SBF and the two-way street of deception
people want to believe
If you try to calculate the equity of a balance sheet with an entry for HIDDEN POORLY INTERNALLY LABELED ACCOUNT, Microsoft Clippy will appear before you in the flesh, bloodshot and staggering, with a knife in his little paper-clip hand, saying “just what do you think you’re doing Dave?” You cannot apply ordinary arithmetic to numbers in a cell labeled “HIDDEN POORLY INTERNALLY LABELED ACCOUNT.” The result of adding or subtracting those numbers with ordinary numbers is not a number; it is prison.
—Matt Levine, FTX’s Balance Sheet Was Bad
You can either believe that you are the Messiah or not believe it. Others can either believe that you are the Messiah or not believe it. This leads to four cases:
i) You believe you are the Messiah, and others believe it. You become a charismatic religious leader.
ii) You believe you are the Messiah, and no one else believes it. You become a mental patient.
iii) You don’t believe you are the Messiah, and neither does anyone else. You are ordinary.
iv) You don’t believe you are the Messiah, but others do. You are a fawned-on celebrity.
I am inclined to put Sam Bankman-Fried into category (iv).
Actually, my favorite example of category (iv) is Harold Hill, the main character in The Music Man. Hill is a scam artist, and he knows it. He falsely styles himself a “professor” who has a system for teaching boys to play musical instruments. He does this in order to sell band uniforms and instruments. His plan is to skip town before everyone figures out that he has not created an actual marching band.
In the 1962 movie version, in the climactic final scene (which always brings tears to my eyes), he stands in handcuffs in front of the townspeople, who are ready to seek vengeance. When boys show up in band uniforms, a local woman who has fallen in love with him hands him a baton and looks at him encouragingly. He says, “I couldn’t.” But he reluctantly waves the baton, and the band begins to play, haltingly. Then all of a sudden, they miraculously transform into a spectacular marching band.
Perhaps the Messianic nature of The Music Man had not occurred to you. But Hill cures a little boy (played by Ron Howard) of shyness. And there is a minor character who shrieks “Ye Gods!” at several points.
My guess is that people have a strong desire to follow a Messiah. This desire gets exploited, either consciously or unconsciously, by someone who has the right combination of charisma and sociopathy. That is how I see SBF. But did SBF create a crypto fools’ paradise, or did the crypto craze create SBF?
The 1999 Internet Bubble was another fools’ paradise. In November of 1999, I wrote about it, also invoking The Music Man.
One of the most important topics in human psychology is deception and self-deception. I was glad to seewrite about a 1964 best-seller on this topic, called Games People Play. It is also a central theme of The Elephant in the Brain, by Kevin Simler and Robin Hanson. If you have not explored this topic, I encourage you to do so.
But social scientists often model deception as a game played between the deceiver and an adversary who does not want to be deceived. I do not think this is the full story. The process also involves a desire to believe. It seems that people want to be deceived.
In fact, deception may be at the very heart of civilization. The term cyberspace originated in William Gibson’s science fiction, where he called it a “consensual hallucination.” Government and banks are consensual hallucinations that we have sustained. Crypto is a consensual hallucination that may or may not prove sustainable.
If you have never seen the 1962 version of The Music Man, I cannot recommend it strongly enough.
The willingness of people to be deceived is why some financial regulations are necessary. Watching the house of cards of crypto coins and exchanges fail is a lesson. If you enable people to build castles in the sky with no foundation, they will do so. The best and brightest will even be suckers.
I shed no tears for hedge fund managers and investors who lost money on crypto. I shed no tears for retail investors who lost the crypto gamble. I will be angry if government secured financial assets are used to support the crypto casino. Furthermore, there is the real problem of the crypto system creating money out of thin air as virtual crypto assets are assigned a real valuation and used as collateral!
Yes, the central bank does the same - creating money out of thin air. I don't care for the central bank diluting my nation's currency. But I don't see the answer being private actors creating their own fake money and exchanging it for government backed currency. Isn't this like a criminal actor printing and passing around counterfeit bills? I don't think a civil society should tolerate this.
When I think of crypto I can't help thinking of the tulip bubble of centuries ago. When crypto started I asked my son about it and he said it was a pure tulip bubble and nothing really new. With nothing behind it, it is a pure gambling play; if you are not the "house, " you will lose.