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Forget Wall Street, worry about fintech (bloomberg.com)
48 points by ugwigr 8 days ago | hide | past | web | 29 comments | favorite

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.

Honest question, are there legitimate use cases for an ICO? If so, are there real world examples you can point to?

Another way to put the question, are ICO's inherently flawed, or is there a wheat vs. chaff issue? I see opportunity in the latter.

Completely agree. How did this article make it here?

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

--Upton Sinclair

>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.

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

In fact, there is movement in the wrong direction.

Well... one could argue that, for any new financial product, the skepticism (and therefore level of regulation) should be very high, because we don't know what the dangers are yet. After a decade of experience, the level of regulation could be reduced; after a second decade it could be reduced again.

That's in an ideal world. In this one, of course any regulatory regime is something you try to use for your own competitive advantage, especially if you've got a more cozy relationship with the regulators than your competitor does...

> 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.

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.


I think you're taking liberties with the term "got rid of".

Those banks that we "got rid of" were just consolidated into other "too big to fail" banks. And even worse, the ones that survived learned that the White House and Congress will backstop them even when they crank up the risk, use corrupted ratings agencies, and sell mortgages of the worst quality to Fannie Mae + Freddie Mac.

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.

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.

The interesting part about being perhaps due for a recession, is the role of the Fed's hyper low rate policy.

The US has never had such low rates for such a long period of time. Will we trade mediocre economic performance for perpetually cheap debt & interest rates, in other words.

Huge mountains of debt motivated by its low expense (whether eg at Apple or at the Federal level), sapping economic expansion potential as capital is diverted and mal-invested (eg IBM and GE financial engineering) and debt costs grow ever larger, combined with perpetually low rates that feed a loop of addiction and harm.

It's a form of the Japan scenario. Why didn't low rates in Japan spur faster economic expansion and massive inflation? Economic velocity plunged because an ever greater share of their capital available for investment was going to service debt. It explains in part why the US economic 'recovery' has been so slow compared to the past (the early Obama Administration GDP growth forecast projections coming out of the recession, missed by a mile).

If the last recession was 2008 we're not overdue _yet_ are we? :-)

Maciej Ceglowski had a good article about the advertising bubble: http://idlewords.com/2015/11/the_advertising_bubble.htm

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

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.

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

There are three tiers of money as it pertains to Silicon Valley.

- Local wealth derived from IPOs, acquisitions, etc. spanning decades. There is a vast amount of this wealth in SV.

- Institutional money that the VC firms put to work. That comes from all over the US and the world. That derives from all sorts of sources, from rich individuals to things like the CalPERS retirement system.

- Public listings and local corporations (eg income earned by Facebook or Apple through normal operations, and their ability to utilize their public stock); and external corporate partnerships / investments (that could be anything from Softbank or Alibaba to Walmart, Amazon or a random company in NYC).

It's unlikely any of these is a particular source of crisis risk in the near future. In fact, the only surprise right now is that SV isn't seeing far more wildly inflated activity given the Fed policies and the stock / real estate market price levels.

To put it into context. The big jump in unicorn valuations mostly happened several years ago. The last three or so years hasn't seen any further dramatic leap in that regard, despite a large gain in the US real estate and stock markets. In other words, SV has been pretty damn boring the last 24-36 months while other areas of economic activity have been hopping.

Private equity initially, then the public.

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.

> "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?

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.

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).

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.

> 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.

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.

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.

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.

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.

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