The lesson here is that the next SBF should make sure to hold a monopoly in the use of force within a sovereign territory before engaging in financial shenanigans.
A bailout is the wrong metaphor for the Fed's losses being absorbed by the Treasury. Not withstanding some legal subtleties, the government owns the Federal Reserve Board of Governors. Saying the government bailed out the Fed is like saying you bailed out your right hand when it ran out of cash.
The government "sweeps" all the profits of the Fed, leaving it with no capital. Given that the Fed has remitted over a trillion dollars since 2009, it seems myopic to only consider the current year where losses are 60 billion and expected to peak below 200 billion.
With some other form of organization they could have a buffer of capital and there wouldn't be a Treasury loss until that was exhausted. I prefer that entirely government entities not have capital because consolidating the government's borrowing leads to lower borrowing costs from more liquid issues. But other forms are possible.
"We made a lot of profits and then gave them away to a bankrupt organization." is not a line item on a balance sheet. That money is gone, this organization is insolvent. It is a money printer plain and simple.
Any org with debts in USD can avoid "insolvency" by paying those debts with USD. Easy if you can print up USD, like a counterfeiter being legalized, and use those newly printed USD to pay off debts.
Viola - NOT insolvent.
(Likely inflationary and possibly hyper-inflationary, but NOT insolvent. Which is why non-gov't orgs cannot legally print counterfeit cash. Otherwise it would be "victimless", no? )
Inflation is legal counterfeiting. I agree with your premise that just printing more money papers over the problem. Unfortunately when you get to this point it isn’t a short term fix so you can get back to a stable business model. It is the last gasp of a broken system run by incompetents. If we magically cut our deficit in half tomorrow, the crew in charge would run it back up w/in the next 4 years.
So not “insolvent”. But also not a going concern. The coyote has run off the cliff, he just doesn’t k ow it yet.
I think the correct way to criticize what one thinks was borrowing to finance an activity with NPV<0 is to observe that future income would have been greater if the activity had not been financed and the resources used to fund it had rather been left for the private sector to invest. The future financial transactions between taxpayers and bond holders is close to irrelevant.
> Now the Fed is bankrupt. It has to be bailed out by the Treasury (you and me). Unlike FTX, the Treasury can still get away with issuing tokens.
I'd quibble with this a bit. The government can issue new money (seignorage) as a last resort. It's best to think about the government's power over money as a residual power of government like war. Just like in war, the government can ask you to volunteer. Loan them money. Or, the government can draft you. In monetary terms, raise your taxes. If all else fails, because money is intangible, they can issue new money and devalue the existing stock in your pockets.
The seignorage last resort gets ugly. German 1920s hyperinflation, for example. More likely the U.S. government just sells assets--land, buildings, "rights" (to drill, to import, to incorporate). The government has a lot of liabilities, but also a lot of assets
The fiat USD is quite a bit more like crypto than it used to be, and even more so with QE and the Fed (gov't) owning huge quantities of "private assets". Along with Fed - Treasury - Banks trading gov't bonds. The need to pay US taxes in US $ is a huge backing for the value of USD. No other "money" has that quality, thus are arguably less safe / more volatile. Even gold (& silver & gems & art & ...) are subject to trust/ mob valuations. [A recent note on the value of the Mona Lisa points out how 150 years ago it was much much much less valuable, and less than many other artists' works.]
Biggest difference is that there are many alternatives to all other currencies, especially the USD as an alternate to Bitcoin, or Euros, Rubles, Rupees, Renminbi (/Yuan), or Yen. Almost all of the rich and powerful people in the world depend on USD stability for a huge part of their wealth.
I totally trust that the rich will take actions to insure the USD doesn't crash like the FTX token, or even as Bitcoin might, or the Ruble, or Renminbi or Euro or any other currency. Because, and as long as, there is no realistic alternative that is NOT based on "fiat" / trust value.
This doesn't mean investing in USD now is most likely to have the best ROI / risk value -- tho it's also not clear that any other investment has less risk and/or more ROI.
I'm wondering about the relevant counterfactual for these discussions. The current Fed balance sheet in a world without QE? The current state of the macroeconomy in a world without QE? It feels like the crux of this is the effectiveness or ineffectiveness of the policy.
Approximately 100% of all non-bitcoin crypto currencies are a scam. FTT is no exception. The dollar is the strongest fiat currency on the planet and it is in terrible shape. A money that cannot be debased or confiscated is the best answer to this monetary conundrum. Bitcoin is that monetary asset. The faster that the rest of these scams are uncovered and eliminated, the better. Don't be fooled by the SBFs or the FEDs of the world. Do your own research, custody your own assets.
Fiat currency have no backing other than the trust that holders might have in using it as a mean of exchange or store of value. Taxation can only help in plugging a hole in government budget deficits, normally one of the symptoms. Argentina, Venezuela, Zimbabwe, Lebanon, Turkey are examples of countries where fiat ccy at a certain point might be worth the paper they are printed on. Stable coins like USDC have collateral as far as I know in the form of treasury bills or cash deposit, they are audited.
But USDC's collateral is still Fiat. There is no real asset no matter how far you dig, unless we are going to sell Alaska back to the Russians. The intangible asset this is all built on is trust. The U.S. has been despoiling that for the last several years with crazy increases to the money supply and then threw a cherry on top earlier this year by siezing Russia's foreign currency reserves. Not good times to be in the fiat business.
"The Treasury is like FTX, issuing tokens that it calls bonds."
It would seem to me that the tokens are much more like dollars issued by the Fed. The tokens don't pay interest like bonds, do they? The principal never has to be paid back, does it?
FTX issued dollar debt using tokens as collateral, which seems sort of like Treasury bonds, sort of not.
I haven't been following Kling long but this has to be the worst piece he has written. It seems he is completely wrong but maybe he just hasn't explained himself clearly.
First, start with what OneEyedMan said in another comment. I completely agree and add to that here: As I noted under "The Fed Isn't Dead" (Nov 4), the Fed holds $8.8T in debt assets and they are paying interest on $3.1T of bank reserves. (Both numbers as of Sep 2022.) This is not bankrupt. Instead, they have a negative cash flow which is a completely different but related problem, though it does raise questions regarding how they got in that position. And one can and should be concerned about Federal debt but that is also an entirely different but related problem.
BLUF - It seems our disagreement might center on whether the Fed's total capital is $42B or some number much larger. Where does $42B come from?
99% of that article seems to confirm what I said. The Fed has a negative cash flow. By this I mean the same as what the article calls operating loss. This is not bankrupt.
Exceptions:
1 - "That is 30 times the Fed’s total capital of $42 billion."
I have no clue where this $42b number comes from.
According to your quote of Nick Timiraos in The Fed Isn't Dead, the Fed holds $8.3T in securities. I found that in September 2022 they held $8.8T. I'm not aware of liabilities other than $3.1T of bank reserves. Is this where I am missing something?
2 - "but the Fed’s annual operating loss is on a path that will soon exceed the Fed’s total capital. If these operating losses were booked into retained earnings, as required by Generally Accepted Accounting Principles, within a year, the Fed would report negative capital."
""the Fed will soon be technically insolvent."
This is slightly different than your claim the Fed is bankrupt. Either way, I don't see how it can be argued the Fed is anywhere near bankrupt. Besides, what appears to be a positive, if declining, balance sheet, can always be shored up by printing more dollars, which it appears the Fed currently doesn't want to do. That seems like a good thing even if it means a deteriorating Fed balance sheet.
3 - "The Fed’s investment portfolio has a net position of about $5 trillion of long-term fixed-rate investments"
Maybe this isn't different than I said if another $3.3T of holdings are in short term or floating rate holdings. Does this mean the operating losses on $3.1T of bank reserves is a short term problem?
I had the opportunity to ask John Cochrane and Tyler Godspeed about QE a few months ago... now, I’m not an economist but know enough to be dangerous.
I was a little perturbed that my (likely badly phrased) question about why QE had continued so long & why it gets sidelined in general interest rate/fed reserve discussions, and shouldn’t we be a little bit worried about interest rate exposure, especially in a time of inflation and rising rates, was answered more or less as follows:
Eh, it’s not that big a deal and didn’t really do much. Worry about entitlements and congressional spending on the fiscal side, and worry about acting too slow on interest rates on the monetary side.
There were a few academic references to studies on QE/monetary policy thrown in that I didn’t follow... but I was left very disappointed (and I still respect John Cochrane’s views a lot) and feeling like I was getting smoke and hand waving.
I think that John thinks of QE the way that I do. Think of Freddie, Fannie, the Fed, and Treasury as all part of the government, which they are. Freddie, Fannie, and Treasury choose to issue some long-term debt. With QE, the Fed transformed some of that long-term debt into short-term debt. From that perspective, QE is sort of silly. It's one government agency messing with the debt maturity structure of the other government agencies. If you had a single person in charge of government debt management, that would never happen. As it turns out, taxpayers would have been better off had the Fed not done QE. But as citizens, the much bigger risk we face is that government's debt and unfunded liabilities for entitlements will be very difficult to meet going forward.
Forgot to add: didn’t have time to follow up, but it left me with the obvious question - ok, if I shouldn’t worry now because it didn’t do much or isn’t a big deal or however I should take that answer... why did we bother? Why is it and Bernanke heralded for doing it? What am I missing?
Think of QE (and the current round of bad but not crazy inflation) as the Fed creating throwing the government a lifeline.
For example, In the short-run, inflation would let the government raise more tax revenue to pay off the debt, and reposition interest rates (and the expectations that underly them) back into historically sustainable norms.
The problem is, the federal government keeps ignoring these lifelines. Instead of using the opportunity to get its house in order, the federal government isn't willing to reduce spending enough to go that route, so eventually the high inflation rate will lead to borrowing at higher rates, which will lead to further crisis.
Metaphorically, every time the Federal government is tossed a lifeline, instead of taking it, it turns and swims further out to sea.
Exactly so. Fiat currencies are way worse than cryptos as they don't have any collateral to back them other than the willingness of the public to hold them and accept them as mean of exchange. the FTX story is much about governance and internal controls but as often happens it will be taken as an opportunity for the Government to step in with a couple of thousands pages of regulations. i'd rather much see a Darwinian process where investors also learn.
Exactly. Just because an idea is towards the end of an evolutionary chain doesn't mean it is a good one. Most evolutionary ends are bad ones; things that have been around for a long time are at least good in the sense of being stable, if not good in the sense of "nice for humans."
I think the FTX crisis actually shows the existing regulations are fine. The crypto exchanges that operate legally in the US appear to have very little FTX exposure and are handling the run on various crypto currieries without major issues. In other words- they did not steal customer funds.
There really is very little regulation needed for the exchange - simply don’t steal customer segregated monies. The enforcement needed is not rocket science.
Aside from keeping banks and exchanges honest, the idea that the government is going to protect the average schmoe from buying worthless promises is risible.
i completely agree. actually many frauds / big losses happen because of weak if not non existent internal controls (call them segregation of duties, 4 eyes principles, checks and balances). It should be part of investor's due diligence, difficult to regulate that efficiently
If I put 0.1 BTC on an exchange (as opposed to a bank) I am not lending them that BTC, I am asking them store store it for me. That's why they have to actually own 1 BTC for every BTC in deposits. Using the deposits to pump up the price of their own SmokenTokens is stealing
Preventing and punishing stealing is an ancient and obvious duty of government.
True, a company needs "internal controls" to ensure they don't accidentally steal. But that won't help if the leaders are stealing on purpose.
Agreed. You are not going to catch clever thieves through regulation, but it seems straightforward for the government (or third party) organizations to ensure no accidental stealing is happening.
I have no idea why you would imply that Cryptos have collateral backing them up. They don't.
And fiat currencies have the distinct advantage of being backed by the taxing ability of the government that issues them. For sure there is public trust involved and they can fail but the safeguards available are significant.
They are backed by taxes, but the taxes are going to be given to you in the same fiat currency. In other words, fiat currencies are backed by themselves, which is exactly the same as saying you can exchange your dollars for dollars I just printed off the machine.
The lesson here is that the next SBF should make sure to hold a monopoly in the use of force within a sovereign territory before engaging in financial shenanigans.
Just like this guy: https://en.wikipedia.org/wiki/Robert_Mugabe#/media/File:Mugabe_1979_a.jpg
As Tyler Cowen described him in March- "The Excellent Sam Bankman-Fried".
A bailout is the wrong metaphor for the Fed's losses being absorbed by the Treasury. Not withstanding some legal subtleties, the government owns the Federal Reserve Board of Governors. Saying the government bailed out the Fed is like saying you bailed out your right hand when it ran out of cash.
The government "sweeps" all the profits of the Fed, leaving it with no capital. Given that the Fed has remitted over a trillion dollars since 2009, it seems myopic to only consider the current year where losses are 60 billion and expected to peak below 200 billion.
With some other form of organization they could have a buffer of capital and there wouldn't be a Treasury loss until that was exhausted. I prefer that entirely government entities not have capital because consolidating the government's borrowing leads to lower borrowing costs from more liquid issues. But other forms are possible.
"We estimate that the Fed’s balance sheet as of mid-October suffers from a $1.3 trillion mark-to-market loss." https://thehill.com/opinion/finance/3705053-the-fed-is-in-the-red-should-it-still-pay-cfpbs-bills/
"We made a lot of profits and then gave them away to a bankrupt organization." is not a line item on a balance sheet. That money is gone, this organization is insolvent. It is a money printer plain and simple.
Any org with debts in USD can avoid "insolvency" by paying those debts with USD. Easy if you can print up USD, like a counterfeiter being legalized, and use those newly printed USD to pay off debts.
Viola - NOT insolvent.
(Likely inflationary and possibly hyper-inflationary, but NOT insolvent. Which is why non-gov't orgs cannot legally print counterfeit cash. Otherwise it would be "victimless", no? )
Inflation is legal counterfeiting. I agree with your premise that just printing more money papers over the problem. Unfortunately when you get to this point it isn’t a short term fix so you can get back to a stable business model. It is the last gasp of a broken system run by incompetents. If we magically cut our deficit in half tomorrow, the crew in charge would run it back up w/in the next 4 years.
So not “insolvent”. But also not a going concern. The coyote has run off the cliff, he just doesn’t k ow it yet.
I think the correct way to criticize what one thinks was borrowing to finance an activity with NPV<0 is to observe that future income would have been greater if the activity had not been financed and the resources used to fund it had rather been left for the private sector to invest. The future financial transactions between taxpayers and bond holders is close to irrelevant.
> Now the Fed is bankrupt. It has to be bailed out by the Treasury (you and me). Unlike FTX, the Treasury can still get away with issuing tokens.
I'd quibble with this a bit. The government can issue new money (seignorage) as a last resort. It's best to think about the government's power over money as a residual power of government like war. Just like in war, the government can ask you to volunteer. Loan them money. Or, the government can draft you. In monetary terms, raise your taxes. If all else fails, because money is intangible, they can issue new money and devalue the existing stock in your pockets.
The seignorage last resort gets ugly. German 1920s hyperinflation, for example. More likely the U.S. government just sells assets--land, buildings, "rights" (to drill, to import, to incorporate). The government has a lot of liabilities, but also a lot of assets
Good tho long article on crypto & finance by Matt Levine:
https://www.bloomberg.com/features/2022-the-crypto-story/?leadSource=uverify%20wall
The fiat USD is quite a bit more like crypto than it used to be, and even more so with QE and the Fed (gov't) owning huge quantities of "private assets". Along with Fed - Treasury - Banks trading gov't bonds. The need to pay US taxes in US $ is a huge backing for the value of USD. No other "money" has that quality, thus are arguably less safe / more volatile. Even gold (& silver & gems & art & ...) are subject to trust/ mob valuations. [A recent note on the value of the Mona Lisa points out how 150 years ago it was much much much less valuable, and less than many other artists' works.]
Biggest difference is that there are many alternatives to all other currencies, especially the USD as an alternate to Bitcoin, or Euros, Rubles, Rupees, Renminbi (/Yuan), or Yen. Almost all of the rich and powerful people in the world depend on USD stability for a huge part of their wealth.
I totally trust that the rich will take actions to insure the USD doesn't crash like the FTX token, or even as Bitcoin might, or the Ruble, or Renminbi or Euro or any other currency. Because, and as long as, there is no realistic alternative that is NOT based on "fiat" / trust value.
This doesn't mean investing in USD now is most likely to have the best ROI / risk value -- tho it's also not clear that any other investment has less risk and/or more ROI.
I'm wondering about the relevant counterfactual for these discussions. The current Fed balance sheet in a world without QE? The current state of the macroeconomy in a world without QE? It feels like the crux of this is the effectiveness or ineffectiveness of the policy.
Post #100 where I totally agree with Arnold, but:
1. I believe it strengthens the case for Bitcoin.
2. He would totally disagree with me.
Approximately 100% of all non-bitcoin crypto currencies are a scam. FTT is no exception. The dollar is the strongest fiat currency on the planet and it is in terrible shape. A money that cannot be debased or confiscated is the best answer to this monetary conundrum. Bitcoin is that monetary asset. The faster that the rest of these scams are uncovered and eliminated, the better. Don't be fooled by the SBFs or the FEDs of the world. Do your own research, custody your own assets.
100% of the non-bitcoin crypto currencies are a scam... so why would anyone believe that Bitcoin was not also a scam?
And bitcoin is not a scam because? Its a crypto token not backed by anything except cultural zeitgeist. Functionally no different than doge coins .
Brand name, hype - its worth something. But its a fickle thing
Fiat currency have no backing other than the trust that holders might have in using it as a mean of exchange or store of value. Taxation can only help in plugging a hole in government budget deficits, normally one of the symptoms. Argentina, Venezuela, Zimbabwe, Lebanon, Turkey are examples of countries where fiat ccy at a certain point might be worth the paper they are printed on. Stable coins like USDC have collateral as far as I know in the form of treasury bills or cash deposit, they are audited.
But USDC's collateral is still Fiat. There is no real asset no matter how far you dig, unless we are going to sell Alaska back to the Russians. The intangible asset this is all built on is trust. The U.S. has been despoiling that for the last several years with crazy increases to the money supply and then threw a cherry on top earlier this year by siezing Russia's foreign currency reserves. Not good times to be in the fiat business.
"The Treasury is like FTX, issuing tokens that it calls bonds."
It would seem to me that the tokens are much more like dollars issued by the Fed. The tokens don't pay interest like bonds, do they? The principal never has to be paid back, does it?
FTX issued dollar debt using tokens as collateral, which seems sort of like Treasury bonds, sort of not.
I haven't been following Kling long but this has to be the worst piece he has written. It seems he is completely wrong but maybe he just hasn't explained himself clearly.
First, start with what OneEyedMan said in another comment. I completely agree and add to that here: As I noted under "The Fed Isn't Dead" (Nov 4), the Fed holds $8.8T in debt assets and they are paying interest on $3.1T of bank reserves. (Both numbers as of Sep 2022.) This is not bankrupt. Instead, they have a negative cash flow which is a completely different but related problem, though it does raise questions regarding how they got in that position. And one can and should be concerned about Federal debt but that is also an entirely different but related problem.
https://thehill.com/opinion/finance/3705053-the-fed-is-in-the-red-should-it-still-pay-cfpbs-bills/
BLUF - It seems our disagreement might center on whether the Fed's total capital is $42B or some number much larger. Where does $42B come from?
99% of that article seems to confirm what I said. The Fed has a negative cash flow. By this I mean the same as what the article calls operating loss. This is not bankrupt.
Exceptions:
1 - "That is 30 times the Fed’s total capital of $42 billion."
I have no clue where this $42b number comes from.
According to your quote of Nick Timiraos in The Fed Isn't Dead, the Fed holds $8.3T in securities. I found that in September 2022 they held $8.8T. I'm not aware of liabilities other than $3.1T of bank reserves. Is this where I am missing something?
2 - "but the Fed’s annual operating loss is on a path that will soon exceed the Fed’s total capital. If these operating losses were booked into retained earnings, as required by Generally Accepted Accounting Principles, within a year, the Fed would report negative capital."
""the Fed will soon be technically insolvent."
This is slightly different than your claim the Fed is bankrupt. Either way, I don't see how it can be argued the Fed is anywhere near bankrupt. Besides, what appears to be a positive, if declining, balance sheet, can always be shored up by printing more dollars, which it appears the Fed currently doesn't want to do. That seems like a good thing even if it means a deteriorating Fed balance sheet.
3 - "The Fed’s investment portfolio has a net position of about $5 trillion of long-term fixed-rate investments"
Maybe this isn't different than I said if another $3.3T of holdings are in short term or floating rate holdings. Does this mean the operating losses on $3.1T of bank reserves is a short term problem?
I had the opportunity to ask John Cochrane and Tyler Godspeed about QE a few months ago... now, I’m not an economist but know enough to be dangerous.
I was a little perturbed that my (likely badly phrased) question about why QE had continued so long & why it gets sidelined in general interest rate/fed reserve discussions, and shouldn’t we be a little bit worried about interest rate exposure, especially in a time of inflation and rising rates, was answered more or less as follows:
Eh, it’s not that big a deal and didn’t really do much. Worry about entitlements and congressional spending on the fiscal side, and worry about acting too slow on interest rates on the monetary side.
There were a few academic references to studies on QE/monetary policy thrown in that I didn’t follow... but I was left very disappointed (and I still respect John Cochrane’s views a lot) and feeling like I was getting smoke and hand waving.
I think that John thinks of QE the way that I do. Think of Freddie, Fannie, the Fed, and Treasury as all part of the government, which they are. Freddie, Fannie, and Treasury choose to issue some long-term debt. With QE, the Fed transformed some of that long-term debt into short-term debt. From that perspective, QE is sort of silly. It's one government agency messing with the debt maturity structure of the other government agencies. If you had a single person in charge of government debt management, that would never happen. As it turns out, taxpayers would have been better off had the Fed not done QE. But as citizens, the much bigger risk we face is that government's debt and unfunded liabilities for entitlements will be very difficult to meet going forward.
Forgot to add: didn’t have time to follow up, but it left me with the obvious question - ok, if I shouldn’t worry now because it didn’t do much or isn’t a big deal or however I should take that answer... why did we bother? Why is it and Bernanke heralded for doing it? What am I missing?
Think of QE (and the current round of bad but not crazy inflation) as the Fed creating throwing the government a lifeline.
For example, In the short-run, inflation would let the government raise more tax revenue to pay off the debt, and reposition interest rates (and the expectations that underly them) back into historically sustainable norms.
The problem is, the federal government keeps ignoring these lifelines. Instead of using the opportunity to get its house in order, the federal government isn't willing to reduce spending enough to go that route, so eventually the high inflation rate will lead to borrowing at higher rates, which will lead to further crisis.
Metaphorically, every time the Federal government is tossed a lifeline, instead of taking it, it turns and swims further out to sea.
Glenn Reynolds has <a href=https://nypost.com/2022/11/14/uncle-sam-is-playing-the-same-game-as-broke-disgraced-crypto-king/>a similar take</a>.
When you put a link in a substack comment, leave out the HTML codes. Substack recognizes http and assumes it's a link.
Exactly so. Fiat currencies are way worse than cryptos as they don't have any collateral to back them other than the willingness of the public to hold them and accept them as mean of exchange. the FTX story is much about governance and internal controls but as often happens it will be taken as an opportunity for the Government to step in with a couple of thousands pages of regulations. i'd rather much see a Darwinian process where investors also learn.
It's under appreciated that the concepts of government and fiat money are actually the RESULTS of a couple thousand years of Darwinian process.
So is cancer.
In evolution, most lineages die out and most novelties will last less long than the whatever they evolved from.
The unbacked dollar has been around since 1971. https://wtfhappenedin1971.com/
Exactly. Just because an idea is towards the end of an evolutionary chain doesn't mean it is a good one. Most evolutionary ends are bad ones; things that have been around for a long time are at least good in the sense of being stable, if not good in the sense of "nice for humans."
I think the FTX crisis actually shows the existing regulations are fine. The crypto exchanges that operate legally in the US appear to have very little FTX exposure and are handling the run on various crypto currieries without major issues. In other words- they did not steal customer funds.
There really is very little regulation needed for the exchange - simply don’t steal customer segregated monies. The enforcement needed is not rocket science.
Aside from keeping banks and exchanges honest, the idea that the government is going to protect the average schmoe from buying worthless promises is risible.
i completely agree. actually many frauds / big losses happen because of weak if not non existent internal controls (call them segregation of duties, 4 eyes principles, checks and balances). It should be part of investor's due diligence, difficult to regulate that efficiently
I don't get it.
If I put 0.1 BTC on an exchange (as opposed to a bank) I am not lending them that BTC, I am asking them store store it for me. That's why they have to actually own 1 BTC for every BTC in deposits. Using the deposits to pump up the price of their own SmokenTokens is stealing
Preventing and punishing stealing is an ancient and obvious duty of government.
True, a company needs "internal controls" to ensure they don't accidentally steal. But that won't help if the leaders are stealing on purpose.
Agreed. You are not going to catch clever thieves through regulation, but it seems straightforward for the government (or third party) organizations to ensure no accidental stealing is happening.
Daniele,
I have no idea why you would imply that Cryptos have collateral backing them up. They don't.
And fiat currencies have the distinct advantage of being backed by the taxing ability of the government that issues them. For sure there is public trust involved and they can fail but the safeguards available are significant.
They are backed by taxes, but the taxes are going to be given to you in the same fiat currency. In other words, fiat currencies are backed by themselves, which is exactly the same as saying you can exchange your dollars for dollars I just printed off the machine.
Fiat currencies are not backed by anything.