What Happened Today: November 17, 2022
Bankman-Fried blabs; Germany hoards cash; Beef goes 3D
The Big Story
While the collateral damage caused by the collapse of the FTX cryptocurrency empire continues to pile up, a new extraordinary interview with its co-founder Sam Bankman-Fried reveals some of the thinking and motives that led to its implosion. “Everyone goes around pretending that perception reflects reality. It doesn’t,” Bankman-Fried, colloquially referred to as SBF, wrote in a Twitter direct-message interview with Vox reporter Kelsey Piper. “Some of this decade’s greatest heroes will never be known, and some of its most beloved people are basically shams.” The sham, in this case, appears to be Bankman-Fried’s own role, much promoted by the media, as the preeminent figurehead for effective altruism, the squishy philanthropic movement he sought to fund with his fortune. Indeed, as SBF suggests, his company’s books were as artificially constructed “as the world of finance and the regulators who can’t distinguish between good and bad.”
Hailed for years as a Gen Z Warren Buffett with a heart of gold, SBF told Vox that he “didn’t want to do sketchy stuff … And I didn’t mean to. Each individual decision seemed fine, and I didn’t realize how big their sum was until the end.” As for the ideals that he espoused the year before to Vox—“if you’re running Philip Morris, no one’s going to want to work with you on philanthropy,” as Piper summarized it—SBF wrote back: “Heh. Man, all the dumb shit I said. It’s not true, not really.”
Today, the FTX shock waves have pushed the BlockFi marketplace to announce it’s teetering on the edge of bankruptcy while Genesis Global Trading paused its customer withdrawals and Galois Capital and Ikigai Asset Management both announced massive exposure to FTX. New documents filed as part of FTX’s bankruptcy showed on Thursday that SBF had signed off on $4.1 billion worth of loans from FTX customer accounts to his investment arm Alameda, with $3.3 billion of that loan going to SBF himself and one of his personally controlled subsidy corporations.
“He is obviously already a target, but his continued attempts to control the narrative increase his jeopardy,” Avi Schick, a partner at Troutman Pepper and a former deputy attorney general in New York, told The Scroll. “The masters of the universe of the tech world tend to believe that they can create their own reality, but as Elon Musk recently learned with Twitter, the legal process has a way of confining even those who think they can always play by their own rules.”
In the Back Pages: Robber Barons in the New Gilded Age
→ When President Trump advised Germany to reduce its reliance on Russian gas during his 2018 United Nations speech, the German delegation famously laughed at the suggestion. But now, with Russia cutting off Europe’s energy supply, the German government is scrambling to prepare the nation for possible blackouts. Because Germany is one of Europe’s most cash-centric nations, with 60% of day-to-day shopping conducted in physical bills, German officials are particularly concerned that residents will not have access to cash in the event of an electrical grid failure. With plans now in place to ensure both enough gas on hand for armored bank vehicles and backup energy for ATMs, German officials believe the central bank will have enough cash to move around to satisfy demand, though withdrawals might become limited during a blackout. Meanwhile, the Germans are scrambling to open new port terminals to receive natural-gas tanker shipments from overseas partners that may ultimately replace upwards of 60% of the gas they were once importing from Russia.
→ The FBI has opened a probe into the May 11 death of a Palestinian American journalist, Shireen Abu-Akleh, who was shot in the head while reporting on an Israel Defense Forces raid in Jenin in the West Bank. The killing caused a massive uproar around the world, with many assuming malicious intent by the IDF, but a subsequent Israeli investigation ruled that Abu-Akleh was most likely shot by the “unintentional fire” of an IDF soldier. The U.S. Security Coordinator office agreed with the IDF’s conclusion and the matter was settled. The FBI’s provocative decision to reevaluate the incident is making waves, and some lawmakers are threatening to investigate the Department of Justice for politicization and anti-Israel bias. “Everyone involved in this disgraceful stunt should be investigated and then either fired or impeached,” Sen. Ted Cruz (R-TX) told the Washington Free Beacon. For their part, representatives from the Biden administration and State Department told the Israeli government that they had nothing to do with the FBI’s decision. Lame-duck Israeli Prime Minister Yair Lapid made clear that Israel will not cooperate: “We will not abandon our soldiers to foreign investigations,” he said.
→ For a few minutes on Wednesday, the G20 summit in Indonesia transformed into the WWE, and Chinese President Xi Jinping laid an absolute smackdown on Canada’s Justin Trudeau. Xi accused Trudeau of leaking their earlier conversation—about Chinese interference in Canadian elections—to the press. “That’s not appropriate,” Xi told Trudeau. “That’s not the way the conversation was conducted.” The power moves are a little harder to pull off back at home, however. Last Friday, Xi gave the green light to China’s banking industry to start easing credit flows back into the ailing real estate sector, with the goal of “stable and healthy development.” But the reality may just be that Xi is staving off his country’s “Lehman moment” by slowing the continued defaults across the market.
→ San Francisco has borrowed a page from the Willy Wonka playbook as it looks to bestow generous gifts to select members of its transgender community. Mayor London Breed announced a new program on Wednesday that will provide 55 eligible transgender residents with $1,200 each month for up to 18 months to combat poverty. Priority for these golden tickets will go to “transgender, non-binary, gender non-conforming, and intersex people who are also Black, indigenous, or people of color (BIPOC), experiencing homelessness, living with disabilities and chronic illnesses, youth and elders, monolingual Spanish-speakers, and those who are legally vulnerable such as TGI people who are undocumented, engaging in survival sex trades, or are formerly incarcerated.” This is San Francisco’s third guaranteed-income program. Meanwhile, the San Francisco Board of Supervisors was informed on Wednesday that the city could now face a $200 million annual revenue shortfall due to the increase in remote work among city residents.
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→ If you thought Waco, Texas, couldn’t possibly be the site of any more government negligence and overreach, see this: Suburban Waco mom Heather Wallace was arrested in front of her children for making her son walk half a mile home. In a moment of parental difficulty, with her eight year old son Aiden acting up in the back of the car on the way home from karate, Wallace did what any of our grandparents would have done and asked Aiden to walk the rest of the way home. The suburb they live in is safe, and Aiden was accustomed to the walk, but a local woman called the cops anyway to report a child walking by himself on the sidewalk. When the cops showed up at Wallace’s house with Aiden in tow, they informed Heather that they had to arrest her because in downtown Waco, her son could have been kidnapped and sex-trafficked. Ultimately, Wallace lost her job at a pediatric sleep consulting business due to having child endangerment charges on her record, and she will likely never work with children again. She’s a regular David Koresh.
→ After the recent revelations that Iranian citizens were still trading crypto in spite of U.S. sanctions, now there’s news that Iranian military drones being used in Ukraine are being made with U.S. parts. A recent study of captured drones conducted by Ukraine’s military and reviewed by a Kyiv-based nonprofit shows that approximately 50% of parts for the Iranian-made drones deployed by the Russian military are sourced from the United States and approximately 33% from Japan. One component, an infrared lens, is made in Israel. The Japanese Embassy in Washington, D.C., said that Japan “will continue to exercise strict export control on the Foreign Exchange and Foreign Trade Act that prevents the diversion of Japanese products and technologies to military use,” a sentiment echoed by the Israelis and the U.S. Department of Commerce. Good intentions notwithstanding, the globalized marketplace makes it increasingly difficult to shut down the international flow of high-tech components and impose a complete lockdown on commerce; parts can be ordered over the internet and shipped through a third-party nation that does not have sanctions on Iran. “The holes in the export laws are primarily people who are bad actors, bad actors who refuse to obey U.S. export laws and those of their host countries,” Chris Johnson, CEO of Sierra-Olympic Technologies, told The Wall Street Journal. Ukrainian inspectors first suspected Johnson’s company had made the lens found in the drones. “If someone in the U.S. bought something export-controlled and shipped it on to Iran, they’d be in jail.”
→ Video of the Day:
It looks like the opening of Westworld, except these 3D printed slabs of meat aren’t sentient and won’t kill you if you try to eat them. Israeli next-gen meat company Redefine Meat has struck a deal with esteemed European meats dealer Giraudi Meats to bring their plant-based cuts to Europe. The Israeli company—which claims to love actual animal meat too—makes its product from a combination of soy and pea protein as well as a variety of other plant-based proteins and fats to mimic the texture and flavor of the good stuff. Using 3D printing technology, the Israelis are able to produce faux steak cuts, ground beef, lamb, bratwurst, and more. Barclays predicts that plant-based meats could make up 10% of the market by 2029. Since the rabbinate has granted Redefine Meat’s products kosher pareve status, it’s likely many Jews will be thanking them for their first cheeseburger, at home, or in Europe.
→ Top-ranked Yale and Harvard Law schools are pulling out of the famous, or infamous, U.S. News and World Report rankings, with Yale saying that the “profoundly flawed” rankings are biased toward profitable law careers and meritocratic scholarships. Yale Law Dean Heather Gerken said that the rankings privilege programs that give scholarships for high LSAT scores and deduct points for programs that encourage students to pursue public interest law. Schools are penalized for leaving students with a high debt load, and the rankings do not account for loan forgiveness programs administered to those lawyers who go on to work in the public sector. While there has always been critique of the U.S. News rankings methodologies, they have been essential for many law schools to recruit the best and brightest, especially for those schools who might not be noticed by prospective students. “If a lot of other schools follow their lead,” said Russell Korobkin, dean of UCLA’s School of Law, “then the U.S. News rankings and the stranglehold that it has over law schools will disintegrate.” For his part, CEO of U.S. News and World Report Eric Gertler said it was the mission of U.S. News rankings to ensure the schools are held accountable for the education they provide.
TODAY IN TABLET:
The Minyan: Jews with Disabilities by Abigail Pogrebin
A roundtable discussion about physical barriers, attitude adjustment, and how to be more welcoming as a community
Ulysses Shmulysses by Howard Jacobson
James Joyce was the first to understand that Jews make the perfect protagonists
SCROLL TIP LINE: Have a lead on a story or something going on in your workplace, school, congregation, or social scene that you want to tell us about? Send your tips, comments, questions, and suggestions to firstname.lastname@example.org.
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Robber Barons in the New Gilded Age
The threat is private infrastructure, not all big business
By Michael Lind
Do Americans live today in a new Gilded Age, dominated by robber barons? It depends on what you mean by “gilded age” and “robber barons.” The real parallel to draw is between the generation that followed the Civil War and the present one. In both eras, the greatest problem hasn’t been big business as such, but rather a particular kind of big business—private infrastructure corporations that control chokepoints in the U.S. economy, like railroads in the first Gilded Age and online giants like Google, Amazon, Facebook, and Twitter in the second. The solution to the ills of our second Gilded Age is the same as the one for the first—not antitrust campaigns indiscriminately targeting all large and successful firms, but public regulation of a few essential commercial and social infrastructure firms.
In popular memory, shaped by progressive historians in the first half of the 20th century, industrial capitalists wearing top hats and gold watch chains came to power during the Civil War, defeated the agrarian Confederates and tyrannized factory workers and small farmers until the New Deal of the 1930s. But this cartoon version of history confuses two different eras that followed the Civil War.
In the first period, from 1865 until the 1890s, there were few big businesses in the U.S. other than the railroads. When Mark Twain and Charles Dudley Warner wrote their satire The Gilded Age: A Tale of Today (1873), the richest Americans were railroad infrastructure executives like Cornelius Vanderbilt, Leland Stanford, Collis P. Huntington, and Jay Gould, and financiers who invested in railroads like J.P. Morgan.
In the late 1880s the only big manufacturing firm listed on the New York Stock Exchange was one related to the railroads, Pullman’s Palace Car Company. As late as 1881, the value of Carnegie Steel was only $5 million, at a time when 41 American railroads were valued at $15 million or more. In 1886, when John D. Rockefeller’s Standard Oil Company controlled 90% of the U.S. oil industry, then used mostly for illumination by kerosene lamps, Standard Oil’s value of $33 million was dwarfed by that of numerous individual railroads, including the New York Central Railroad. Only with the Great Merger wave of the 1890s and early 1900s, and subsequent waves of business growth and mergers, did giant manufacturing firms come to overshadow railroads, including many giants that are familiar today, from the Ford Motor Co. to General Electric.
Firms in both manufacturing and infrastructure sectors benefit from scale. Manufacturers often need long production runs and high sale numbers to recoup the costs of initial investment in plants and benefit from increasing returns to scale and diminishing marginal costs of production. A car factory is expensive to build, but once built, if it can crank out one car it can crank out 10,000. By contrast, infrastructure grids benefit from network effects—a railroad that connects a hundred towns is more efficient and useful than a single railroad line between two towns.
The phenomenon of increasing returns to scale in manufacturing makes it hard, but not impossible, for new entrants to break into manufacturing sectors dominated by existing big firms or their modern equivalents: firmlike supply chains with many suppliers orchestrated by “original equipment manufacturers” (OEMs) like Apple and Nike. Even so, outright monopolies are rare in manufacturing, where there tend to be a few large, rival, oligopolistic firms in sectors like automobiles, planes, and telephones.
Automobile manufacturers are big companies, to be sure, but none has more than a small share of its particular market. In 2019, before the COVID-19 pandemic, Toyota had the highest global market share of all carmakers—a measly 10.2%, followed by Volkswagen (7.59%), Ford (5.59%) and Honda (5.46%).
The global market for actual physical phones, as opposed to service networks like Apple’s, is also competitive. In the first quarter of 2021, Samsung led with 22% market share, followed by Apple with 17%, China’s Xiaomi with 14%, Oppo with 11%, and Vivo with 10%.
Software firms, as opposed to online infrastructure firms, can be competitive as well. For example, Google’s office suite software is gaining on Microsoft’s still-dominant version.
Monopoly is a much greater danger in infrastructure than in manufacturing or services because the benefits of scale for infrastructure firms come from network effects. Bigger networks are more efficient, and the most efficient would be a single network. Even libertarians like Milton Friedman recognized that in networks like electricity and water, free market competition would tend to produce a single “technical monopoly” (to use Friedman’s phrase).
Like the phrase “gilded age,” the term “robber baron” is often misunderstood. Today “robber baron” is used loosely as a pejorative term for “capitalist” or “rich person.” But the metaphor of the robber baron itself alludes to economic predation by owners of chokepoints in transportation. The original robber barons were medieval German aristocrats with estates along the Rhine River who forced river-borne merchants and travelers to pay tolls in order to proceed.
Like the railroad barons of the first Gilded Age a century and a half ago, most of today’s superrich tend to have made their money not by inventing flying cars or robots but by controlling important commercial networks and information: Jeff Bezos in retail, Mark Zuckerberg in social media, Michael Bloomberg in terminals disseminating stock market information. The few American celebrity billionaires who actually make physical things in the United States tend to be de facto government contractors, dependent on government tax subsidies or contracts for what they make: electric cars and batteries in the case of Elon Musk, and rockets in the case of Musk and Bezos. Both Musk and Bezos originally made their fortunes in the commercial infrastructure sectors of finance and retail, respectively.
Pity the country whose richest and most influential people are infrastructure tycoons like Cornelius Vanderbilt in the 19th century, or Mexico’s Carlos Slim today. The largest part of Slim’s fortune is based on the privatization of Telmex, the Mexican telephone monopoly, during the 1990s. In 2019, Slim’s business empire accounted for 70% of the mobile phone line market in Mexico and 80% of the landline market. Slim is not an entrepreneur who invented a new product, like Thomas Edison, Henry Ford, or Steve Jobs. He was already rich, bought a privatized government utility, and raked in the fees from a captive consumer market.
Largely as a result of the windfall from the privatization of the Telmex public utility, in April 2021 Slim was the 24th richest person in the world, according to the Bloomberg Billionaires Index. For a time starting in 2015, he was the largest shareholder of The New York Times.
Many of today’s household-name American billionaires, including Zuckerberg and Bezos, are more like Carlos Slim than like Edison, Ford or Jobs. Instead of making profits by selling innovative goods or services, they rake in toll fees from the need of businesses and individuals to use the quasi-monopolistic platforms they control.
Warren Buffett has explained his ideal business: “High pricing power, a monopoly.” In 2009, his firm Berkshire Hathaway purchased 77.4% of the shares of BNSF Railway, the largest purchase by Berkshire Hathaway to date.
Essential infrastructure firms in transportation and telecommunications tend to have power over other businesses and consumers in ways that manufacturers can only envy. In the 1920s, Americans who did not like Ford Model Ts could buy Packards, Chryslers, Studebakers or, if they were adventurous, Stutz Bearcats. But in the 1880s, if you were a farmer or small manufacturer in the United States and the local railroad monopoly refused to ship your products or charged crippling fees, you were out of luck.
Even if they are not operating in physical space in the way a railroad company does, firms that control chokepoints in commerce can act as de facto infrastructure monopolies or oligopolies. The search market, for example, may seem competitive. In 2019, according to Marketing Land, 44% of people went directly to Amazon to begin searching for products, while only 34% used Google, Bing, or Yahoo.
But here’s the problem. Unlike in manufacturing or other markets, in practice even a moderately high market share for an infrastructure grid or online platform can function like an absolute monopoly. How many shoppers looking for coffee makers, after all, check Amazon—then check Google, then Bing, then Verizon Media, then write down and compare lists of the various results to see if any coffee makers were left out? Similarly, a coffee maker company that Amazon arbitrarily chooses not to show suffers through no fault of its own, even if it were listed on lesser-used sites.
Today’s robber barons and their tollbooth enterprises wield vast and unchecked social and intellectual power, as well as market power. Amazon is far from monopolizing groceries, but it is a de facto infrastructure monopoly when it comes to book sales, and it uses that raw power to censor books that question the progressive party line for ideological rather than commercial reasons. For example, Amazon banned Ryan T. Anderson’s 2018 bestseller When Harry Became Sally: Responding to the Transgender Moment, and explained in a letter to Republican members of Congress: “As to your specific question about When Harry Became Sally, we have chosen not to sell books that frame LGBTQ+ identity as a mental illness.” Although there is a debate among psychiatrists about how to classify gender dysphoria, Amazon has decided to censor scientific and theological debate on issues where it threatens the party line of progressive Democratic orthodoxy. When you search Amazon today, When Harry Became Sally is nowhere to be found—but in truly Orwellian fashion, Amazon does sell Kelly Novak’s rebuttal to Anderson’s now-disappeared book, Let Harry Become Sally: Responding to the Anti-Transgender Moment. Amazon also sells Mein Kampf.
There is a point at which a retailer ceases to be a firm in a marketplace and becomes, in effect, a marketplace itself, in which other vendors compete to sell their goods and services. A de facto public marketplace cannot complain when the government regulates it. Capitalist markets were, in their origins, public markets in medieval Western Europe created by kings or towns, and subject to public regulations and laws. For the public to regulate a firm that was once a retailer but has since metamorphosed into a de facto public marketplace is merely to reassert the authority of the sovereign state—like subjecting a private security company to stricter government regulation once it has expanded into a private army, even if it started out as three guards at a shopping mall.
The crisis of the new Gilded Age, then, is not caused by big business as such, or even by competitive businesses owned by tech billionaires, as the Microsoft and Google software rivalry suggests. The threat in today’s second Gilded Age comes from the lack of public regulation of a small number of commercial and social infrastructure platforms and grids that vast numbers of other businesses and consumers must use, with no realistic alternatives.
Fortunately, we know what to do. In the early 20th century, it looked as though the private electric infrastructure empires of tycoons like Samuel P. Insull would rival those of the railroad tycoons of an earlier generation. But in the modern United States there are no electricity kings or water barons, thanks to public utility regulations from the Progressive Era and the New Deal. Electricity and water are provided at regulated rates by private firms supervised by government commissions or, in some cases, direct provision by municipal governments. (I address my checks for my electric utility bills to the City of Austin, Texas). Similarly, apart from a few toll roads and highways, streets in the United States are free and paid for out of taxation, to the perpetual distress of libertarians who want to make you pay a toll to the shareholders and managers of a national or global corporation every time you get on a highway.
Search engines like Google, online sales platforms like Amazon, and even Facebook, to the extent that they are essential in connecting consumers with advertised products, are in different ways successors to the Yellow Pages phone directory in the days of Ma Bell’s government-regulated monopoly. There is no need to recreate something like the old AT&T regulated telephone monopoly of the 20th century. Instead, the federal government should license any firm that functions in whole or in part as a search engine or general sales platform—but only in return for the firm’s agreement to obey a single set of industrywide rules and standards set by Congress or an executive agency under congressional, presidential, and judicial oversight.
What those government-imposed rules on all government-licensed online infrastructure platforms should be can be debated. That’s what democracy is for. The government might make it illegal for platforms to promote their own product lines (the Yellow Pages did not advertise its own Yellow Pages lawn mowers and Yellow Pages bicycles). Political or ideological discrimination against users of a platform should be illegal, with narrowly defined exceptions for pornographers and the like. (Note to censorious, authoritarian progressives: The new, uniform government rules for online commerce and communications should not define all conservatives or libertarians as fascists for the purpose of banning them from public infrastructure utilities.)
To name one example, the federal government—not individual firms—should write the standardized public terms of service for all internet firms that are allowed to access customers and do business in the United States. No longer would you click on a website and see a pop-up asking you to “Agree” or “Disagree” to giving up your right not to be tracked and not to have your browsing habits sold to other companies. A single standard contract specifying user rights and dispute resolution methods should be set by federal law, not imposed on users by vendors in the form of different but equally unintelligible pseudo-contracts.
In short, essential online platforms that function as de facto monopolies should be highly regulated, low cost, low profit, or no profit public utilities like water and electricity. States and cities should have the authority to create their own low-cost municipal search engines and online retail platforms, paid for out of taxes, if they choose, like existing public water and electric utilities.
Today, Consolidated Edison (Con Ed) is one of the largest private but publicly regulated electrical utility companies in the country. Yet you’re unlikely ever to have heard of its chairman, president, and CEO, Timothy P. Cawley. In 2020 Cawley’s total compensation, in cash and equity, was $2.8 million.
In a well-governed American economy, the celebrity tech tycoons whose banal pronouncements, marital lives, and vanity trips into outer space are covered by the media, and whose firms increasingly determine what Americans can and cannot read, view, or listen to, would be CEOs of regulated utilities like Con Ed. They would be as relatively obscure, modestly paid (in comparison), and lacking in discretionary power over other companies and individuals as Timothy Cawley.
As the example of Con Ed suggests, we Americans can find models for regulating today’s essential intangible infrastructure utilities in the way that we regulate railroads, electric, and water utilities. Far from harming American capitalism, turning today’s unregulated online infrastructure companies into privately owned or publicly owned regulated utilities would not harm firms in other sectors, and might even free most companies and consumers alike from excessive charges and arbitrary power.
A mixed economy with a dynamic market sector does not necessarily produce infrastructure robber barons. In fact, industrial capitalism works best without them.
This piece originally appeared in Tablet in July