Insofar as (at the risk of sounding tautological) transformative technologies are concerned, Neil Postman is surely right. But then, as Roy Amara pointed out, “we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” David Oks uses a common myth of technological replacement to illustrate– and more specifically, to observe that there’s a lot more to replacing labor than just automating tasks.
He begins by recounting an interview a few months ago of J. D. Vance by Ross Douthat in which (in response to a question from Douthat about the potential downsides of AI, in particular the prospect of its “obsoleting” human workers) Vance responded sanguinely, arguing that ATM machines didn’t eliminate bank tellers. Indeed, Vance suggested, “we have more bank tellers today than we did when the ATM was created, but they’re doing slightly different work…”
There are two interesting things about what Vance said, both relating to the example that he chose about bank tellers and ATMs.
The first thing is what it tells us about who J. D. Vance is. The bank teller story—how ATMs were predicted to increase bank teller unemployment, but in fact did not—isn’t a story you’ll hear from politicians; in fact, for a long time, Barack Obama would claim, incorrectly, that ATMs had decreased the number of bank tellers, in order to suggest that the elevated unemployment rate during his presidency was due to productivity gains from technology. I’ve never heard a politician cite the bank teller story before: but I have seen the bank teller story cited in a lot of blogs. I’ve seen it cited, for example, by Scott Alexander and Matt Yglesias and Freddie deBoer; and I’ve heard it, upstream of the humble bloggers, from such fine economists as Daron Acemoglu and David Autor. The story of how ATMs didn’t automate bank tellers is, indeed, something of a minor parable of the economics profession…
… But the other thing about the bank teller story that Vance cites is that it’s wrong. We do not, contrary to what Vance claims, have “more bank tellers today than we did when the ATM was created”: we in fact have far fewer. The story he tells Douthat might have been true in 2000 or 2005, but it hasn’t been true for years. Bank teller employment has fallen off a cliff. Here is a graph of bank teller employment since 2000:
So what happened to bank tellers? Autor, Bessen, Vance, and the like are right to point out that ATMs did not reduce bank teller employment. But they miss the second half of the story, which is that another technology did. And that technology was the iPhone. The huge decline in bank teller employment that we’ve seen over the last 15-odd years is mainly a story about iPhones and what they made possible.
But why? Why did the ATM, literally called the automated teller machine, not automate the teller, while an entirely orthogonal technology—the iPhone—actually did?
The answer, I think, is complementarity.
In my last piece, on why I don’t think imminent mass job loss from AI is likely, I talked a lot about complementarity. The core point I made was that labor substitution is about comparative advantage, not absolute advantage: the relevant question for labor impacts is not whether AI can do the tasks that humans can do, but rather whether the aggregate output of humans working with AI is inferior to what AI can produce alone. And I suggested that given the vast number of frictions and bottlenecks that exist in any human domain—domains that are, after all, defined around human labor in all its warts and eccentricities, with workflows designed around humans in mind—we should expect to see a serious gap between the incredible power of the technology and its impacts on economic life.
That gap will probably close faster than previous gaps did: AI is not “like” electricity or the steam engine; an AI system is literally a machine that can think and do things itself. But the gap exists, and will exist even as the technology continues to amaze us with what it can now accomplish.
But by talking about why ATMs didn’t displace bank tellers but iPhones did, I want to highlight an important corollary, which is that the true force of a technology is felt not with the substitution of tasks, but the invention of new paradigms. This is the famous lesson of electricity and productivity growth, which I’ll return to in a future piece. When a technology automates some of what a human does within an existing paradigm, even the vast majority of what a human does within it, it’s quite rare for it to actually get rid of the human, because the definition of the paradigm around human-shaped roles creates all sorts of bottlenecks and frictions that demand human involvement. It’s only when we see the construction of entirely new paradigms that the full power of a technology can be realized. The ATM substituted tasks; but the iPhone made them irrelevant…
[Oks unpacks the stories of the ATM’s and iPhone’s impact on banking, then looks ahead, by anaology, to what might be in store with AI. He concludes…]
… I am not a “denier” on the question of technological job loss; Vance’s blithe optimism is not mine. But I’m skeptical that simply slotting AI into human-shaped jobs will have the results people seem to expect. The history of technology, even exceptionally powerful general-purpose technology, tells us that as long as you are trying to fit capital into labor-shaped holes you will find yourself confronted by endless frictions: just as with electricity, the productivity inherent in any technology is unleashed only when you figure out how to organize work around it, rather than slotting it into what already exists. We are still very much in the regime of slotting it in. And as long as we are in that regime, I expect disappointing productivity gains and relatively little real displacement.
The real productivity gains from AI—and the real threat of labor displacement—will come not from the “drop-in remote worker,” but from something like Dwarkesh Patel’s vision of the fully-automated firm. At some point in the life of every technology, old workflows are replaced by new ones, and we discover the paradigms in which the full productive force of a technology can best be expressed. In the past this has simply been a fact of managerial turnover or depreciation cycles. But with AI it will likely be the sheer power of the technology itself, which really is wholly unlike anything that has come before, and unlike electricity or the steam engine will eventually be able to build the structures that harness its powers by itself.
I don’t think we’ve really yet learned what those new structures will look like. But, at the limit, I don’t quite know why humans have to be involved in those: though I suspect that by the time we’re dealing with the fully-automated organizations of the future, our current set of concerns will have been largely outmoded by new and quite foreign ones, as has always been the case with human progress.
But, however optimistic I might be about the human future, I don’t think it’s worth leaning on the history of past technologies for comfort. The ATM parable is a comforting narrative; and in times of uncertainty and fear we search naturally for solace and comfort wherever it may come. But even when it comes to bank tellers, it’s only the first half of the story…
As to whether the wisdom of Amara and Oks is widely-shared, consider this from Crunchbase:
Crunchbase data shows global venture investment totaled $189 billion in February — the largest startup funding month on record — although 83% of capital raised went to just three companies. They include OpenAI, which raised $110 billion, also in the largest round ever raised by a private, venture-backed company.
The record month for venture funding took place against the backdrop of a trillion-dollar stock market drop as AI compute and tooling unsettled leading public software companies. [See also here.]
All told, venture investment was up close to 780% year over year from the $21.5 billion raised by startups in February 2025.
OpenAI was not the only company to raise tens of billions of dollars last month. Its closest rival, Anthropic, raised $30 billion, marking the third-largest venture round on record.
Waymo, Alphabet‘s self-driving division, raised $16 billion. Together, those three rounds totaled $156 billion, representing 83% of the global venture capital raised in February.
A further four companies each raised $1 billion or more last month: Tokyo-based semiconductor manufacturer Rapidus; London-based self-driving platform Wayve; San Francisco-based AI for robotics World Labs; and Sunnyvale, California-based AI semiconductor company Cerebras Systems.
These massive rounds were led by strategic corporate investors, a host of private equity and alternative investors, as well as a few multistage venture investors and a government agency…
As we contemplate change, we might send sanitary, odor-free birthday greetings to Sir Joseph William Bazalgette; he was born on this date in 1819. A civil engineer, he became chief engineer of London’s Metropolitan Board of Works, in which role his major achievement was a response to the “Great Stink of 1858,” in July and August of 1858, during which very hot weather exacerbated the smell of untreated human waste and industrial effluent. Bazalgette oversaw the creation of a sewer network for central London which addressed the problem– and was instrumental in relieving the city from cholera epidemics, in beginning the cleansing of the River Thames, and in creating (a crucial part of) the infrastructure that underlay its extraordinary growth over the next century.
Even as agricultural land is becoming a covetedinvestment (as manifest in the purchases of billionaires like Stan Kroenke, Bill Gates, and Jeff Bezos, and by institutions like Nuveen and the Canadian Pension Investment Board and by publicly-traded REITs like Farmland Partners and Gladstone Land Corp), there’s another class of investor– with a very different use case– on the hunt. Joy Shin and Ryan Duffy report…
Last year, a datacenter developer started working the phones along Green Hill Road in Silver Spring Township, PA, outside Harrisburg. Mervin Raudabaugh got the call: a mystery buyer wanted to buy his 261 acres of farmland. The developer offered him $60,000 an acre for the land the 86-year-old had farmed for six decades. Mervin turned it down, selling to Lancaster Farmland Trust for <$2M instead, thereby locking the soil into agricultural use. “I was not interested in destroying my farms,” he told a local Fox affiliate.
Two things about this story might have been unthinkable a generation ago: that anyone would offer a farmer nearly $16M for that land, and that it’d be worth more dead (paved over) than alive (producing food).
The Supermarket of the World
For the better part of a century, that’s what America was. From 1959 through 2018, the country ran an agricultural trade surplus every single year, peaking near $27B in 1981, when soybeans, corn, wheat, and rice flowed out of the heartland in volumes that functioned as soft power and hard trade leverage. (When the Soviet harvest failed in 1963, Khrushchev had to buy American wheat through private US grain companies: at market rate, without credit, shipped on American vessels, which was a humiliation leveraged by his enemies to oust him the following year.)
Then, in 2019, the curves crossed. The U.S. has since run a deficit in four of the last six fiscal years. Last year, we imported $43.7B more in agricultural products than we sold.
Washington has started saying the right words. Last month, the USDA and Department of War signed a memorandum designating agriculture as a national security priority. Multiple bills linking food security to national security percolated through the last Congress. If you talk to the right folks in Washington, you’ll hear agriculture now being discussed the way semiconductors were in 2021 — as a sovereign capacity that a serious country cannot offshore.
All of which sounds right, none of which changes what is happening on the ground. Because the ground is the problem.
In real estate, you think in square feet, in proximity, in comps. Farmland trades in acreage, water tables, growing seasons, and soil composition. And right now, profitably farming that acre is just about the hardest it’s ever been.
Since 2020, seed costs have climbed 18%, fertilizer 37%, fuel 32%, and interest on operating loans 73%. Labor is up 50%. These costs never came back down after the 2021-22 supply chain shock, but crop prices did, creating a double squeeze on farmers. Farmland has appreciated nearly four-fold from ~$1,090/acre in 2000 to $4,170 in 2024.
Some 40% of U.S. farmers are over 65. The American Farmland Trust estimates nearly 300M acres will change hands through inheritance in the next two decades. When it does, the math facing each heir will look a lot like Mervin’s. What would you do: keep farming a business with collapsing margins, or if one was offered, take the check?
A Collision of Old & New Economies
Datacenters, chip fabs, and other megaprojects need what farms need: flat land, abundant water, reliable power, and access to transport.
In Loudoun County, VA, ground zero of America’s datacenter buildout, farmland already lists at $55,000–$79,000/acre, a significant premium over the statewide average because markets are pricing in the possibility the land will convert from farmland to computerland.
Conversions are large and getting larger. Meta’s $10B compute cluster in Richland Parish, Louisiana, sits on 2,250 acres of former soybean fields. Samsung’s new $17B fab occupies 1,200 acres outside Taylor, Texas, a town that once called itself the largest inland cotton market in the world. Micron’s $100B megafab is going up on 1,400 acres of former agricultural land and wetlands in Clay, New York. These are some of the largest private investments in American history, and among the most economically and strategically consequential bets we’re making as a country. You can’t help but notice the symbolism of it all: each is being built on rural land that was growing something one or two generations ago.
Datacenter developers, who already need some PR help, have seen local opposition to these projects emerge as a real planning risk, with farming families showing up at county meetings to argue that once the land converts, it will never come back.
Nobody should pretend this is irrational. A fab generates more economic value per acre than any soybean field ever will, the jobs pay better, and the strategic logic of onshoring chips is sound. But the math that makes each individual conversion obvious is the same math that, in the aggregate, leaves you structurally short on food. The country is losing about 2,000 acres a day, with 18M more projected to convert by 2040.
The Flow of Capital
As Washington works to subsidize the farming, to the tune of $10–$15B in federal support each year, Wall Street is betting on the land underneath it leaving farming.
Nuveen Natural Capital, a subsidiary of TIAA, manages $13.1B in farmland across 3M acres globally and recently launched a REIT targeting $3B in new capital. Those holdings have appreciated far beyond what crop income would justify, because it follows the pattern of a conversion optionality play: buy well-located agricultural land at agricultural tax rates and wait for rezoning.
Nearly 95% of American farms are still family-run, but most are modest operations. The 6% of farms generating $1M+ in sales produce 78% of everything, up from 69% just five years ago. Farming has developed the power-law distribution of a winner-take-most industry, except the winners don’t get to set their own prices. The family farm persists in name, but the economics (and economies of scale) increasingly push it to operate like a corporation or exit.
And institutional investors have some strange bedfellows on their side of the orderbook. Foreign investors held an interest in nearly 46M acres as of 2023 – 3.6% of all privately held farmland – up 85% since 2010. Canada alone holds 15M acres. China, which cannot feed its population from its own soil, built COFCO International into a state-backed grain trader that does $38.5B a year and accumulated millions of acres globally. Saudi Arabia was pumping Arizona’s groundwater through Fondomonte, a state-linked operation growing alfalfa for export, until Arizona killed the leases in 2023. Those countries treat productive soil as something worth a sovereign premium, and something you want to physically control…
[The authors recount the history of “Agro-Doomerism” and consider the (largely technological) potential solutions to the conundrum: “This is a hard problem, but it is a solvable one, as shown by the long history of technological revolutions in agriculture. Today, a set of technologies that were each too expensive or immature a decade ago have converged to the point where the raw inputs for a farm, ex land, can get radically cheaper, all at once.” They enumerate some of those potential saviors, and conclude…}
… The long arc of agro-doomerism and technological revolutions say there’s reasons for optimism. Many times before, the “math” said we’d run out of food; many times before, new science, systems, and processes came along that changed the denominator and proved the doomers wrong. Hoping and praying for AGI or another Norman Borlaug [the father of the Green Revolution] to save our bacon is not a strategy, but abundance-oriented technology stacks that don’t force a zero-sum choice between preservation and productivity might be. We should look at systems that help unfallow and uplift acres, making farmland competitive enough that we don’t pave over too much and one day realize we want the topsoil back – or our ag trade deficit erased.
The bet worth making is 1) to never bet against America, of course, and 2) that something similar will happen here: that productivity, not preservation alone, will close the gap. This is a generational opportunity, a category deeply in the national interest, and a sector wanting more capital, technology, engineers, and founders to show up. Those who get there first will be serving a gigantic market, and attacking a problem that Washington has acknowledged is existential but has no idea how to productively solve.
The supermarket of the world was built on cheap land and cheap water. Neither are cheap anymore, and both are being bid up by us – via population growth – as well as the industrial renaissance that we care so deeply about. But that doesn’t mean we can forget foundational inputs – literally – to our way of life…
Farming vs. fabs (and data centers)… American agriculture is caught in a collision between old and new economies: “The Supermarket of the World.”
Rubble left in the aftermath of Hurricane Michael is pictured in Mexico Beach, Florida, U.S. October 11, 2018. REUTERS/Jonathan Bachman (source)
One of the effectively-secret ingredients in the world’s economic growth over the last couple of centuries has been insurance. The ability to insure against catastrophic loss has underwritten (pun intended) the trillions and trillions of dollars of loans that have funded the construction and acquisition that has enabled the growth of both commercial endeavor and the the accumulation of personal wealth (directly through home ownership and indirectly through equity ownership in those commercial endeavors or participation in pension schemes that own that equity).
But in a way that was enitrely predictable, climate change is rendering a growing portion of the world uninsurable. Gavin Evans ponders what that might mean…
The Florida peninsula looks like a sore thumb. It juts into the Gulf of Mexico and the Atlantic, where the water is getting warmer year on year, prompting fiercer hurricanes that can blow down houses like collapsing decks of cards. Climate scientists are convinced all hell will break loose sooner or later when a monster-sized, property-destroying storm makes a direct hit on Miami or Tampa-St Petersburg. Given three near-misses in the recent past, the experts view such a calamity as inevitable. It’s a huge risk for anyone living there – they stand to lose everything – but also for those bearing the financial side of this risk, the insurance companies. Some in the industry are seeing this as a portent for their future – an impending existential threat with profound implications for the economic system.
There are no easy solutions for people still paying off mortgages and those who want to buy property along the Florida coast, because the potential payout on the back of a mammoth storm is so high that the reinsurers (who insure the insurers against catastrophe) are refusing to underwrite their clients and, with no reinsurance, there’s no insurance; and with no insurance, no mortgages; and with no mortgages, no property market. Insurance protects investments against loss and is therefore a pillar of the economic system. If it goes, economies are destabilised.
Many panicked homeowners have rushed to make their houses less risky for insurance companies by reinforcing their roofs with hurricane clips, installing impact-resistant windows, doors and shutters, and strengthening their foundations. But it’s not just storms and higher, warmer seas that concern insurers. Rising temperatures mean that the frequency, range and ferocity of wildfires are also on the rise.
So far this year, 3,374 wildfires have burned an area of Florida totalling 231,172 acres (at the time of writing), and it is even worse in California where 7,855 blazes have killed at least 31 people, destroyed more than 17,000 houses and devoured 525,208 acres of land, at an estimated cost of more than $250 billion. Here, too, homeowners rushed to make their properties more palatable to cold-footed insurers – clearing their surroundings of anything flammable, covering yards with gravel, sheathing houses with fire-resistant stucco, and replacing wooden roofs with steel.
But, even for the most diligent, insurance companies have turned tail, dumping existing clients and abandoning fire-prone and storm-prone areas altogether. On the Californian fire front, 2024 was a turning point as several insurers ceased issuing new policies because of fire-associated risks, including the United States’ biggest property insurer, State Farm, which cancelled policies in parts of Los Angeles. It is all too easy to view this cynically, but it’s happening because property insurers have been reporting year-on-year losses from climate change-related payouts.
Insurance companies survive by making more money from covering risk than they lose from these risks, which is why they prefer clients less likely to claim (insofar as they can predict the risk involved) and require them to pay substantial excess to discourage claims. When payouts rise above the premium intake, insurance companies either hike up these premiums or withdraw. But when that risk is considered catastrophic, potentially affecting many thousands of clients, as with Floridian storms and Californian fires, it is the reinsurers who are the first to retreat because they will ultimately bear most of the cost.
Reinsurers aggregate payout patterns to establish the likelihood of having to make huge payouts from future natural catastrophes. They do this by gathering exposure data from existing insurers in a geographical area, and by examining catastrophe models (computer simulations that estimate potential losses from natural perils). When they put all this together with detailed analysis of conditions within the area, they come up with a figure for their total potential loss if a catastrophic event strikes.
This is why reinsurers focus so intensely on climate change. Take a glance at the websites of big ones like Swiss Re and Munich Re and you get a sense of how central this is to their calculations – a concern that has spread to property insurers who are starting to hire climate consultants. Even more than market volatility, climate is their biggest headache. ‘You won’t meet a single insurance or reinsurance CEO who doesn’t believe in climate change,’ the insurance investor and former Lombard Insurance CEO James Orford told me. ‘They see it in the numbers – a combination of more extreme, less predictable events, combined with big losses of sums insured. All the modelling suggests these are uninsurable risks.’…
[Evans recaps the history of insurance, starting in Genoa, in the mid-14th century, with the insuring of maritime expeditions; examines the current state of play; examines the efforts (and gauges the weaknesses) of state’s efforts to step up with coverage when insurers step away; then considers another role for states…]
If states do withdraw from insurance and reinsurance, some of the most lucrative areas of the US, Canada, Europe, Asia, Africa and Australia will be devastated: no mortgages and no banks, leading to more ghost towns and villages. ‘It ends with depopulation and abandonment,’ said Agarwala. ‘Climate change reduces the operating space for humanity.’ In the UK, rising sea levels and coastal erosion could literally reduce operating space, putting 200,000 British homes at risk by 2050. There’s no coastal-erosion insurance, which puts more burden on the state, mainly to pay for new defences, but also to help people move.
Governments can take action in other ways, by investing greater sums in risk-prevention and management. There are signs of this happening such as the ‘fire-hardening’ and storm-prevention efforts in Florida, and improved flood defences in the UK; meanwhile, the EU’s Recovery and Resilience Facility is being used in several countries to build and renovate operations centres to cope with wildfires, and to buy firefighting helicopters.
In future, it is likely that voters will demand that their state and national governments do far more, regardless of the cost. They will want tougher building codes, including limitations on building in risky areas; expensive fire-prevention and fire-fighting schemes; better flood and storm defences; improved early catastrophe management, involving relocating people from risky areas and, when disaster strikes, rapid life-saving interventions such as large-scale emergency evacuations. If the insurance industry is forced to retreat by the climate crisis, all of this infrastructural investment will require vast chunks of taxpayers’ money. It is hard to avoid the feeling that this is part of our destiny, and that the sore thumb of the Florida peninsula is pointing us to the future…
Whole regions of the world are now uninsurable, bringing radical uncertainty to the economy: “The insurance catastrophe,” from @aeon.co.
As we cover up, we might send highly-charged birthday greetings to a man who made foundational contributions both to the detection of climatic conditions and to a technology that may help allieviate climate change: John Frederic Daniell was born on this date in 1790. Named the first professor of chemistry at the newly founded King’s College London in 1831, he was an avid meteorologist. He invented the dew-point hygrometer known by his name and a register pyrometer; in 1830 he erected a water-barometer in the hall of the Royal Society.
But Daniell is better remembered as a chemist (and physicist), especially for his invention of the Daniell cell, an element of an electric battery much better than voltaic cells, the standard before him. Indeed, the Daniell cell is the historical basis for the contemporary definition of the volt (the unit of electromotive force in the International System of Units). All advances in battery technology since then were “from” the base that Daniell laid.
A stlll from It’s a Wonderful LIfe, small-town banker George Bailey (Jimmy Stewart) on left (source)
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.
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
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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.”
In a follow-on (in a fashion) to an (R)D earlier this month on financialization and gambling, Liz Hoffman on the striking changes underway in the financial sector…
Wall Street is starting to look a bit like a stage drama where nobody is playing the part that casting assigned.
To build a giant Louisiana data center, Meta raised $29 billion in equity from Blue Owl (a firm known for private credit) and private credit from PIMCO (a firm known for public bonds). Google has piles of cash and a red-hot stock, but is instead bringing its pristine credit rating to the deal table, backstopping crypto miners. The $7 billion that KKR and Apollo are putting into Keurig Dr Pepper is “equity” in the sense that it will help KDP reduce its debt load. But it isn’t coming from their traditional PE funds.
You think companies are built with equity and debt? That’s cute, today’s masters of the universe will chuckle while patting your head.
What used to be called simply “investing” or “lending” has been replaced by “capital solutions” — hybrid equity, kickers, and cash flows tailored to match the returns promised to investors on the other side. Growing pots of money now resemble liquid sand, moldable into whatever shape will fit the money hole in front of it. This shift has been obscured by narratives, overcooked in my view, about a battle between private credit and banks: “There’s one system,” Goldman Sachs President John Waldron told me a few weeks ago, and it’s changing quickly.
Goldman reorganized itself along these lines earlier this year… Apollo, one of the original private-equity firms, is now 80% credit… and firms from Chicago buyout shops to Middle Eastern sovereign wealth funds have launched “capital solutions” arms. Lawyers are jumping in downstream.
Prioritizing what companies actually need over whatever widgets Wall Street happens to sell is good customer service. Personal wealth management got a lot better when firms started asking “how much do you need to retire?” instead of “would you like to buy this structured note?”
And the rise of insurance money in investing has created patient capital that in many cases fits those money holes better than blunter instruments. Much of KKR and Apollo’s Keurig investment will end up in their insurance arms, backed by long-term contracts with the coffee-pod maker, people familiar with the matter said.
But flexible capital will almost certainly overflex, and not everyone with “go-anywhere” money should go anywhere. I suspect that before this cycle is over, we’ll see a few instances that leave everyone asking, “why did they own that?”… Sometimes “capital solutions” just code for investing in distressed companies, which is nothing if not a capital problem in search of a solution, trade publication Private Debt Investor wrote…
As we go back to basics, we might note that it’s International Accounting Day– a celebration of the field on this date each year that commemorates the publication of Luca Pacioli’s seminal work, Summa de Arithmetica, Geometria, Proportioni et Proportionalita, in 1494, which introduced the double-entry bookkeeping system—a foundational element of modern accounting.
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