TGIF: Beware the Regulatory Storm over FTX

The bankruptcy of the cryptocurrency exchange FTX and the alleged fraud by co-founder Sam Bankman-Fried, which has cost customers millions, is tailor-made for anyone who already wants the power of government to expand, especially in the area of financial privacy. For that reason I think it would be useful to take a 30,000-foot view of the matter. I offer these considerations as someone with no more than a layman's knowledge of the cryptocurrency phenomenon. (I found this Reason video helpful.)

First, fraud is illegal. If a firm accepts money from clients and uses it in violation of the contractual terms, that is already against the law and the victims have legal recourse. So right off the bat we should be highly doubtful about calls for new laws and regulations or expanded regulatory oversight.

Second, regulation can create a moral hazard. That's what happens when a sense of security provided by insurance or government regulation unintendedly encourages the very bad thing that one sought to avoid. Think of the massive stock fraud perpetrated by Bernie Madoff. Madoff was a well-connected investment insider who defrauded highly sophisticated individuals and charities. He didn't prey on naive widows. Madoff had even worked with the Securities and Exchange Commission (SEC). Isn't it plausible that the existence of the regulatory regime worked to Madoff's advantage? Imagine if no such regime had existed and investors had not been led to rely on an SEC "watchdog," with all the classic bureaucratic deficiencies, to protect them. Would they have been such easy marks? I think not.

Fraud is always possible no matter the regulatory environment. Thus a false sense of security is worse than none at all.

Critics of markets denigrate the buyer beware principle, but when compared to the alternative -- trust state bureaucrats -- it looks pretty good. To the extent that regulators weaken buyer beware, they do a disservice to the public while posing as benefactors. Buyer beware is necessary in any legal environment. If you were you're looking for a new doctor, would you be content simply to throw a dart at a list of government-licensed physicians? Or would you ask around?

Third, the alleged criminality of FTX should not impugn cryptocurrency per se any more than Maddoff's criminality impugned the stock market per se. If, as appears to be the case, a bad actor harmed a lot of people, he should have to compensate his victims. (Of course, that may not come close to making them whole.) But Bankman-Fried's wrongdoing must not be used to demonize cryptocurrency as inherently suspect and illegitimate or to drive it out of existence. No reasonable person concluded that we should not have a stock market because Madoff used it to fleece lots of people.

Fourth, some powerful people are out to get cryptocurrency precisely because it can help regular people maintain some privacy. Those with a fetish for government power have pushed and often attained measures designed to abolish financial privacy. For example, through the government's "Know Your Customer" rules, banks are obliged to inform regulators about their depositors' behavior even if no evidence of criminality exists. Regulation of the government-cartelized banking industry is so extensive that bureaucrats can make virtually any demand and the unwitting depositors whose privacy is compromised have little or no recourse. In a competitive banking industry with market-based money, banks would perhaps offer different assurances about privacy and consumers would freely decide what level they valued at what price. That's how it should be.

If people believe that financial privacy matters only to those who have harmful activity to hide, they need to get over it. Financial privacy and privacy in general are simply implications of self-ownership and should matter to everyone. It is obviously important in authoritarian and totalitarian countries, where governments freely confiscate people's wealth, but it's also important here. We can't know exactly what the future holds. Remember what happened to protesting truckers' bank accounts in Canada? Let's also not forget PayPal's threat, since rescinded, to fine customers for spreading alleged misinformation. And the war on drug sellers and users can't be a good reason for denying financial privacy because the so-called drug war should be abolished.

No one who cares about individual freedom should stand by and let the FTX scandal become a pretext for expanded government power and the destruction or nationalization of cryptocurrency.

TGIF: Midterm Blues

As midterm elections go, for champions of individual liberty this one could have been worse. I see two bright spots. The likely slim majority of Republicans in the House could -- maybe -- produce a measure of gridlock on domestic spending and regulation, and the blame for the Republicans' substandard midterm performance might fall entirely on Donald Trump, driving him from the stage. When you consider all the possible outcomes from Tuesday, that's not bad.

In most midterm years the only outcome worth hoping for is gridlock. Gridlock, however, wouldn't be the best outcome under all conceivable circumstances. Libertarians want Congress to get many things undone, especially but not limited to out-of-control military and so-called entitlement spending. The latter, which is on autopilot, finances programs that are facing insolvency. When that happens, today's spending, taxing borrowing, and money creation will look trivial.

But hardly anyone in power even talks about these and similar problems, so gridlock for the next two years is hardly likely to stop anything good from happening. In other words, gridlock was worth rooting for. It won't be worse than continued Democratic domination.

So regardless of what happens in the Senate, if the House goes Republican, even by the small margin that appears likely, we might see it block the most egregious domestic spending and regulatory measures proposed by Joe Biden and the congressional Democrats. I'd keep an eye on any more energy bills intended to interfere with the use of fossil fuels. Not that Republicans are reliable when it comes to opposing domestic spending -- far from it -- but we can hope. On the other hand, don't look for a freeze, much less a reduction in military and related spending. Republicans have not lost their commitment to the warfare state. 

As noted, the other good news from Tuesday was the poor showing for Trump, some of whose favorite candidates lost. Not all of those he endorsed bit the dust, but some key ones did, such as in Pennsylvania and New Hampshire. He may yet be disappointed by still-undecided races in Arizona, Georgia, Colorado, and elsewhere.

I'm hoping that Republicans will blame Trump for their party's poor showing in the midterms. The out-party is supposed to make big gains in Congress, in governor's mansions, and in state houses, but the Republicans did not do it. This happened in a year when the voters' top concerns were inflation and crime, and with an unpopular Democrat in the White House. Who or what else could be responsible for the lackluster midterm performance if not Trump?

So if Tuesday's results play a role in convincing Trump to stay out of the 2024 presidential election, we can breathe a sign of relief. Liberty would be better off without his toxic presence. (This is not to say that Ron DeSantis, who would be the chief beneficiary, offers any hope.)

With another election behind us, it's worth remembering what a fraud electoral politics is. Campaigns are little more than performance art -- bad performance art. The skill that ignorant voters tend to reward is a candidate's mastery at delivering a particular tribe's or coalition's talking points. Much of what elected officials do is interfere with our peaceful productive endeavors, but how many voters know anything about economics? Without that knowledge, all that's left are cosmetics and rhetoric that reassures.

The candidates typically don't know anything either, but they and their handlers do know that the voters are ignorant and thus are suckers for comforting soundbites. It's just a matter of which candidate gets more of his or her tribe to the polls.

If you can see in this any resemblance to selecting office holders according to their actual knowledge, judgment, competence, and integrity, let me know.

I'm not implying that politics could be better than this. The problems are inherent because government is a top-down way of attempting to organize society that cannot help but violate individual liberty. What I'm saying is that at best politics is show-biz by other means. 

So as usual, the election gave us both good news and bad news. The good news is that the losers lost. The bad news is that the winners won. 

TGIF: Election Day 2022

Another election day is upon us. We're told that we have a duty to vote because so many Americans gave their lives for that right. But perhaps it ought to be spelled R-I-T-E, as in a religious ritual.

Is it a duty or a right? Let's make up our minds. In 21 countries voting is mandatory -- although the law is not always enforced -- but that absurd idea has never had traction here. There is something weird about an alleged right that one is compelled to exercise. It certainly would be unique.

And did Americans really fight wars for the vote? Many who were killed in wars that the government tricked them into fighting might have thought they were risking their lives for freedom, but the freedom to vote probably didn't rank high on the list. Americans certainly died in the domestic struggle for full citizenship -- civil rights-- which includes the vote, and I don't mean to disparage that struggle.

I'm saying that the freedom to govern one's own life is more important than the vote, and deep down people know it. In our private lives individual action really counts: we tend to reap the lion's share of the benefits and pay the price of our actions. When I go to the supermarket to buy eggs, I am confident that I'll bring home eggs. Virtually all the costs, both in time and money,  and the benefits are mine; thinking about them is how I decide if going to the supermarket is worthwhile in the first place.

Voting is different. Individual action is almost always indecisive -- each person has only one vote, and the costs and benefits of each person's decision are widely and thinly dispersed throughout society. That disconnect breeds irresponsibility.

Imagine if we shopped for groceries the way we pick rulers. On Shopping Day you would walk into the supermarket and see before you two (maybe three or four) sealed pre-filled shopping carts. Each cart has a different selection of products. Your task is to vote for a cart from among the candidates. That may not be easy. Undoubtedly, you would like some of each cart's contents and dislike others. You would have to decide which one has more of what you want and less of what you don't want. And no, you would not be to able exchange items with other people.

So you would mark your ballot and then return home to watch the election returns. The cart that you get to bring home is the one that wins 50 percent plus 1 of the votes or perhaps a plurality. Of course, it may not be the one you voted for. Oh well. (To make this even more like politics, the cart you bring home isn't exactly like the one you saw in the supermarket. Campaign promises are notoriously ephemeral.)

I submit that that would be a stupid way to shop for groceries. But that's the system we use to pick the people who are empowered to meddle in our lives, embroil us in war, and do other foolish things that no one has any business doing. I acknowledge that voting is preferable to violence for selecting rulers, but when Churchill said democracy beat any alternative, he overlooked a contender: consistent liberalism (libertarianism), which does not allow majorities to negate individual rights.

Mathematically, one vote is rarely decisive and that's only in the smallest jurisdictions. As the late public-choice economist Gordon Tullock pointed out (watch the video "Voting Schmoting"): "It’s more likely that you’ll get killed driving to the polling booth than it is that your vote will change the outcome of the election."

No election in my adult lifetime would have turned out differently had I done something other than I did on election day. Not one. While the smaller the vote pool, the greater the chance of a tie, greater is not the same as great. In most places that chance is insignificant. People still talk about how close the 2000 Bush-Gore vote for president was in Florida. But the margin there was 537 out of nearly six million votes. As far as I've been able to determine, no individual Floridian cast or declined to cast 537 votes that day.

So when the good-government types tell you to get to the polls because "every vote counts," you know not true. It is certainly true that the winner by definition must have more votes than the loser. (Presidential elections are more complicated, of course.) But each person has only one vote, and it will make no difference. The only action you can control will not decide the outcome.

Someone might object that although your chance of casting the decisive vote is typically only the tiniest bit above zero, you won't know for certain how things will turn out until the votes are counted -- so you'd better vote. But if that were the right way to look at it, playing the lottery would be a good financial strategy because your chance of winning, no matter how small, is greater than zero. But it's not a good strategy. Except in truly desperate circumstances, we don't usually undertake a course of action unless we see a reasonable chance of success. That's how we avoid wasting scarce time, energy, and resources. Instead of voting, perhaps your time would be better spent doing something that has a reasonable chance of making a difference in some way that matters to you. Every action -- including voting -- has opportunity costs.

Tullock wasn't telling people to stay home on election day. He pointed out that many people vote because they like to vote, and he meant no criticism of them. Voters can have many reasons for liking that activity, such as feeling part of a like-minded group of people. Tullock simply thought that aiming to determine the outcome of an election is a bad reason to vote.

People can also have good reasons to dislike voting. They may not want to participate in a civic religious-style rite, which apologists for the government power will invoke in order to blame the voters and excuse the politicians and bureaucrats for bureaucratic incompetence and misconduct. If "we are the government," as we are often told, then the fault must lie in ourselves. But are we the government? Or is popular sovereignty the secular equivalent of the divine right of kings -- a fiction to rationalize an elite's power over us? (See the section titled "The Fiction of Representative Government" in my article "The Misrepresentation of Health Care Reform.")

One last thing: we are also told that if we don't vote we have no grounds to complain. That fallacy was put to rest in 1851 when the classical liberal Herbert Spencer pointed out that, apparently, voters have no grounds to complain either because those who voted for the winner got what they wanted and those who voted for the loser accepted the rules of the game. So everyone must shut up and obey. How convenient.