Contra Gensler and the Chinese Mirror
Gary Gensler, the chairman of the Securities and Exchange Commission, may be everything a classical liberal wants to avoid. I will take him as representative of the federal bureaucracies that want to control cryptocurrencies and the emerging decentralized finance (“DeFi”) markets. (See Andrew Ackerman, “Stablecoins in Spotlight as U.S. Begins to Lay Ground for Rules on Cryptocurrencies,” Wall Street Journal, December 25, 2021.)
In an instructive article, The Economist evoked the breath-taking potentialities of DeFi: cryptocurrencies, blockchains technologies, fungible or non-fungible tokens, etc. (“Adventures in DeFi Land,” The Economist, September 18, 2021). A few quotes:
Piece by piece a new kind of economy is being built through applications on various blockchains. Each addition makes it more likely that the whole will amount to something meaningful and powerfully disruptive. …
The Ethereum blockchain, which underpins much of DeFi activity, settled $2.5trn-worth of transactions in the second quarter of 2021, including payments and transactions to facilitate trading and lending. (Visa, a payments giant, settled about the same amount in the same period …) …
Innovations, such as automated marketmakers, arbitrage systems and self-stabilising currency regimes, are already pushing the boundaries of financial technology. …
That makes it possible to construct smart contracts—self-executing agreements in which a chain of actions follows when certain conditions are met. These are automatically enforced and cannot be tampered with. …
[Non-fungible tokens] for instance, could become more widely used. Today they are digital collectable claims, but in theory they could represent ownership claims on homes. Mortgage creation could then be wrapped into a single, efficient bundle.
These developments illustrate what Friedrich Hayek explained was a major benefit of liberty (Law, Legislation and Liberty, Vol. 1: Rules and Order [University of Chicago Press, 1973], p. 56):
Since the value of freedom rests on the opportunities it provides for unforeseen and unpredictable actions, we will rarely know what we lose through a particular restriction of freedom.
The Economist often tends to trust government regulation at least as much as the autoregulating order of the market, but Gensler looks like an incarnation of the “man of system” described by Adam Smith:
The man of system, on the contrary, … is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it.
According to the Wall Street Journal (Paul Kiernan, “SEC’s Gensler Doesn’t See Cryptocurrencies Lasting Long,” September 21, 2021), Mr. Gensler compares cryptocurrencies to Wild West banking:
Mr. Gensler likened the thousands of cryptocurrencies in existence to the so-called wildcat banking era that took hold in the U.S. from 1837 until 1863 in the absence of federal bank regulation. Before President Abraham Lincoln created the Office of the Comptroller of the Currency, banks issued their own currencies, which they sometimes refused to redeem for their purported value in gold or silver.
What a strange view of economic history! Before and after Lincoln, American banks have been heavily regulated, often more heavily than banks in other Western countries. Canada provides a good comparison. Since 1840, Americans have experienced 12 episodes of banking panics with widespread withdrawal suspensions; Canadians have had zero. In 19th-century America, so-called “free banks” (which were not free at all) as well as the “national banks” were forbidden to issue money not backed by government bonds. They faced branching limitations and prohibitions, hence the proliferation of “unit banks” with a single place of business. In Canada, each bank could freely issue its own currency up to the value of its capital until the early 20th century. After Canada was officially founded in 1867, branching was never limited. Canada was the efficient Far West. American regulation has been the Far West only in the bad sense of the term. For more details as well as sources, see my “A Very Bad Solution to Very Real Problems,” Econlog, January 31, 2018.
In 1933, under Franklin D. Rosevelt, the US government stopped redeeming dollars for their promised gold value and not only “sometimes,” but definitively.
Not surprisingly given his biases and knowledge failures, Gensler thinks that investors need his protection. He says that the “robust enforcement and examinations regimes … are essential to protecting investors, maintaining fair, orderly, and efficient markets.” What about free markets instead of what politicians and bureaucrats think is “fair, orderly, and efficient”? (See his recent statement before the Senate Committee on Banking, Housing, and Urban Affairs.) Apparently, he needs to dictate what he thinks investors want—shibboleths like “environmental, social, governance” (ESG) disclosures—because only the government, as opposed to markets, can give people what they want. Also unsurprisingly, he complains that his agency does not have enough money and staff. Protecting so many people is an expensive piece of cake.
Jennifer Schulp of the Cato Institute quotes from Gensler’s Senate testimony (“The SEC’s ‘Daddy’ Issues,” National Review, September 24, 2021):
Senator [John] Kennedy [R, La]: As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?
SEC Chairman Gensler: No. No. (laughs)
Senator Kennedy: Then why do you act like it?
Mr. Gensler shows blind confidence in the competence of the federal government—that is, of its politicians and bureaucrats. It is as if public-choice analysis had taught us nothing during the past seven decades. Government failures are generally worse than market failures.
What does the Chinese mirror have to do with this? As I explained in a recent Econlog post, the image that Americans see when they look at China is, or should be, the deformed image of their own government’s authoritarian failures—deformed and multiplied of course by the extra power of the Chinese state. A case in point: just a few days ago, the Chinese government forbade all cryptocurrency transactions. The more totalitarian a government is, the more it fears cryptocurrencies and decentralized markets that can escape its authority. Let’s hope the US government will try to be different from its Chinese counterpart instead of being seduced by the image it sees in the mirror.