Posts Tagged ‘economics’
“Money is a servant to politicians and the country. But, if the politicians and the country become the servant of the money, the politicians have failed.”*…
Given all that’s going on in the current adminsitration, it’s hard to keep track of the havoc. Here, an update on a drama playing out in the legislature (with heavy White House involvement).
Crypto interests came after the local banker last week in a bitter Congressional fight. As Matt Stoller explains, they didn’t win, but it’s not over…
… [Last] Thursday, the Senate Banking Committee abruptly canceled its meeting, known as a mark-up, to write little-noticed legislation to deregulate the financial system. And the reason is that two of the more powerful forces in D.C. – the banking lobby and the new MAGA-powered crypto world – came into conflict. The result, so far, is a stalemate.
I haven’t written about crypto for a few years, because there’s not much to say beyond “they did a lot of bribes in a bribe-prone system.” But depending on what happens next, we could be looking at the end of an iconic American figure, the local banker, and his or her replacement with something very different. The context of the legislative fight is, as you see in lots of other areas, the decline of the productive institutional fabric of America.
Culturally speaking, banks have a weird place in America, as they are the institutions that control permission to use resources. The endless number of bank heist movies, often with plucky burglars as heroic figures telling bank customers they needn’t worry because it’s not their money at risk, suggests that there’s a lot of skepticism of financial power in general. But there are two types of bankers, the generous local elite and the extractive beancounter. These represent a traditional populist vs oligarch framework.
Take the holiday classic film It’s a Wonderful Life. It’s about a small town banker named George Bailey, played by Jimmy Stewart. Bailey’s help financing useful things in Bedford Falls, like houses and businesses, contrasts with the avaricious Harry Potter, who is a stand-in for Wall Street.
There’s a reason for these cultural totems. Americans have always understood that distant control of credit is dangerous, the theme of movies such as Wall Street, Margin Call, and The Big Short. They also see that local control of credit and payments is key to self-sufficiency. Local banks uses to be, and to some extent still are, the powerhouse of American cities and towns.
That said, there have always been a variety of financial institutions to serve different kinds of customers, including large corporations. There are three kinds of banks in America, the small bank, the regional bank spanning a few states, and a few dozen national mega-banks. Local banks, a la George Bailey, are more efficient with better service and more commercial lending. According to the Institute for Local Self-Reliance, roughly half of U.S. assets were held in small banks, which did most of the productive lending. In 2020, small and regionals held just 17% of industry assets, but offered 46% of bank lending to new and growing businesses.
In the post-war era, this mix of banking was relatively stable, with roughly fourteen thousand local banks and thrifts serving as mortgage and commercial lenders, and check clearing institutions. But in the early 1980s, policymakers sought to consolidate the sector, enacting a series of deregulatory laws to encourage bank failures and mergers. The result is that today we have fewer than four thousand banks, and by the end of the Trump administration, we may have fewer than a thousand.
Of course, the world isn’t the same as it was forty five years ago. Since the 1980s, finance has changed. We are a capital markets driven economy, not a bank-driven one, and we use credit cards not checks, apps and ATMs more than branches. Bailouts have replaced proactive regulation, and we now have four giant Too Big to Fail banks that span multiple lines of business from investment banking to brokerage services. But local economies still depend on local banks, and there are fewer and fewer of them…
… Banking is a great business, because mostly you pay customers a small amount for the use of their money, and get the government to guarantee you a profit. You can make more if you actually do the work to lend money, but you don’t have to.
In return for this easy profit via a government safety net, bankers accept regulation. As the brilliant scholar Saule Omarova notes, the best way to understand banks is as franchises from the government. Bankers safeguard the nation’s money and payments system, and are well-paid for it, but it’s fundamentally a public and not a private duty. That’s why there are banking charters from the state.
The rise of crypto parallels the consolidation and corruption of banking. From the 1980s onward, small town bankers, like everyone else during the neoliberal era, became heavily oriented around removing rules against speculation and froth. The low interest rate environment of the New Deal gave way to a high interest rate world, and that put enormous pressure on the balance sheets of bankers who had lent money more cheaply. That, plus the turn of the Democrats away from protecting small towns in favor of consumer rights, led to a sharp anti-government sentiment among local bankers…
[Stoller unpacks the history of banking the last few decades and then turns to crypto…]
… While anti-monopolists argued for a renewal of public institutions to tamp down on concentrations of wealth and power, the crypto world went the opposite way, arguing that it was the very existence and power of public institutions that led to the crisis in the first place.
Crypto was ideological, at first framed around utopian rhetoric and the blockchain. Unfortunately, there were no actual real use cases for productive ends, it was entirely a way of scamming or speculating without rules. During the 2010s, when the Federal Reserve kept interest rates at zero and engineered a set of bubbles, crypto was one of the more prominent ones. In 2021, I wrote an article titled “Cryptocurrencies: A Necessary Scam” describing the ideological goal of crypto.
Fortunately, regulators kept crypto hived off from the real economy, so as the bubble blew up, it didn’t much matter. In 2022, when Sam Bankman-Fried and a host of crypto institutions collapsed in an orgy of fraud and leverage and money laundering and sanctions evasions, crypto seemed to be over. But it wasn’t, because of the power of the banking lobby, the weakness of Joe Biden’s administration, and the general pro-deregulation consensus in Congress…
… After Biden, the crypto industry had immense political leverage over a supine Congress and a friendly administration. Concerns over things like consumer protection ended, of course, but even more “serious” things like worries over national security and sanctions evaporated. Trump pardoned the Binance CEO Changpeng Zhao, and no one cared any longer that crypto was used to funnel money to Hamas and Venezuela.
The narrative around crypto changed, as crypto proponents dropped their naive ideological arguments. Industry proponents no longer argued there’s anything innovative, or that crypto is important for payments or any other purpose. It’s purely a mechanism to speculate. And the industry ended its commitment to a stateless approach. The trading side of crypto attacked stock market regulations, while the banking side demanded access to the banking franchise, including bank charters, access to the Federal Reserve safety net, and so forth. They started claiming they are bank-like, only better, and that the current banking order is lazy and protected by regulation.
And that brings us to the legislative fight last week. A few months ago, Congress did its first set of favors for the crypto industry, passing the Genius Act, which allowed for companies to issue “stablecoins,” which is to say, they can take dollar deposits as long as they back those deposits with actual dollars. However, they were mostly barred from paying interest on stablecoins. And the payment of interest on deposits is really key, because that’s what would allow stablecoin issuers and crypto exchanges to compete with banks over those cheap customer deposits that enable profits. It is an existential problem, not for the JP Morgan’s of the world, as they are so big it doesn’t matter, but for the rest of the banking sector, the local and community guys.
The most aggressive crypto firm, Coinbase, sort of offers interest on deposits, with what are called “rewards.” By calling them rewards instead of interest, Coinbase is trying to create a loophole in the Genius Act. But it’s a grey area, at best, and regulators could crack down.
The next piece of legislation pushed by the crypto world was called the Clarity Act, which has a number of elements, some of them involving rules around speculation. If it passes, we can expect very little regulation of the stock market, anti-money laundering, or insider trading going forward. But the fight that led to the cancelation of the markup of the Clarity Act is whether “rewards,” aka interest on deposits, are legal. Enter the banking lobby.
Community and regional bankers are not used to fighting with conservatives, because they haven’t had to. They did block liberal lawyer Omarova from becoming the bank regulator at the Office of Comptroller of the Currency. But they certainly aren’t used to dealing with feral and weird crypto MAGA online influencers with billions of dollars. That doesn’t make sense to them. And it should have been obvious that they were in the crosshairs of the crypto industry; the Federal Reserve just launched a rulemaking to give crypto a mini bank charter, which should scare the hell out of the local banks.
But they finally have started to get in gear, pointing to a Treasury report saying that $6.6 trillion of deposits might leave the banking system if crypto companies could pay interest on stablecoins. The Independent Community Bankers Association, the trade group for local bankers, mobilized its members against stablecoin rewards.
Much of the crypto world doesn’t care about stablecoins or banking; they are interested in removing the rules regulating speculation and gambling. For them, it’s a securities law matter. But for Coinbase, which makes roughly a billion dollars in revenue with stablecoins, that part of the bill does matter. And so Brian Armstrong pulled his support for the bill on the eve of the markup. There’s something a bit odd about Coinbase’s opposition, since they got 95% of what they wanted, and everyone else is fine with the legislation. But I don’t want to speculate too much on motivations, the point is Armstrong was unhappy with the final bill.
It’s not clear what happens now. The Senate Banking Committee has put enormous time and effort into this legislation, at the behest of crypto donors. But it really is an zero sum fight. If crypto exchanges can pay interest or rewards on stablecoins, then local banks lose their deposit base. If crypto exchanges can’t, then they won’t get access to cheap deposits. While Senators are desperate for some sort of compromise, it doesn’t look like there is one. Someone has to win and someone has to lose.
This battle is one where there is no good guy, but if there’s someone who is less bad, it would be the local bankers. They at least do lend into communities, and are subject to real regulation. Crypto is a disaster, and if we integrate crypto into the real economy, they will eventually demand their own bailout. But the critique that banks don’t pay much in interest on accounts is accurate. Furthermore, the credit card business is a bloated monopolistic mess. Still, those problems are largely about the Too Big to Fail banks, not the local guys, and the TBTF banks will be fine regardless.
Honestly, I’m exhausted by the question that we are forced to answer in this fight. Should credit allocation and payments be controlled by a set of lazy right-wing bankers who hate government, or a hungrier and deeply corrupt group of crypto scammers? It would be nice to have an alternative to those two interest groups. And eventually, we will, since it’s becoming clear that the state will have to take a much bigger role in credit allocation. But for now, the fact that crypto finally got stopped, at least temporarily, by the banking lobby, well at least it’s funny. And it does show how checks and balances are useful even when everyone involved is deeply flawed.
At this moment, I’ll take what I can get…
The end of an era? “The Slow Death of Banking in America,” from @mattstoller.skystack.xyz.
Pair with Molly White‘s “They’ve bought themselves a Congress” (“Coinbase calls the shots in the Senate…”) and from Matt Levine: “Stablecoin Narrow Banking” (“one solution here is to allow stablecoins to pay interest (like banks) but also impose capital requirements (like banks). I would not bet on that happening though…”) “Memecoin Venture Capital,” (“… today I want to talk about the fourth category, tokens promising no rights…”)
* Oliver Kemper
###
As we hollow out our mattresses, we might send painless birthday greetings to Felix Hoffman; he was born on this date in 1868. A chemist for the German chemical and pharmaceutical company Bayer, he sythesized both acetylsalicylic acid (ASA), which Bayer marketed as “aspirin,” and diamorphine, which was popularized under the Bayer trade name “heroin.”
“The Middle East has oil, China has rare earths”*…
Often called “the seeds of technology,” rare earths are a group 17 metallic elements (the 15 lanthanides plus scandium and yttrium) with unique magnetic, optical, and catalytic properties vital for electronics, defense, chemical processing, petroleum refining, and green energy.
China’s dominance over rare earth elements creates an unprecedented vulnerability in global supply chains that extends far beyond the relatively modest $6 billion market size. The risk of disruption in supply of rare earths has become a critical concern as the nation controls 69% of worldwide mining operations, 92% of refining capacity, and a staggering 98% of permanent magnet production, according to Goldman Sachs analysis from October 2025.
This concentration represents one of the most significant single points of failure in modern industrial infrastructure. Furthermore, the rare earth reserves distribution globally shows heavy concentration in geologically limited regions, making supply diversification extremely challenging.
The economic implications of this dominance become clear when considering potential disruption scenarios. Goldman Sachs warns that even a 10% disruption in industries reliant on rare earth elements could trigger $150 billion in lost economic output, alongside inflationary pressures cascading through multiple sectors. Despite rare earth markets being 33 times smaller than copper markets, their strategic importance creates disproportionate systemic risk…
– “China’s Rare Earth Dominance Creates Global Supply Disruption Risks” [source of the image above, and worth reading in full]
Farrell Gregory explains why they figure so prominently in so much discussion of the global economy and of U.S.- China relations and what we might expect…
Over the course of the last year, we’ve seen China suspend rare earth exports twice, generating a short-lived round of public interest and short-lived “expertise” in America. Each crisis followed a similar progression: an aggrieved China introduces export licensing, effectively suspending US access to certain rare earth elements and downstream products. The American public is subjected to alternating shouts of panic and confident assertions that ‘rare’ is a misnomer and the necessary elements are actually abundant in the Earth’s crust. After a period of confrontation, and likely following concessions on both sides, access is reestablished before too much harm is done.
Examining the differences in each crisis is less important than establishing what is quickly becoming a pattern: China is increasingly willing and able to use its dominance in rare earths as leverage against the U.S. It’s worth noting what a change this is from even five years ago: during the entirety of the 2019-2020 U.S.-China trade war, Beijing never introduced export controls for rare earths, despite making threats to do so. Now China assesses its position differently — they’ve accumulated leverage and they’re willing to use it with increasing frequency.
This frequency might be in part because China’s dominant position in rare earths is a time bomb for both sides. The PRC likely wants to use its REE dominance to extract further concessions before the U.S. manages to defuse this dominance with some combination of reshoring and tech advances.
I think it’s a matter of when — not whether — China decides to activate its standing export control infrastructure. They’ve built up leverage, and over time, that leverage will dissipate. In the near-term future, throttling rare earth and magnet exports is still an effective threat to employ in trade disputes with the U.S. In the medium term, successful reshoring and reliance-decreasing efforts will diminish what concessions China can extract from the U.S.
So, expect the rare earth crisis cycle to play out again. When it does, here are a few clarifications on rare earths that may prove helpful for avoiding the most common misperceptions…
Read on: “China’s Rare Earths Chokehold: A Primer,” from @chinatalk.skystack.xyz.
See also: “Rare Earths,” from @profgalloway.com.
And also this: “China Is Overplaying Its Rare-Earth Hand in Japan” from @bloomberg.com (gift article).
* attributed to Deng Xiaoping
###
As we ponder paucity, we might recall that it was on this date in 1839 that the British East India Company [see here and here] established the Assam Tea Company and began the commercial production of tea (grown from slips furtively exported from China) in the region. Beginning in the 1850s, the tea industry rapidly expanded, consuming vast tracts of land for tea plantations. By the turn of the century, Assam became the leading tea-producing region in the world. That growth and innovations in tea preparation caused the price of tea to drop and demand to grow. Soon, London became the center of the international tea trade.
“Mastering others is strength; mastering yourself is true power”*…
After skipping last year (presumably to finish his best-seller Breakneck: China’s Quest to Engineer the Future), Dan Wang is back with his “annual letter.” An excerpt…
… I think the US continues to systematically underrate China’s industrial progress for several reasons.
First, too many western elites retain hope that China’s efforts will run out of fuel by its own accord. Industrial progress will be weighed down by demographic drag, the growing debt load, maybe even a political collapse. I won’t rule these out, but I don’t think they are likely to break China’s humming tech engine. Demographics in particular don’t matter for advanced technology — you don’t need a workforce of many millions to have robust production of semiconductors or EVs. South Korea, for example, has one of the world’s fastest shrinking populations while retaining its success in electronics production. And though China suffers broader economic headwinds, technology firms like Xiaomi continue to develop new products and enjoy rising revenues. Technology breakthroughs can occur even in a suffering society. Especially if the state continues to lavish resources on chips or anything that could represent an American chokepoint.
Second, western elites keep citing the wrong reasons for China’s success. When members of Congress get around to acknowledging China’s tech advancements, they do not fail to attribute causes to either industrial subsidies (also known as cheating) or IP theft (that is, stealing). These are legitimate claims, but China’s advantages extend far beyond them. That’s the creation of deep infrastructure as well as extensive industrial ecosystems that I describe above.
Probably the most underrated part of the Chinese system is the ferocity of market competition. It’s excusable not to see that, given that the party espouses so much Marxism. I would argue that China embodies both greater capitalist competition and greater capitalist excess than America does today. Part of the reason that China’s stock market trends sideways is that everyone’s profits are competed away. Big Tech might enjoy the monopolistic success smiled upon by Peter Thiel, coming almost to genteel agreements not to tread too hard upon each other’s business lines. Chinese firms have to fight it out in a rough-and-tumble environment, expanding all the time into each other’s core businesses, taking Jeff “your margin is my opportunity” Bezos with seriousness.
Third, western elites keep holding on to a distinction between “innovation,” which is mostly the remit of the west, and “scaling,” which they accept that China can do. I want to dissolve that distinction. Chinese workers innovate every day on the factory floor. By being the site of production, they have a keen sense of how to make technical improvements all the time. American scientists may be world leaders in dreaming up new ideas. But American manufacturers have been poor at building industries around these ideas. The history books point out that Bell Labs invented the first solar cell in 1957; today, the lab no longer exists while the solar industry moved to Germany and then to China. While Chinese universities have grown more capable at producing new ideas, it’s not clear that the American manufacturing base has grown stronger at commercializing new inventions…
Eminently worth reading in full: “2025 letter.”
Pair with “U.S.-China Economic Competition” (from Rand) and “The Outlook for China-US Strategic Competition in 2026” (an interview with Sarah M. Beran in The Diplomat)
* Lao Tzu
###
As we grapple with geoeconomics and geopolitics, we might remind ourselves just how fast China’s rise has been: on this date in 1967, in the midst of the Cultural Revolution, the Shanghai People’s Commune was established following the seizure of power from local city officials by revolutionaries. Shenzen was, at the time, a sleepy backwater, just off what was then the British colony of Hong Kong.
“An imbalance between rich and poor is the oldest and most fatal ailment of all republics”*…
The rich in the U.S. just keep getting richer. Over the five decades, incomes have risen materially faster at the very top than anywhere below, and similarly, wealth has accumulated much more quickly at the top than anywhere below. A report from the Stone Center On Socio-Economic Inequality (at CUNY) looks at the mutually-reinforcing relationship between these two dynamics…
Homoploutia describes the situation in which the same people (homo) are wealthy (ploutia) in the space of capital and labor income in some countries. It can be quantified by the share of capital income rich who are also labor income rich. In this paper, we combine several datasets covering different time periods to document the evolution of homoploutia in the United States from 1950 to 2020. We find that homoploutia was low after World War II, has increased by the early 1960s, and then decreased until the mid-1980s. Since 1985 it has been sharply increasing: In 1985, about 17% of adults in the top decile of capital income earners were also in the top decile of labor-income earners. In 2018 this indicator was about 30%. This makes the traditional division between capitalists and laborers less relevant today. It makes periods characterized by high interpersonal inequality, high capital-income ratio, and high capital share of income in the past fundamentally different from the current situation. High homoploutia has far-reaching implications for social mobility and equality of opportunity. We also study how homoploutia is related to total income inequality. We find that rising homoploutia accounts for about 20% of the increase in total income inequality in the United States since 1986…
Note that the report was written in the 2020 (and published in The Review of Income and Wealth in 2023). The dynamic has continued since; the polarizing impact has grown.
“Homoploutia: Top Labor and Capital Incomes in the United States, 1950–2020,” from @stone-lis.bsky.social. (Read the full report here.)
[image above: source]
* Plutarch
###
As we evaluate equity, we might recall that it was on this date in 1970 that The Oregon Highway Division attempted to destroy a rotting beached Sperm whale with explosives, leading to the now infamous “exploding whale” incident.
“It’s easy to meet expenses – everywhere we go, there they are.”*…
… And those expenses seem to keep rising. Ben Brubaker weighs in on one ever-more-timely culprit…
Imagine a town with two widget merchants. Customers prefer cheaper widgets, so the merchants must compete to set the lowest price. Unhappy with their meager profits, they meet one night in a smoke-filled tavern to discuss a secret plan: If they raise prices together instead of competing, they can both make more money. But that kind of intentional price-fixing, called collusion, has long been illegal. The widget merchants decide not to risk it, and everyone else gets to enjoy cheap widgets.
For well over a century, U.S. law has followed this basic template: Ban those backroom deals, and fair prices should be maintained. These days, it’s not so simple. Across broad swaths of the economy, sellers increasingly rely on computer programs called learning algorithms, which repeatedly adjust prices in response to new data about the state of the market. These are often much simpler than the “deep learning” algorithms that power modern artificial intelligence, but they can still be prone to unexpected behavior.
So how can regulators ensure that algorithms set fair prices? Their traditional approach won’t work, as it relies on finding explicit collusion. “The algorithms definitely are not having drinks with each other,” said Aaron Roth, a computer scientist at the University of Pennsylvania.
Yet a widely cited 2019 paper showed that algorithms could learn to collude tacitly, even when they weren’t programmed to do so. A team of researchers pitted two copies of a simple learning algorithm against each other in a simulated market, then let them explore different strategies for increasing their profits. Over time, each algorithm learned through trial and error to retaliate when the other cut prices — dropping its own price by some huge, disproportionate amount. The end result was high prices, backed up by mutual threat of a price war.
Implicit threats like this also underpin many cases of human collusion. So if you want to guarantee fair prices, why not just require sellers to use algorithms that are inherently incapable of expressing threats?
In a recent paper, Roth and four other computer scientists showed why this may not be enough. They proved that even seemingly benign algorithms that optimize for their own profit can sometimes yield bad outcomes for buyers. “You can still get high prices in ways that kind of look reasonable from the outside,” said Natalie Collina, a graduate student working with Roth who co-authored the new study…
Read on for more on recent findings that reveal that even simple pricing algorithms can make things more expensive: “The Game Theory of How Algorithms Can Drive Up Prices,” from @benbenbrubaker.bsky.social in @quantamagazine.bsky.social.
See also the charmingly-understatedly-titled “AI-Driven Personalized Pricing May Not Help Consumers.“
* anonymous
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As we muse on malign mechanisms, we might recall that it was on this date in 1787 that the first in a series of eighty-five essays by “Publius,” the shared pen name of Alexander Hamilton, James Madison, and John Jay, appeared in the Independent Journal, a New York newspaper. Known collectively as The Federalist Papers, they were an effort to urge New Yorkers to support ratification of the Constitution approved by the Constitutional Convention on September 17, 1787. While aimed at New Yorkers, the essays were reprinted in newspapers (and pamphlets) across the fledgling nation.
In Federalist Paper #12, Alexander Hamilton (later the first Secretary of the Treasury) articulated an argument for the economic advantages of a united government under the proposed Constitution– and sketched the outline of the financial and commercial regime we’ve built since.
Your correspondent is heading into a series of meeting sufficiently intense that (R)D will be on brief hiatus. Regular service should resume on October 30.
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