How the financial crisis revolutionised money
Late in the evening on the 14th of September, 2008, word began to spread that Lehman Brothers, one of the most profitable banks in the world, was about to collapse under the colossal weight of its debts. Throughout the early 2000s, the bank had spent over half a trillion dollars betting on the American housing market as it inflated into a bubble, clinging to the belief that the price of homes would not fall, despite mounting evidence to the contrary. When the market crashed in 2007, all hell broke loose. Its executives spent their last year at the firm flailing wildly as the price of homes sank to record lows; they shuffled assets around and courted investors in the hopes of preventing their demise. But nothing worked.
As the sun rose over Manhattan on the 15th, dozens of newly unemployed investment bankers moped around the bank’s Wall St. headquarters with cardboard boxes overflowing with files. Down the road from them, the American financial sector was in a panic. By the time the New York Stock Exchange (NYSE) opened for business at 10 am that day, investors were in a hurry to sell their stocks in a range of different banks, making it clear that they expected more bankruptcies to follow. Investors weren’t wrong to worry either. After all, Lehman Brothers was far from the only bank that took reckless bets that failed to pay off. In the year leading up to its collapse, dozens of smaller banks declared bankruptcy; a few larger ones were bought by competitors or the government.
Within days, the global financial system was in a tailspin. Executives from across Wall St. began flowing into the office of Ben Bernanke—then the conservative Chair of the Federal Reserve, responsible for setting the United States’ monetary policy and interest rates—desperate for him and other policymakers to step into action with a plan to save them. Bernanke, in turn, rushed back and forth between Washington D.C. and New York City, working in tandem with President George W. Bush’s economic team to find a way to stave off a recession.
In some ways, Bitcoin is like any other currency; people can use it to buy products and record transactions. But, in one major way, it’s unrecognisable.
Less than a month later, both houses of the American Congress created the Troubled Asset Relief Programme (TARP), enabling the U.S. government to bail out its financial sector by pumping hundreds of billions of dollars into it. The policy was controversial, amounting to a hand-over of government money to private banks that spent years engaged in knowingly fraudulent, predatory, and reckless conduct within the housing market. By most accounts, the bill that created TARP only passed after Bernanke lobbied lawmakers by exaggerating the effects of not bailing out the financial sector. Hank Paulson, a former Goldman Sachs head who was then the Treasury Secretary, gave legislators—few of whom were economists—just one night to decide whether they supported the bill.
It didn’t take long for Bernanke to join the rest of the U.S. government. In early December, he released a short press release announcing that the Federal Reserve would print $600 billion to buy mortgage debt held by banks—separate from TARP. Within a few years, that number grew to more than $2 trillion. Anger directed at the Federal Reserve soon poured in from across the political spectrum. But some of the most caustic critics of Bernanke were his former allies. By using his power as the head of America’s central bank to print a significant amount of money, Bernanke had abandoned long-standing libertarian principles and betrayed the American right.
Since the late 1960s, when the American economists Anna Schwartz and Milton Freidman published A Monetary History of the United States, the right has believed that one of the most significant causes of inflation is an increase in a country’s money supply. According to them, the amount of money in circulation should grow at the same rate as the economy. If it grows too fast, you get inflation; too slow, a recession. In 2008, many libertarians argued that Bernanke risked sending the United States into a hyper-inflationary spiral.
It was during this moment of crisis that Satoshi Nakamoto*—a pseudonymous programmer—released a short white paper on an obscure online message board. Days after Bernanke formally announced the Fed’s decision to buy bank assets, Nakamoto described their vision of a new currency that made central banks and financial institutions obsolete. Amid a global crisis, Satoshi invented Bitcoin.
In some ways, Bitcoin is like any other currency; people can use it to buy products and record transactions. But, in one major way, it’s unrecognisable. A major issue that any currency faces is the double-spend problem: How do we ensure that a person doesn’t duplicate a dollar? If everyone could produce money, it would lose its value immediately. Most traditional currencies deal with this by only allowing financial institutions to create money. In the public sector, Bernanke and other central banks have the exclusive right to print currencies. Outside of government, regular banks can lend money that they don’t have, producing new dollars with each new loan.
But if the goal of the crypto movement is to democratise finance, as many of its advocates claim it is, stripping governments of their power to regulate our monetary system is not the way to go.
But this system isn’t perfect. As Nakamoto wrote in their 2008 paper, “[financial institutions] must be trusted not to debase [conventional currencies], but the history of fiat currencies is full of breaches of that trust.” Under Nakamoto’s system, both central banks and commercial banks would be irrelevant. Instead, a computer program and millions of users control the currency, working cooperatively to generate new bitcoins and prevent duplicates. Each time someone tries to transfer a bitcoin, groups of people, known as miners, race to verify that the transaction is authentic. Once this happens, Bitcoin’s program adds it to a public database and generates a bitcoin for the successful miner.
If Bitcoin became a widely used currency, our economy would transform—and not necessarily for the better. Without a central bank in place, every economic crisis could easily progress into a depression. For instance, during the financial crisis, though Bernanke did essentially reward toxic behaviour by buying bank assets, he also helped the American economy to recover from a recession by maintaining low interest rates. While some of his actions do deserve criticism, doing nothing would have caused spending to crash across the globe, hurting the most vulnerable people in our economy.
In 2008, Nakamoto’s disdain towards financial institutions wasn’t unwarranted; it still isn’t. But if the goal of the crypto movement is to democratise finance, as many of its advocates claim it is, stripping governments of their power to regulate our monetary system is not the way to go. Rather, the solution would involve making central banks and financial institutions more accountable to the public; it would involve tightly controlling our financial sector and barring former bankers from holding some public sector jobs. Hobbling central banks would only create a less stable economy with fewer protections from economic shocks.
Bitcoin is not value-neutral. Underpinning the currency are a host of ideas about politics and economics. Though it may be easy to separate Bitcoin from the ideologies surrounding it, it’s worth remembering that every Bitcoin investor is, knowingly or not, buying into an argument about how our society should work.
