession.

> your corner side community bank that acts as intermediate and its job is community welfare and good relations

Spain used to have a lot of these, and the financial crisis blew almost all of them up: https://en.wikipedia.org/wiki/Savings_bank_(Spain)

Centralized financial exchange markets are at least somewhat regulated and notably FTX.US is supposedly A-OK. Just because some stuff in crypto doesn't have regulations doesn't mean it is a free-for-all.

>Just because some stuff in crypto doesn't have regulations doesn't mean it is a free-for-all.

It pretty much does. The free-for-all disregarding of laws (including laws against fraud) is the stated purpose of crypto. They've been pitching this as Fight Club For Finance since the very beginning. The exchanges with a legitimate appearance are just fronts to get you to the back room with all the unregulated tokens offering insane interest rates. If you didn't come for a scam-or-be-scammed fight to the death, there isn't any reason to use crypto. The crypto bros just missed the part where Fight Club falls apart if you tell everyone about it. Or maybe they got too excited and forgot about that rule.

In light of recent events this appears to be an inaccurate statement

What does A-OK mean? No exposure at all?

As I understand it, FTX outside the US offered many exotic financial products: e.g. 24/7 traded Tesla stock tokens[1], leverage, etc., which I don't believe US based crypto exchanges are allowed to offer(Coinbase stopped offering leverage in 2020, for example). The acquisition offer yesterday did not include FTX.us[2]

This may mean that the US part of the exchange and the associated customer funds were not lent out, but we shall find out.

[1]https://coinmarketcap.com/currencies/tesla-tokenized-stock-f... [2]https://www.cnbc.com/2022/11/08/binance-offers-to-buy-ftxs-n...

I guess we now know that A-OK just means one day away from declaring bankruptcy.

> ...has regulations and insurance behind it.

And billion dollar bailouts. With a few billions every decade or so, FTX probably survives such crises multiple times over.

I mean, banking was already hundreds of years old in the 2000s. So recent bubbles and crashes in traditional markets seem like evidence that regulation, at least the kind that ends up being implemented, isn't doing much to prevent very bad outcomes.

There are two kinds of risk that are fundamentally unavoidable in being a "bank" - that is, any institution that borrows short and lends long. One is liquidity as a result of that duration mismatch: you have enough money owed to you that you've lent out, but it's not due yet. The other is loan writeoffs: you've lent money that you cannot get back, often because it's secured against an asset whose value has fallen significantly.

These can be reduced but not entirely eliminated by setting reserve requirements, LTV ratios, etc., which is what https://www.bis.org/bcbs/basel3.htm is all about.

You can't really eliminate the duration mismatch without eliminating anything recognisable as a "bank", and it becomes much more expensive to get credit and to do basic financial operations.

The problem is that once rates hit zero people will just hoard cash like Keynes suggested with his liquidity trap. The only "funds" available are short term deposits. Nobody is buying certificates of deposits. When the bank issues a loan without a CD it has to create new liquid money, that is the only way.

The answer is quite simple, just keep going down with interest rates even if they are negative. That is fully consistent with the loanable funds model.

Thanks for the explanation, but I'm not sure how it relates to my comment. It sounds like you're saying regulations help because they force banks to keep reserves. I think this helps in the short term, but in the long run creates incentives to deceptively package assets into AAA ratings (as in 2008), and that things like FDIC also just create incentives to get too big to fail. So I stand by my statement.

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