Mises Wire

As Easy Money Crashes, the Political and Legal Effects Appear

In his recent article targeting the collapse of the FTX exchange, Ryan McMaken noted that the easy money regime we have lived under for more than two decades has led to yet another bubble with a spectacular crash. Enron and WorldCom blew up in the wake of the first bubble; Lehman Brothers and other investment banks and Wall Street firms went down in the 2008 collapse of the infamous housing bubble. The third iteration of the great bubble economy not only gives us a housing crash, but throws in Silicon Valley and the troubles of the social media giants to boot.

Elon Musk’s $44 billion purchase of Twitter, the company already adept at losing money, is turning out to be a financial loss. Meanwhile, back at the ranch, Tesla, the company that made Musk famous, is also in a financial tailspin. Amazon already is laying off employees and Silicon Valley’s hiring boom has turned into a firing boom as firms seek to pare down staffs to people who actually contribute something to operations.

Equities, which not long ago were the only game in town, given interest rate suppression, now are officially in bear market territory, and many of us who had at least some money in equities are looking at losses, some substantial. Moreover, because securities that pay interest still have not caught up with inflation, no matter where we put our money, losses in real terms are almost a guarantee. White House claims of a great economy notwithstanding, the near future, if not grim, certainly is uncertain.

The reverberations will not just be felt by businesses, but also by the politicians that received vast amounts of campaign cash from Silicon Valley companies and employees, with Democrats being the big winners, raking in 98 percent of political tech money and personal contributions from billionaire CEOs. In this year’s Georgia US Senate race, Democrat incumbent Raphael Warnock received substantially more money from California donors (including Silicon Valley and Hollywood) than he received from contributors in his own state.

Indeed, the easy money regime has been quite good not only for the tech and social media firms, but also for the Democratic Party. Before the FTX exchange blew up, Sam Bankman-Fried, the supposed genius that created it, gave Democrats nearly $40 million for the 2022 elections, putting him second only to George Soros in money sent to Democrats. Because financially the next two years (at least) do not look good for the tech-internet-crypto sector, one doubts that the Democratic Party is going to experience the financial windfall it received not only from California-based firms but from many other US corporations and Wall Street companies again any time soon.

These developments might have a significant effect on the 2024 elections, as Democratic candidates will not be as able to outspend and overwhelm their Republican opponents as has been the case ever since the Barack Obama years. But there is another factor that will be significant, and that is the possibility of criminal charges being brought against people—like Bankman-Fried—whose firms have collapsed spectacularly, evaporating billions of dollars in the process.

The George W. Bush Department of Justice (DOJ) won convictions against WorldCom CEO Bernard Ebbers in 2005 and Enron leaders Ken Lay and Jeffrey Skilling the next year. Like in so many other federal cases, the actual charges fell into the murky categories of “fraud” and “conspiracy,” which jurors tend to convict under because they believe that “something happened,” as opposed to there being clear, direct violations of federal criminal law.

For example, both Lay and Skilling sold some of their Enron stock before the price collapsed, but they also purchased Enron stock later. Prosecutors (and journalists) claimed that the two were “dumping” their stock in advance of a meltdown they knew was coming, but the facts were much more complicated and didn’t follow the narrative. However, since the trial was held in Houston, where most people who lost money in the Enron collapse lived, it was inevitable that the two would be convicted no matter what the evidence. It turned out that prosecutors were hiding evidence and suborning perjury with some of their “star” witnesses, but no matter. Enron lost a lot of money, and someone had to pay.

Skilling and Lay had given money to Republican candidates, but that didn’t buy any legal protection from the Bush administration. It will be interesting to see if Merrick Garland and his boss, Joe Biden, go after Bankman-Fried with the same vigor that the Bush DOJ pursued people whose companies blew up.

If Garland looks to prosecute, he certainly has a case, based on fuzzy accounting that borders on outright fraud. Writes McMaken:

The “genius” in this case is Sam Bankman-Fried (SBF), a thirty-year-old MIT grad who ran FTX into the ground and had placed control of his clients’ money in the hands of a small number of friends with virtually no real experience, knowledge, or scruples about how to responsibly manage funds. Financial record keeping and reporting at the company were haphazard at best.

The calculations will be murky for a while, but it now looks like FTX has “lost” at least $1 billion to $2 billion of client funds, not to mention billions of dollars in investments in the company that evaporated. Much of it was probably just stolen. But it’s difficult to guess at this point because FTX didn’t bother to put together an accounting department.

Robby Soave writes in Reason:

John Ray III, who was brought in to manage Enron following that company’s self-destruction in 2001, is now the CEO of FTX. In a court filing last week, he said he has never seen such “a complete failure of corporate control,” including at Enron.

“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” he said in a court filing.

However, Soave also points out that mainstream media coverage of the FTX collapse has been scant at best. This is not due to a lack of interest in a major financial scandal per se, but rather reflects the reluctance of the media to criticize someone who gave millions of dollars to mainstream and progressive news outlets like Vox and ProPublica. Soave writes:

SBF is still benefitting from some kinder-than-expected coverage from the mainstream media, even in the wake of the revelations about his fraudulent activities—and even from outlets that did not receive his largesse. The New York Timesreport on this disaster uses soft, passive language to disguise blame at every turn. This is the outlet that treats nearly every development in the tech sector as an existential threat to democracy, yet its summation lets SBF write his own verdict. Expanded too fast? Failed to see warning signs? He defrauded people out of millions of dollars! The empire didn’t collapse of its own accord; it collapsed because its foundations were fraudulent.

Meanwhile, The Washington Post’s reporting on this subject has centered on SBF’s “pandemic prevention” spending. “Before FTX collapse, founder poured millions into pandemic prevention,” writes the paper. “Most of those initiatives have come to a sudden halt.”

But will the Biden DOJ investigate, or will it look the other way? For that matter, while the FTX collapse is the most spectacular collapse of our present age, the end of easy money is going to produce a number of other bankruptcies. The difference is that many of the firms that go under will do so because they became highly leveraged and were on a branch being sawed off behind them when interest rates rose.

For now, Merrick Garland and his underlings are directing most of their energy at finding ways to prosecute Donald Trump and his supporters. But the financial fallout from the third major financial crisis of the twenty-first century may become so widespread that even Garland, Biden, the Washington Post, and the New York Times may have to notice.


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