
Forget Wall Street, worry about fintech - ugwigr
https://www.bloomberg.com/view/articles/2017-09-18/the-next-crisis-will-start-in-silicon-valley
======
loeg
Regardless of what you think of the headline claim (edit: the link was
originally "The next financial crisis will come from Silicon Valley," or
something like that), the op ed does not argue it well.

Mt Gox isn't an example of a Silicon Valley company, much less a big enough
institution to cause any kind of financial crisis. It failed with no effect on
the greater economy.

Betterment and Wealthfront don't trade based on some black box machine
learning AI. They just perform relatively straightforward tax-loss harvesting
and rebalancing. Not HFT. Suppose all of their robots start making bad trades.
The capital they manage represents a tiny fraction of the US market. It's hard
to imagine that leading to a financial crisis.

Finally, ICOs have almost nothing to do with Silicon Valley fintech. They're
just a classic scam dressed up in a new format.

~~~
uptownhr
Completely agree. How did this article make it here?

~~~
RickS
“It is difficult to get a man to understand something, when his salary depends
on his not understanding it.”

\--Upton Sinclair

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Clubber
>The world of finance looks very different today than it did 10 years ago.

Not really.

>In the years since 2007, we have made great progress in addressing the too-
big-to-fail dilemma.

Not really.

>There are no easy answers, but a start would be to look ... [at] ... new
“regulatory sandboxes,” where fintech companies can cooperate with regulators
to ensure the safety and soundness of their businesses.

Here's the meat. Wall Street doesn't want their business automated by SV (as
alluded to in the article), so even though they endlessly fight regulation of
their own industry, the have no problem suggesting regulation for the SV
little brother.

~~~
yardie
> we have made great progress in addressing the too-big-to-fail dilemma

We got rid of a lot of big, too-big-to-fail, banks since then. The problem is
we got rid of a lot of too-big-to-fail banks.

~~~
Clubber
Warren says the sum of the too-big-to-fail banks is even bigger than it was in
2008. Also, Trump is trying to scale back the regulations put into place after
2008.

[http://www.wsj.com/video/elizabeth-warren-too-big-to-fail-
ba...](http://www.wsj.com/video/elizabeth-warren-too-big-to-fail-banks-now-
even-bigger/311C0E9A-4424-4E7F-97F4-684EF6A68A51.html)

------
tabeth
I know it's irrational, but I'm cautious. It has been _very_ consistent in the
United States' history: there's a recession roughly every decade _at least_ ,
and we're overdue. The question is who will be standing up when the music
stops? We're all trying to make sure it's not us.

Given that Silicon Valley has been responsible for much of the growth in the
past decade, it's only natural, if not inevitable that it will be responsible
for the collapse, as well.

In any case, I'm not sure I buy the article. Banks weren't entirely
responsible for the Great Recession (there were actually chains of events the
government was responsible for that was simply accelerated by banks). Mortgage
banked securities were obviously a creation of finance, but ultimately it was
the demand that catapulted what was a terrible idea into something
unsustainable AFAIK.

Taking this same train of thought: what has Silicon Valley created that's a
bad idea that will be abused by regular people in a negative feedback loop
that will result in another recession? My money is on advertising, not
financial tech.

~~~
hkmurakami
The #1 risk for modern SV is likely interest rates.

Low interest rates spurred a search for returns by pensions, endowments and
SWFs which would unwind to some extent as interest rates return to historic
norms, as lower risk yield instruments become viable again.

Many startups' growth and hiring are being driven by equity capital rather
than operational revenue, meaning that any causes that would undermine the
flow of capital from LPs to VCs to Startups would lead to companies folding
and increasing unemployment in the region.

A negative signal to LPs from an exit outcome standpoint may have an analogous
effect. For example, Uber dying would be a very significant negative signal to
LPs.

What I wonder when thinking of this is what the ratio of startup jobs to bigco
jobs looks like these days.

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ben_jones
The next crisis will start wherever Silicon Valley's money comes from. Honest
question: where does it come from? The American consumer?

~~~
pjmorris
I'd argue that Silicon Valley's primary paying customer is the VC, and that
VC's have had a field day with the easy money pumped out by the Fed and
distributed to Wall Street over the last decade.

Signs of a crisis may show up in SV, but it'll trace back to a(lack of) VC
funding that traces back to Wall Street.

~~~
hkmurakami
VC is a middleman broker to LPs in this context, where LPs are endowments,
pensions funds, SWFs, and the like.

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cm2187
While the points the article makes are valid (in essence, the massive
regulations that apply to banks, asset managers, traditional wall street
institutions are the result of previous bad experiences, not just regulatory
evilness), Fintech is still more a promise than anything big enough that it
could really tank the economy. Don't think it's going to be the next crisis.
The one after or one even later perhaps.

What could have a large impact is the bath that people who are buying silicon
valley stock at 600x P/E are going to take.

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caseysoftware
> _" Third, fintech has not developed the set of unwritten norms and
> expectations that guide more traditional financial institutions."_

I celebrate that they don't follow the norms of the "more traditional
financial institutions" since they were the ones that f*d up catastrophically
in the first place.

And criticizing that Wealthfront and Betterment are not diversified seems odd.
If they diversify at an individual level, isn't it likely that the sum of all
those diversifications also be diversified?

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jfasi
I disagree the next crisis will be fueled by fintech: fintech does not hide as
much risk as the institutions that failed before the crisis. Contrast this
with the underlying causes of the financial crises:

First off, as of 2007 AIG, Bear Stearns, and friends were in the center of a
large, complex web of interlocked investments, contracts, and creditworthiness
assumptions. Billions of dollars in value were declared to be "safe" and used
as collateral for further leverage, effectively laundering them of their
inherent riskiness. When this web collapsed, it happened all at once. Today's
fintech firms run the gamut, but by and large they consist of proprietarily-
managed, non-traded funds. There's none of the securitization that allowed
risk to creep outward. The result is that a failure in one is less likely to
trigger a failure in the entire system.

Secondly, consider whose wealth fintech is managing. If fintech were managing
hundreds of billions of dollars of money belonging to people, institutions,
and other banks, it'd be cause for concern. But if the marketing of funds like
Betterment and Wealthfront are any indication, they're targeting individual
investors. Naturally, individuals losing money is a bad thing and would
depress demand and confidence for a while, but it's a far cry from the
catastrophic, systemic credit crunk we experienced as a result of the crisis.

Finally, just because a system is automated doesn't mean it's going to rogue.
Just because an algorithm is complicated doesn't mean it's fragile. I
appreciate (and to a certain degree share) the anxiety, but I think it's
misplaced in this particular case. This article seems to be to be more about
hand-wringing about computers doing things than actual commentary about the
structure of the financial system.

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mliswhat
I understand that there are substantial risks involved in Bitcoin or
cryptocurrency related ventures. But looking at companies like Betterment or
Wealthfront but I'm still unsure about the risks involved in them (aside from
terrible decision making).

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ejlangev
This article is very poorly argued. While there are some questionable things
happening among some Fintech firms they're still far too small to harm the
overall economy and could simply go out of business without too large an
impact. Mt Gox isn't a good example because it did precisely that, and they
felt the need to overplay the total loss by quoting bitcoin prices as if they
were lost today rather than 3 years ago.

Seems more likely that crises from sub-prime auto loans or student loans could
cause the next real issue. Attempting to compare total size of risk from
massive wall street firms and banks to relatively small fintech firms seems
like a fools errand.

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djrogers
> the fintech revolution has created an environment ripe for instability and
> disruption.

The article did not do a very good job of making this case in a couple of
ways. First of all, the reasons given were all hand-wavy and assume all finch
will fail at the same time in the same way because... Automation?

The second, and probably larger problem with the thesis is that in the grand
scheme of things there really isn't enough money in fintech startups at this
point to make a big impact on the economy, and it'll be a long time before
there is.

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paulpauper
how did this even get upvoted to the front page

 _These financial technology (or “fintech”) markets are populated by small
startup companies, the exact opposite of the large, concentrated Wall Street
banks that have for so long dominated finance. And they have brought great
benefits for investors and consumers. By automating decision-making and
reducing the costs of transactions, fintech has greased the wheels of finance,
making it faster and more efficient. It has also broadened access to capital
to new and underserved groups, making finance more democratic than it has ever
been._

 _But revolutions often end in destruction. And the fintech revolution has
created an environment ripe for instability and disruption. It does so in
three ways._

 _First, fintech companies are more vulnerable to rapid, adverse shocks than
typical Wall Street banks. Because they’re small and undiversified, they can
easily go under when they hit a blip in the market. Consider the case of
Tokyo-based Mt. Gox, which was the world’s biggest bitcoin exchange until an
apparent security breach took it down in 2014, precipitating losses that would
be worth more than $3.5 billion in today’s prices._

Lehman, Bear, Aig failures were in the hundreds of billion, even
trillions..these are a few billion, tops.

Betterment and Wealthfront are pretty much just index fund clones.

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adventured
This is a fatalism meets comeuppance fetish. The emotional desire to see the
next crisis come out of Silicon Valley, rather than a rational consideration
for how likely that actually is.

The mainstream media is increasingly frothing at the mouth as it pertains to
Silicon Valley being a power target for them to hit. You can barely avoid it
on a daily basis when it comes to the NY Times or Washington Post etc.
Somewhere in the last few years it became acceptable to target pretty much all
aspects of SV for criticism (whether culture, or wealth, or political
influence, or demographics), whereas previously it was mostly off-limits (not
only did their audience largely not want to read it, SV is almost entirely
liberal and a modern extraordinary economic success story, so attacking that
made no sense across the board). What changed? It's simple, only one thing
changed in the last 20-30 years: its companies got so big that it now
challenges the power structures in DC and NY, and has corporations that are
richer and more powerful than eg Exxon Mobil or Walmart. So the liberal media
has decided their own ideological brothers in SV are now fair game due to
their immense wealth and influence (I don't have an elaborate opinion on that
targeting, it clearly crossed some vague threshold in the last few years).

Fintech is so hilariously, comically tiny compared to what caused the 2007
financial disaster (billions of dollars in scale vs trillions of dollars in
scale). It would take decades of non-stop expansion for Silicon Valley's
fintech to get big enough to pose that sort of national economic risk. You can
tell that's the case by how empty the article is of any actual content or
argument - it's about seven paragraphs of content, and maybe less than one
paragraph says anything in support of the article's premise.

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rossdavidh
Odd that it doesn't compare the relative impacts of the dot-com bust (Silicon
Valley based) and the Great Recession (Wall Street and finance based). Oh,
maybe because that wouldn't bolster their point very well.

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throwaway2016a
The original title was "The Next Crisis Will Start in Silicon Valley"

The only sane way to deal with articles like this is to add the word Seldon in
front of Crisis. It makes the article more interesting.

