 This is Mises Weekends with your host Jeff Deist. Welcome back once again to Mises Weekends. We're featuring a video this week instead of a guest interview with Patrick Byrne, who's actually going to be the keynote speaker at our upcoming event in San Diego in two weeks. So if any of you are in the Southern California area, there's still time to register for that at mises.org slash events. Patrick, many of you probably know, is the founder and CEO of Overstock.com, but he's actually much more than that. He holds degrees from Dartmouth and Stanford and Cambridge, actually a PhD from Stanford. He's very deep on a broad variety of topics. He can talk about Eastern religion, Austrian economics, e-commerce and supply chain, but especially blockchain technology, which is where his heart is, and he's personally invested in some technology that's going to bring blockchain to a whole host of transactions that currently require titling and lawyers and that sort of thing. This is a fascinating talk longer than our usual weekend show, but absolutely worth your while. We think we're doing something quite disruptive, that we're building something quite disruptive. And I'll start with, there's a conservative writer, he's out at Hoover, Francis Fukuyama, who wrote a book about, called Trust that says that the reason, and this was written in the mid-90s, and it was the reason Germany and Japan and the United States do so much better than companies like Italy and China, is that it's a question of trust. And in a place like China, you can't, there aren't central institutions that are trustworthy. You only trust people in your own family. And so economic enterprises can't get bigger than, told her some, okay, great, can't get bigger than really one big family can run, and Italy kind of runs the same way. And the same way, and the theory, Fukuyama said, was that handcuffs the size of enterprises and hence the efficiency and the ability of the economy to grow. What's left out of his analysis, but what's left out of his analysis is the problem of centralized institutions. And the problem of centralized institutions is they get captured. Regulatory capture is much more a feature of the political process. Regulatory capture came out in 1972, I think, a friend of Milton Friedman's, George Stigler, wrote about this. I think that may, it's the first formal description of which I'm aware. But it's the tendency, we set up regulators to protect us from certain industries, not remembering that those regulators have a tendency to become captured by those industries and turned against us. The SEC being but one example that comes to mind. And there's even possibility of deep capture, which is that they capture not just the regulator, but the political process and the journalists and even academics. I have a website called, which Dr. Slano mentioned, DeepCapture.com, which investigates this in the U.S. and has won all kinds of awards for investigation of corruption in the United States. The problem with captured centralized institutions is that they generate what John Kenneth Galbraith called the bezel. And I'm reminded of somebody once said, all great economists are tall, with the exception of Milton Friedman and John Kenneth Galbraith, which the economists will get here. Galbraith was a terrible economist. But he did have this, he did have a, his idea of the bezel was that at any given point, if you could freeze time and ask everybody what they had in the financial system and add it up, you would get this and you look at what's actually there and there's only this much there and the difference is the bezel. It is the amount that has been embezzled from society and has accumulated the bezel. I became a believer about a decade ago that there's quite a bezel built into our financial system. The essence of the crypto revolution is that it can solve that problem. In fact, one way to think of it is for 6,000 years of recorded human history, we've always faced a choice. Do we want, when we have our consensual exchange, do we want to go peer to peer or in which case trust becomes a factor? Can I trust you? I'm trading you this camel for this gold coin. How do I know you've debased, have you debased the gold coin or not debased the gold coin? So there's, we can go that way or we can have a centralized institution. Somebody, there's a business model. Somebody who has the monopoly on force and this oasis has gold coins minted, stamps his face on them and then if anyone debases that, kills them. That's a way of, that's a business model of monetizing your monopoly on force in a situation. That's one business model, that's one way to do it. What the crypto revolution lets us do for the first time in human history is go back, get away from central institutions and go back to peer to peer exchange that is trustworthy. Fortunately or unfortunately, there are a lot of social and political institutions which have as their business model now what I just described and this is going to disrupt them. So I think that this is unlike Al Gore, I was not around quite for the beginning of the internet but I was here a few years after the beginning of the internet and we had an idea we were doing something as big as the Gutenberg Bible. I think the crypto revolution is going to be more significant than that because of the accumulation of our centralized institutions which in one way or another are in the business of since you can't trust each other you need us and crypto and so you have to, you can't have peer to peer, you have to have a central institution. Well, we're going to turn them into a buggy whip manufacturers. We don't need those centralized institutions anymore. I'm going to give you a few examples. Well, there's of course central banking, the central counterparty clearing system which I'll be going into. Here's another, in development economics, there's a, well, long education summarize, I'll even skip this. I used to study development economics and decided it was much simpler than people made it out to be. It's not done from the top down, it's done from the bottom up, grass roots, funds are fundable, in other words, there's a whole lot of money sloshing around in the world of development theory and there's so much graph and it's about women. If you want to, if you want to help the world, it's about women. If you, I remember reading papers on an experiment done in India where you take a village and you take the, a very good way to measure increase in well-being in families. You look at the weight of children in a family and you take one village, you give money to men and you look for increase in the weight of children and the truth is you get nothing, you get no increase in the male income, you get nothing, but as this economist put it, three things, an increase in consumption of alcohol, tobacco, and hookers. And I said that to Buffett once and he said, yeah, yeah, and the rest of it, they're waste. But as a joke, Buffett is a very square, tea-toller guy. But anyway, you take an identical village, you increase the income of women and you immediately get this increase in the weight of children. Women bank calories in their children and the same experiments have been done in Africa and South America and such. It's, development's all about women. But there's a missing foundation. An economist from Peru, Hernando de Soto, who for years argued Mystery of Capital is his big book, that in the West there's a bell jar. Some people live within the bell jar of formal legal rights. And they include rights to private property. And with title to property, an entrepreneur can, you can have an incentive to improve your property to, you can pledge it to a bank and raise capital. You can use the capital to expand your business. However, much of the economic activity in the world goes on outside that bell jar. And there isn't an access to it. And he documents in Haiti and Peru and stuff, you know, in Haiti to get, you may have lived for three generations on a piece of land and built your home and your grandfather, great-grandfather built the home and you've added on. And you don't know, you don't, if you someday the local Generalissimo can show up and say, oh, you don't understand, that's our property. And you never know. And if you try to get property, it might take you 35 years and 400 steps, 400 stamps from petty bureaucrats along the way. And everyone who's petty bureaucrats wants to pay off. That, so in that kind of a world, there is no incentive to improve your land. There's less incentive to improve your land. And you certainly can't pledge it to a bank to raise capital. Expansionist worded, the capital is dead. He argues that there's, if you had good land titling systems around the world, it would create far, far hundreds of times more capital would be liberated in the developing world than has ever been transferred to the developing world through Western aid, that it's all there. That all we need to do is create land titling systems. Well, the implication for crypto, it is possible. So by crypto, I mean the blockchain. If you've heard of Bitcoin, I assume everyone's heard of Bitcoin. Bitcoin is just one application of a new technology that arose, was described six years ago. It's based on the mathematics of cryptography. And it's basically, just call it the blockchain. The blockchain you can apply towards currency, and you get a cryptocurrency, that's Bitcoin, you can apply it to, I recently was out in Silicon Valley at a company that's working through this. And they have a list of 180 things that the blockchain can be applied towards and that they think they're just going to step through and come up with a crypto alternative to each. It's possible to develop a land titling system that would be robust, incapable of being cheated, and everything would occur within the blockchain. Why that's, and who's working on this now, no one that I can find, closest I can find is Kate and I know some people who work on smart contracts, which would be sort of a step towards this. But the really big idea is combining financial capital with human capital, which is to say Wall Street. We can replace a lot of the functions of Wall Street, or a significant amount of what's done on Wall Street can be moved into the world of crypto. And I'm going to have to go through why this is important and why it's possible. First, you probably all know the efficient market hypothesis, even if I hope no one here agrees with it. But in the efficient market hypothesis, every security has an intrinsic value. And over time, its price is fluctuating around. And you can imagine under one regulatory regime, there's that much noise, that much fluctuation under a different regulatory regime, there's that much fluctuation. And if you add up all the area under the, in yellow, and you add up all the area in green, the area in green is less than yellow, meaning there's less noise in the system. So regulatory regime B is considered to be more efficient. That's the dominant paradigm of our regulators these days. That's their paradigm. However, and in that paradigm, it is not possible to rig the market. You can't manipulate the market. It's more than a, any more than people at a horse track who are playing games in the betting parlor, and I suppose they had some technique in the betting. That, of course, doesn't affect the underlying horse race. That follows from efficient market hypothesis. Turns out it's not true. I'd like to show you what's, this is supposed to be odd. This is that scene in the matrix. Remember when Neo says you can, or Morpheus says you can have the red pill or the blue pill and you take the blue pill, you wake up in bed, believe it and then you want to believe it or the red pill, I'll show you how deep the rabbit hole goes. There was a massive scheme. There has been, market manipulation has become a regular feature of our markets. And to give you just one example, if you haven't been reading the papers and reading about the LIBOR scandal and the foreign exchange scandal and the benchmark rigging scandal and so on and naked shorting, et cetera. One of my favorite examples is these are two lawyers, Bill Iraq and Marvin Melvin Weiss. They ran a law firm called Milberg Weiss. Then in 2000, they were the originators of the plaintiff strike class action suit. These suits you hear about where our stock share stock goes down and a law firm files a suit and against the company on behalf of all these plaintiffs. Well, it turns out that they were using shill plaintiffs and the DOJ indictment from 2006 refers to these shill, and you can't in the US law firms, you can't pay people to be shills. Well, the law firm, the DOJ indictment on page 29 says the plaintiff's purchase securities at issue anticipating the securities would decline in value in order to position themselves to be named plaintiffs and security class, fraud class actions. Well, there's something very odd about that sentence. Think about it for a minute. The paid plaintiffs, those are the shills. They purchased securities anticipating the securities would decline in value. How'd they know? It turns out these people were being directed to go out and buy stock in certain companies weeks or a month before suddenly they melted down and these lawsuits could be filed. How'd they know if the market's efficient that you could never have done that? And these guys, Bill Iraq and Marvin Weiss, they're not stock investors, but they were able to send people to specific companies ahead of time, weeks or a month ahead of time and buy their stock and then what do you know, the stock melts down and they could file their lawsuits because they were part of... these guys went to jail, the law firm, it was the eighth largest law firm in America melted down a green span in October 2008 when everything was melting down and they said, what's going on here? He explained to them this thing that the left has jumped on this quote from Greenspan, the left jumped on it to say, oh look, Greenspan shows that markets don't work. There are additional regulatory changes at this breakdown of the central pillar of competitive markets requires in order to return to stability, particularly in the areas of fraud, settlement and securitization. The real problems were particularly in the areas of fraud, say, burning made off, securitization that's mortgage backed securities, but settlement. Settlement is this really important issue and there's someone here, Caitlin Long who knows an awful lot about this, about settlement. It's dull as dishwater but I hope you'll stick with me for five minutes because first, who here owns any stock in any publicly traded company in America? Raise your hand. Every single one of you with your hand up is incorrect. None of you own any stock. It's not how the system works. How the system works is suppose you've got grandma buying some stock from a hedge fund who I represent as Gordon Gekko. You think it works like this. Money and stock change hand. That's called settlement but in fact, of course, we know that they don't speak to each other directly. Well, the systems are divorced in the US by which the system only changes hands and stock changes hands. They each are represented by brokers and we think, well, the money in stock goes between accounts between them. That's not even really how it works. All the broker-dealers in America are plumbed into a central organization you've never heard of called the DTCC and the DTCC is where the money and stock changes hands but the truth is it's not even that simple. What's going on is it's all within the DTCC and it just changes hands and accounts within the DTCC and in fact it's even one step more removed from that which is there's a company a subsidiary of the DTCC which owns all the stock in America. Nobody owns any stock but this company it's called CDN Company. This was all set up in 1973 because there was a paperwork crisis on Wall Street and it owns all the stock and then it issues contractual rights I used that stock and so when you have a broker telling you you own 100 shares of IBM what you really have if you read your broker statement the fine print you have a contractual right to some you have a contractual right to a contractual right to a company that actually has the property rights. We laugh at the Soviet Union for having tried to run a society without property rights how could you possibly do that but in our society our property rights have been turned into this system in the last 40 years and they've become our property rights have been sliced diced, circumcised digitized, hypothecated, rehypothecated losing track of who owns what and this shows up this is the common denominator of a number of the scandals you've heard about in the last seven years it comes back to the systems are losing track of who owns what I'll skip the why that had there is fault tolerance in the system and some criminals have figured out how to abuse the fault tolerance to play certain games why it matters is you as Austria will recognize this this is one paradigm of how securities get priced here's another paradigm as their supply demand they meet there's a price if someone can show up and using this fault tolerance create a parent supply in the marketplace they can shift a supply curve and if they can do it enough and especially against a financial company there's ways of breaking the back of a financial stock and that's part of what happened in 2008 and everybody was saying from 2005 to 2008 I had a lot of people saying I was crazy New York Post used to run photos of me with UFOs coming out of my head because I was saying look there's this stuff going on you don't understand and then in 2008 when everything started melting down the SEC went and did exactly what I had been telling them they needed to do for four years it's now become quite a problem the economists aren't writing about it actually I think that I think that in the last two years settlement failures have finally been addressed because it's a national security issue finally some people in the national security establishment have gotten that it's a national security issue and you can't count on the SEC which in my view the SEC is just towel boys for Wall Street they're not up to the game by the way that's why these guys were part of the ring of criminals who were taking advantage of this and because they're part of the ring that's how they knew a month ahead of time or two months ahead of time what companies to set their show plaintiffs up in front of so how can this all I started taking all this data and economists and insiders and people who were really inside baseball kind of guys into explain this on Wall Street and I'm reminded of a line of Bertrand Russell there's a story that Bertrand Russell was once in India teaching Einstein's relativity or something and somebody in Hindu stood up in the back and said I'm sorry professor Russell you have it all wrong the universe rides on the back of a turtle and Russell said okay well what's the turtle ride on and the Hindu cosmology professor said the back of another turtle and Russell said okay well what's that turtle ride on and the guy said I'm sorry professor it's turtles all the way down I started bringing this kind of information with hard data and respected economists explaining this to the NESD FINRA the SEC the US House Banking Services Senate Financial Services the New York Press Corps et cetera et cetera and what I discovered is our establishment was turtles all the way down up until 2008 up until 2008 I was just laughed after 2008 I got a lot of attention and there were a lot of changes and all kinds of actions brought and it's kind of funny because I'll look at some actions brought against people and they'll include whole paragraphs out of papers I wrote eight years ago explaining to some law enforcement people exactly how a certain thing is being done and you know five years later there's somebody you know arrested and there's whole paragraphs out of stuff I wrote that are used in their indictments so I'm happy about that um here's a recent you may have heard of the book flash boys flash boys this recent Michael Lewis book about the flash trading on Wall Street this is how much actual trading how much volume there is on Wall Street over the last tennis years now here's how many quotes there are on Wall Street the difference this is all the flash trading this this doesn't represent any actual activity this is all front running people are front running your orders this is this is nuclear powered front running 90% of the volume now in the market is front running of orders by these computers that are talking back and forth through each other 10,000 times a second so I don't think this is good have Warren Buffett refer to this recently see the regulators like liquidity because under the efficient market hypothesis the more liquidity there is the more selling back and forth there is the more those curves get squeezed down to the intrinsic value so any liquidity is good but Buffett recently said this isn't liquidity this is volume it doesn't really add anything to the marketplace but it's become 90% of the market in fact there was a recent Journal of Finance article that showed the US markets got saturated with liquidity beyond which no liquidity is actually helped in pricing sometime in the late 60s so all this stuff Paul Volcker said back during the crash that the last financial innovation that actually added value to society was the ATM machine nothing else you've heard about since then all these fancy complex derivatives and everything they don't really add any value to society so the current system and I'm drawing to the end Wall Street has centralized settlement high frequency trading its current regulatory environment the shortcomings of these are the centralized settlement is easy to manipulate and the bad guys have figured out how to do it high frequency trading is just a master nuclear powered front running and our regulatory environment has been deeply captured so the simplest solution is to take Wall Street as we know it and drag it behind the barn and kill it with an axe it cannot be fixed nor does it need to be fixed instead we can move this to the blockchain and in the blockchain the virtues of blockchain would be it's peer to peer settlement no centralized settlement, no manipulation egalitarian instead of front running and most importantly there's nothing to capture it's consensus based it's stateless now we have to get the permission of the state to turn it on but we're building this and it's nearly built and when it gets built we'll be turning it on and it's stateless and there's nothing to capture and this is what trading would look like it would be a bitcoin or blockchain trading would look like this it's peer to peer based in the blockchain there's no DGCC to capture none of the games there's no flash trading none of the games that are being played in Wall Street now could be played so this is my next big ambition and I hope you see as a consistent team through this how much of my entrepreneurial activities and drives have actually been informed by the things I've learned over the years from studying Austrian economics so thank you very 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