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Show Notes
As I’ve said often in the past, utilitarianism is a hell of a drug. And it can get you to do incredibly horrible things while you’re high on it. Utilitarianism not even once, just say no to utilitarian.
All of these discussions are old discussions. Instead of being had among 200 people, they are being had in public among vast numbers.
Perry Metzger writes on Substack at Diminished Capacity and on Twitter.
* [00:02:00] Jupiter Brains and Extropians
* [00:07:00] Life Extension
* [00:11:00] Ethical Systems
* [00:19:00] Rejection of Utilitarianism
* [00:26:00] Anarcho-Capitalism
* [00:30:00] SVB Collapse
* [00:40:00] Finanical System Structuring
* [00:54:00] AI
* [01:00:00] The history of futurist discussion of AI
* [01:03:00] AI Safety
* [01:07:00] Fishing in the sea of AI Minds
* [01:17:00] Mask on the Shoggoth
* [01:22:00] Future Shock
* [01:25:00] Competition in FDA Regulation
* [01:38:00] Kardashev Scale Civilizations
* [01:42:00] Estimates of X-Risk
* [01:52:00] Cultural Effects of AI Developments
* [01:56:00] Nanotechnology
* [02:15:00] Sociology of the Nanotechnology field
* [02:27:00] Engineering vs Theorizing
* [02:43:00] Back to the future; accuracy of early extropian discussion
* [02:52:00] Grabby Aliens
* [02:56:00] Astrophysics
This transcript was machine generated and contains errors.
Perry Metzger: [00:00:00] to try to make our lives better, which is, I'm gonna quit my Firefox instance with 8,500 tabs in it.
Ben Goldhaber: Can't hurt. And I do think that the recording is working now. Cool.
Divia Eden: Yeah. Okay. So, and do you wanna introduce Perry or should I?
Ben Goldhaber: No, Divia. I think why don't you do the introduction.
Perry Metzger: Okay.
Divia Eden: Perry Metzger is a computer scientist who's done academic research, who's also had a bunch of different programming jobs, including startups and consulting. He knows more than anyone else I talked to about nanotech.
I originally met Perry through my husband, who met him through an ancap meetup (Anarcho-Capitalism). And from my perspective, he's one of those guys who's been around the futurist scene forever. He was an early member of the Cypherpunks mailing list, started the original cryptography list, and started the Extropians mailing list.
He says that he claims no ownership or originality of any transhumanist ideas, except that he did coin the term Jupiter Brain. So, Perry thanks so much for coming on our podcast.
Perry Metzger: Hello. Actually no one hires me to write software [00:01:00] anymore. People, people hire me to be a horrifying management consultant.
Or what have you. Secretly I still write software here and there, and it horrifies people really, really badly. I have scarred a number of people working for me by having to deal with my software. They, you know, we, but we don't talk about that mostly, you know, and I've, I've gotten rid of most of the bodies over the years successfully.
So provided, no one finds them. We should be okay. Yes. Yeah I’ve done all sorts of stuff. I have no idea actually what I'm going to be when I grow up, but I've been told that if you don't actually figure that out by the time you're 60 or 70, you don't have to grow up.
So I might actually just have to opt for that.
Divia Eden: Sounds good to me. Well, we have a lot of questions, but I was wondering if you could first start by telling our listeners what a Jupiter Brain is, in case they don't already know.
Perry Metzger: Oh, okay. So, I should set a little context, which is for those that, [00:02:00] have no idea what Divia was mentioning when she said, I started the Extropians mailing list about 723,000 years ago.
In, you know, slightly before Homo Sapien showed up I was hanging out with a friend of mine. And I'll cut the story really short by saying that we discovered this zine, this was back in the era when people would decide, you know, they'd get access to a photocopier and they'll start publishing a magazine.
There was this Zine called Extropy: Vaccine for Future Shock put out by a gentleman who was then Max O'Connor, but is now Max Moore. And, you know, Harry and I were reading this thing and it looked like, oh, you know, these guys came down on the same spaceship as us. And I got in touch with Max and I said, Hey, I'd like to set up a mailing list to talk about these ideas.
And the ideas like the Magazine was roughly centered on anarcho-capitalism, radical life extension, transhumanism, uploading artificial intelligence you know neurotropic drugs, the usual stuff that young people were interested in, back then. So, I got in touch with Max and I said, Hey, max, I want to set up a mailing list for subscribers of this thing.
And he said, well, what's that? And I said, well, you know why I set up this thing and a bunch of people then can have an online conversation. And he said, okay. And I sent out invites on something that was called Libernet back then, which was for Crazy Libertarians and the Cryonics mailing list for crazy people who want to freeze their heads to save their asses.
And there's
Divia Eden: some crazy people on this call. Many of us are such people.
Perry Metzger: And I put out a call on a few Usenet news groups for those that don't remember Usenet, it's okay. You know, you don't want to hear how grandpa used to have to walk both ways up the hill to go to school anyway.
And the next thing you know, we have a few hundred people, many of whom become pretty famous, you know, like arguing about all of these topics. And at one point, we were talking about what the future, what the post-human future would look like.
And I did a back of the envelope calculation and I said, well, you know, the largest practical computer I could imagine making would be something like the size of Jupiter, you know, so if youhad an ai, the size of Jupiter, what's roughly the ratio between its cognition levels and the cognition levels of the average human being?
This looks pretty dismal. Right. You know, it's a lot worse than sense. It's a lot worse than the ratio between human beings and ants. And I haven't done the calculation in a while, so, you know, I invite people to go off and figure it out. And so this is where the Jupiter brain meme came in.
My buddy [00:05:00] Harry being, you can figure out what he's like from his initial comment was, well, if your brain's the size of Jupiter, how large is your penis? But anyway the jupiter brain meme died very early on because a bunch of people figured out that the cooling problems of having a computer that large would be bad. And, and the design that all the people who want to build a kishev you know, type two civilization these days are interested in, is the so-called Matryoshka brain, where you take all of the matter in the solar system and turn it into concentric shells of, of, of, you know, photovoltaic and computronium and have them communicate with each other and fly in swarms around the sun.
And of course, completely blot out the sun because why would you want to let any of that precious solar radiation escape when you could use it for computation? By the way, if you ever note there was a tweet that I think I forwarded a while ago, which said, you know, something to the effect of, I'm a conservative, I think that we should leave a hole [00:06:00] in the matryoshka swarm so that sunlight can get to the earth.
Right. You know, and then there are, you know, the more radical types who think that we should just disassemble the earth, because why would you leave all of that precious material being mostly wasted, you know? But nevermind that. So, yeah, I believe that I was the first person to coin the Jupiter brain meme, but it's a dead meme, so who cares?
Is this around obsolete technology? This was the very early 1990s, early nineties. Yeah, I still have somewhere the original invite for people to join the extropians mailing list. I can probably even find the date because thanks to text to the modern world, I can, no.
I would've thought that just doing a spotlight search on my desktop would find it pretty easily, but it didn't. But yeah, [00:07:00] I think that the, I think it was like 33 years ago, maybe 32 years ago. Got it. You know, which should tell you that I'm an old fart.
You know, and my interest in life extension technology is only increased as my body has started disintegrating around me. But you know, it's still here. So I'm not as horribly decrepit as I could be.
Ben Goldhaber: Are there any practices that you personally are interested in or doing around the life extension and longevity? Or is it more focused on -
Perry Metzger: future oriented like crime? I, I follow a vegan diet, mostly to keep my cholesterol levels down and reduce my risk of things like colon cancer and what have you. And I try exercising, but that's gonna give me a few years at most. Right. And if you want to live to be 20,000 or, or you want to upload and become, you know, a general surface vehicle or something like that, possibly
Ben Goldhaber: you need more than the vegan diet.
Perry Metzger: The vegan diet, you're not, it's not going to help that much.
I mean, maybe, you know, that's probably buying me a few years on average, which is worthwhile. Right. You know, it would be so embarrassing to be the last person to die. Like, you know, like they've just about got the life extension tech and no, so close! You just missed it by a few hours. I'm so you gonna live long enough to live forever.
Divia Eden: You're going -
Perry Metzger: Yes. You did not live long enough to live forever. So, you know, by the way, there is no such thing as living forever. Right. You know, the heat, death of the universe is kind of inevitable. Absolutely. But a lot longer. Yeah, but I mean, you'd to be able to live to late state cab, late stage capitalism, and as we know, late stage capitalism will be when the last remnants of our civilization are hanging around black holes, tossing material into rob energy from their angular momentum with the Penrose process in order to keep things going.
That will be late stage capitalism, and that'll be in a few trillion years,
Ben Goldhaber: I suppose We'll have the markets for that. We'll have some prediction markets, on when the last piece of matter is gonna go out.
Perry Metzger: Well, you can, there's a wonderfully depressing Wikipedia page called timeline of the far future that I highly recommend and timeline of the far future includes things like this is leading up to the heat death of the universe.
It goes past the heat death of the universe. Oh, nice. Because, because one of the things that assuming we don't get a big rip, if we get the big rip, then like, who knows what happens? There's this question in cosmology right now because we've noticed that the acceleration that the expansion of the universe has been accelerating.
And the question is, will it continue accelerating? And if it continues accelerating, we might get to the point where like the individual atoms inside of us get torn apart. But if that isn't the case, you know, at some point, for example, even the largest black holes will decay from hawking radiation.
And, and if you read the timeline of the far future, it, it goes through all of that. But the, the [00:10:00] thing that I always mentioned when people talk to me about sustainability and long-term thinking is, well, you know, the earth in, in, in, you know, like only about 600 million years is you're not gonna be able to sustain you know, one of the two basic carbon fixation mechanisms of photosynthesis.
You know, and if you don't have a plan for that, you're not actually thinking long term. ,Right? I mean, that's, that's your, you're thinking short-term, long-term thinking is saying to yourself things like, well we have to send the Von Noman probes across, you know, the universe to star lift most of the hydrogen out of the stars so that we can conserve it for the far future.
Cuz right now it's not doing anyone any good, you know, it's just, it's just burning and sending out photons that dissipate and you can't do much with.
Ben Goldhaber: I imagine in your mind, most of the people who think of themselves as long termist right now really don't deserve that title.
Perry Metzger: Well, it depends. It depends on which long termist, I mean, some of the Bay Area rationalists are long termist. Yeah. But, you know, they, I have problems with some of them for all sorts of reasons. I, as I've said often in the past, utilitarianism is a hell of a drug. And it can get you to do incredibly horrible things while you're high on it. You know, utilitarianism not even once, just say no to utilitarian.
Divia Eden: Do you wanna tell us about what your ethical system is?
Perry Metzger: I guess so. So I have an internal conflict, right? So by the way, when I've used the term moral nihilists, I'm not speaking in terms of nihilism, colloquially, right? I mean like, as opposed to a moral realist? Yeah.
I don't go around walking around wearing black smoking clove cigarettes and, you know, I'm not like one of the characters in the Big Lebowski saying, she cut off her to they, and by the way,
Ben Goldhaber: Say what you will about utilitarianism at least it's an ethos.
Perry Metzger: There you go.
But when we say moral nihilism versus moral realism, there's the question of whether morals have some sort of objective reality. Whether there is such a thing as objective moral knowledge. So there are three, or there's so many levels here. I'm starting to sound like the Spanish Inquisition sketch from Monty Python.
There are four levels to my interest here. So taking a step back though, there's the question of how does one argue with people? And what I mean by that is that a lot of the time when one discusses morality with people online, someone says, you know, that there is a moral obligation to pay a living wage to Sure.
To restaurant workers. You, you know from my point of view at that point, you, you have expressed that you're a moral realist of some point and of some sort. And how have I concluded that? [00:13:00] Well, you're saying that there are moral facts, and based on these moral facts, we are all obliged to behave in a particular way.
And because we are obliged to behave in this way, those who, you know, who fail to behave in this way, you know, are, have, have done something wrong. And we must, you know, and we must correct their behavior perhaps with laws. And whenever I see an argument like that, you know, I immediately assume that whether or not any of the participants are moral realists, they have opened themselves to the question of moral realism and the, and on what basis they have come to this.
because, and, and one of the things you find I'm probably gonna offend all the religious people in the audience and you know, I'm sure that, you know, this will probably reduce your listenership among, among, you know, radical theists, you know old Latin mascots, you wanna hear it anyway, that sort of people.
But I'm gonna tell people anyway, cuz I'm that, just that offensive - I believe that that religion has sort of hurt [00:14:00] people with respect to moral knowledge because there are a lot of people for whom morality is something you assert. You know, God asserts that the following things are moral and the following things are not moral.
And questioning whether something is, you know, that is, is, is absolutely taboo. How dare you say, ask me on what basis right. This belief that the following thing is a moral fact or not.
Divia Eden: So part of what you're saying is that when you say there, there's several levels to it. One of them is that for the purpose of having discussions with other people or arguments with other people, one of your go-tos is if they say, if they use certain types of language, like saying that we're obligated to pay a living wage.
You know, both that you can now sort of have an opening to ask some questions about on what basis. And as a result of having asked a bunch of these questions, you also know that people treat it as a taboo thing when you ask that when
Perry Metzger: Well as soon as you say that, I mean, people get incredibly offended, but I you know, being [00:15:00] the sort of person I am, I ask it anyway knowing full well that they'll be offended.
But there's something wrong with making moral arguments as though you are a moral realist and then refusing to give any basis on which you've come to the conclusion that you're arguing on the basis of, you know, if, if you're going to say there is a moral obligation to do the following thing, you would damn well have some, some rationale about it.
Divia Eden: You want them to be coherent about it. Yeah. You want 'em be able to answer.
Perry Metzger: Yeah. Answer questions. But, you know, I mean, most people don't have a lot of knowledge about moral argumentation at all. You say something like, well, have you read the euthyphro to most people? And they're like, the what?
And, and I'm like, you know, it's a, it's a really great Socratic dialogue. It's aabout, you know, one of the most fascinating questions in theology that you could possibly have.
Divia Eden: I have not read it.
Ben Goldhaber: Same
Perry Metzger: Oh, it asks the most lancing questions, which is, are things [00:16:00] moral because the gods like them?Or do the gods like things because they're moral. And in the former case, should we care what the gods like?
And in the latter case, why do we need the gods? You know, but it's an interesting question, right? For most religious people this is an almost sacrilegious question, you know?
And as I said, there's an infantilizing quality to this because then you say to someone, well, like, why do you believe that restaurant workers deserve whatever a living wage might happen to be? Is that $800/hr. Is that $900 an hour? No one wants to give a specific number.
By the way, probably people listening to this in the future, after another 15 years of inflation will think I wasn't joking. Right. Then you know, but, but, but anyway but there's, so there's another level here though, which is do I actually believe in moral realism?
Because I can argue moral realism as soon as someone brings [00:17:00] something like that up. Sure. But is that something I actually believe? And I don't know. Yeah. I feel like the world works better if I operate on the basis of, of like humor's moral intuition sort of stuff. And so I tend to behave that way.
You know, I think whether though that's simply because the world works better if I do that, or if there's some sort of actual objective reality to morals. You're agnostic on that point. I have, I have trouble actually thinking that the universe cares, but I also have trouble simply abandoning everything and going the full moral nihilism route.
Divia Eden: Yeah, you have, you have competing intuitions about that one. Yeah. And you haven't found conclusive arguments.
Perry Metzger: Right. But I, but I feel perfectly happy. Being a you know, just deciding that that the right thing to do is, is to behave as though morals are real. Right. Because most people try to, or at least, you know, I mean, you know.
No, it's very [00:18:00] rare that, that a politician will stand up in public and claim to be a moral nihilists and especially not politicians. Right? Yes. Yes. Although most of them probably, if they were honest, you know, probably should. Yeah. There was
Divia Eden: that one, Sam Bankman-Fried when he DMD with Kelsey, came closer to that, not that he was quite a politician, but came closer to that than most.
Perry Metzger: Close enough. Yeah. That, that was, that was one of the most interesting cell phones I, I have ever seen. For those of the listeners that don't know what you're referring to there was a certain Twitter DM conversation between a certain - and a certain reporter on the question of morality. Again, utilitarianism is a hell of a drug.
Ben Goldhaber: So I want to bring it back. Is it like, in some sense, your rejection of utilitarianism comes from belief that like the various moral intuitions are the actual guide?
Perry Metzger: The rejection of [00:19:00] utilitarianism comes from the fact that the embrace of utilitarianism always results in horror and madness and fanaticism. In the end, my contention is that utilitarianism is just a weird kind of deontology.
Divia Eden: Okay. But when you say alway, I mean, I don't consider myself a utilitarian, but I I know a number of people that I think would roughly describe themselves as utilitarians, and I think a lot of them live pretty tame lives actually.
Perry Metzger: But the thing is the people who are utilitarians always lead tame lives. I mean, that's, that's kind of a requirement. So let's take a step back. So the first problem I see -
Divia Eden: I'm confused about that. I'm like, wouldn't have, weren't they the communist utilitarians? They didn't live tame lives.
Perry Metzger: But of course they did. I mean, if you look at all of the people in the Politburo around the time that Stalin died, they all lived in these horrible collective apartment blocks in Moscow. [00:20:00] Now Stalin, Stalin lived okay. But by the standards of someone who, who was the owner in fact of million of hundreds of millions of human souls, he didn't live that well. You know, I mean, I, guess he had a few luxuries.
Divia Eden: I'm not contending that Stalin lived very well. I think I'm, I don't accept the descriptions he had a tame life.
Perry Metzger: I don't know. He, he didn't spend a whole lot of time, you know, with coke w****s and that sort of thing. Sure.
Ben Goldhaber: So you mean in like a personal life sense, you mean versus –
Perry Metzger: Also, utilitarians often end up forced by their belief system into various kinds of radical aestheticism. I mean, if you read that Bloomberg piece. Some of the things in it were probably true and some of the things were false. But one of the things that struck me as being absolutely [00:21:00]
Divia Eden: The Bloomberg piece about the effective altruism community.
Perry Metzger: Yes. One of the things that struck me as being absolutely true to how this sort of thing usually disintegrates is people saying to themselves, if I eat this ice cream right now, am I damning some child in the third world to be blind? Because for only a few cents we could get vitamin A for them. And inevitably you find yourself with these groups in which people practice various kinds of aestheticism and at the same time justify all sorts of monstrous behaviors. So, so it's, it's the behavior of the communists is absolutely in line with the failure modes of utilitarianism.
So, so there are a bunch of problems here. Okay. So the first of all, I said something that I think some utilitarians would find kind of puzzling, which is that utilitarianism is just a weird theological I like it. Yeah. I, I'm interested in, [00:22:00] but hearing you say Right, right. Because you have to pick a utility function and the selection of a utility function has, has no, there's no obvious external objective mechanism for doing this.
Right. So you, you have to find some sort of, some sort of mechanism by which you can say what your utility function is and like, you know, how many I, if, if I have to kill, you know, five elderly people to save the one baby, or if I have to kill five babies to save the one elderly, like the way that you decide to cut these things is, is not obvious.
I mean, it's very easy if you're sure if you're a college freshman to say, you know, to say, oh, well, you know, I mean, obviously we're just trying to maximize pleasure and minimize pain. What, what does that mean and whose pleasure? Yeah, I mean, there are all sorts of classic problems in utilitarianism.
Like for example you know, there's the utility monster problem. You know, [00:23:00] let's say that they're out there somewhere. There are space Nazis who derive incredible unheard of amounts of personal pleasure from, from, from watching, you know, you know, certain human ethnic groups being tortured and murdered, you know, and, and it's just in incre incredible amount of pleasure.
So much more than, than than normal humans are capable of experiencing. You know, the, the, and, and, and, and someone might say horrified, well, you know, but I, I didn't mean, I didn't mean their pleasure or, or what have you. Well, then who's, you know, I mean, the, the problem is that that's the calculation problem.
Divia Eden: The calculation's not actually tractable to try to evaluate these things to
Perry Metzger: Right. So, so in the end, you start picking what you do and don't value based on personal taste, and it becomes this, this really weird, well, I am a utilitarian because it's like an objective morality, except it isn't, right.
Divia Eden: So you want people to own what their moral taste is and what their moral intuitions are, and you think there's some pretty bad failure modes that happen when people are both not owning it and sort of trying to push towards a type of coherence.
Perry Metzger: And also you end up with the problem that people start thinking, well, you know, if I, and by the way, I mean there, there was a lot of, well, you know, the Sam Bankman-Fried thing, it wasn't really a failure of utilitarian, but kind of like, you know, what kind of it was, right?
Divia Eden: Yeah this is one of those interesting debates.
Perry Metzger: I think there was a lot of underlying, well, it's okay that I'm screwing all these investors because there's stuff like X risk and you know, the lines of all these people in the third world and all of this political stuff.
Divia Eden: You think it was a load-bearing part of how he was making his decisions.
Perry Metzger: If you read about the risk profiles, I'm trying to remember his girlfriend's name, who was running Alameda? Caroline Ellison. If, you read Caroline’s like comments about things like how they selected the risk profiles of the investments because of what they wanted to do with the money.
Now I, I can argue that right? She was saying that
Divia Eden: they were gonna bet more than Kelly. That that's
Perry Metzger: probably what you're talking about. Oh, yeah. Yeah. And, and, and, okay. And we can also discuss the fact if people know that
Divia Eden: Yeah, we could talk about the Kelly criterion.
Perry Metzger: that, and how stupid it is to bet more than the Kelly criterion period, but, okay.
Divia Eden: So I do wanna hear all of these things, but, but part of where it was also fine is that I wanna understand from your perspective how your views on ethics relate to your views on governance, particularly in potential high stakes situations, which, maybe you can see where I'm going. I do wanna hear your thoughts on that in ai, but also like how it got started.
Do you still think of yourself as an ancap? Did you ever, how does that relate?
Perry Metzger: I still think of myself as an ancap. But that's [00:26:00], but the thing is that on a day-to-day basis, that doesn't have very much effect. Right? Like, for example, you know, if I have to drive from here to there, the only mechanism I've got is a state built, funded and maintained road.
You know, I can't fault old people in the United States too much for taking social security payments. And, and you know, there's elements of the world. We, we're recording this exactly a week after the Silicon Valley Bank collapse and -
- Yeah,. Feel like it's just been a week. And I know people who are horrified by my saying that the FDIC did the right thing by protecting all of the depositors. What sort of an anarcho-capitalist are you? Well, the thing is that we live in a society in which we have this government guaranteed deposit [00:27:00] insurance system.
And I don't think that's a good idea. I think that there are very different and better ways to structure a financial services industry and a deposit insurance system. I think deposit insurance seems to be a fine idea, but if it should be handled privately, but given that we have the thing we have…
People build their lives and their expectations around the world as it is and not the world as I believe it should be. But if you ask me like what's my ideal for how the world should be run, ideally, I think that the state should be minimized as much as possible. And I believe that it is possible to privatize literally all state functions.
Divia Eden: Right? Which doesn't mean that on the margin you are personally opting out of state functions in radical ways. Like you said, you still use roads and it also doesn't mean that on the margin you're against all government action. Like what you said about the FDIC.
Perry Metzger: So the FDIC is an interesting problem, right?
Because the F D I [00:28:00] C and the, the OCC and, and many and the state, you know, bank regulators and what have you about, which I know far too much, they are kind of a net negative, right? People I think are unaware of the extent to which the financial system has been distorted by regulation and by the difficulty of getting and keeping a banking license.
But the places that the system fails pretty badly aren't, weirdly enough, on the deposit insurance side. It is said to be a moral hazard and there's a certain extent to which that would be true if it wasn't for the fact that the F D I C will get medieval on your ass very, very early on.
Divia Eden: Part of what you're saying here is something like, I mean this makes a lot of sense if, assuming I'm reading you right, is that when you imagine like, how would a private system work? You said you think there probably would be something like deposit insurance. Yeah, there probably would be.
And so you don't think that's actually a super distorted, you think that that's something [00:29:00] where the private version might look actually somewhat similar to the government version,
Perry Metzger: It wouldn't look identical to the government version, but I think that it would have certain vague characteristics that are similar and I think that’s okay.
So you know, the reason everyone has been denouncing the S V B - Fox has been denouncing them and NPR has been denouncing them - and everyone out there, most of who, most of the people out there, of course, who are in the middle of denouncing this, don't understand the events that occurred. Do not understand how deposit insurance works, how the F D I C works, et cetera.
But they are all completely convinced for their own reasons that this was a horrible thing that happened. There are people on the right who are convinced that SVB collapsed because of wokeness, and that, you know, and that this is some sort of horrible bailout .
Ben Goldhaber: Is there single key thing you think they're missing? Like something they misunderstood?
Perry Metzger: People don't [00:30:00] understand how any of this worked, what happened, et cetera.
Divia Eden: I get a sense also that this is a big part of how you relate to the world in general, is being very frustrated that you know, a lot of technical details about a lot of things, and that many of the people you are talking to do not get it.
Perry Metzger: You can't expect everyone in the world to know all of the technical details about all of the things around them. The problem arises when people start developing extremely powerful opinions about things that are complicated, that they know nothing about. And I find that something somewhat frustrating.
I've been like a consultant to the financial services industry for decades. I happen to know far more about these topics than normal people do. And I've also seen a bunch of random failures over the years. Bear Stearns, when it collapsed in 2008, owed me a ton of money.
And I had several very bad nights until they got bought out by Chase.
Divia Eden: [00:31:00] So you even have some lived experience about what it's like to be on one end of this.
Perry Metzger: Yeah. Anyway so the thing is there are people who believe, oh, this was a bailout for fat cats and the shareholders and, and the people who owned bonds in that we're issued by SVB are all being wiped out.
Right? Right. They've lost all of their money. There's no bailout for them. The people who, you know, I mean the, the shareholder equity has been wiped out. The, you know, the debt holders are being wiped out. There was a very tiny gap between the deposits and the assets, by the way. So for people who don't know, to a bank, the money, they invest in things like mortgages and consumer, you know consumer revolving credit, business revolving credit, et cetera.
Those are assets. The money that they owe to the depositors is a debt of theirs. [00:32:00] Okay? You can think of the bank money as oh this is my money. You know, this is an asset to the bank. It's just the opposite to the bank. The money that you deposit with, is a liability of theirs, right?
But it's a very special kind of liability. The bank has many kinds of liabilities, right? Because the bank holding company, for example, can issue bonds to raise money. It can issue these weird kinds of preferred shares that only banks can issue in order to raise money, which are, which look almost exactly like a kind of junior debt.
Banks have all sorts of financing mechanisms. You have a lot of instruments that, you know, a lot about to raise money. But the cheapest and easiest form of financing they have are deposits and the, the, the way that the system is rigged up, are supposed to try to make the depositors as whole as possible.
And when all was said and done, it appears that the gap between SVB before the run had roughly like 209 billion [00:33:00] in deposits. Mm-hmm. And it appeared to have like a, it had, you know, something like if, if, if you mark to market and use reasonable strategies, et cetera, it appears that they were short like a billion dollars, which is nothing.
Divia Eden: Yes. Right. Right. Exactly. So now the problem is in terms of the depositors being made whole, even in terms of the most basic math about what they have, the money, almost
Perry Metzger: all of it, you should keep in mind that as a going concern, they were completely screwed. Right? Because they had all of this debt that they owed to people who weren't depositors.
Right? So they were not gonna commit debt service. They were not going to be able to handle the bank. The bank run was impossible for them because they had bought, and we can argue foolishly and I would argue foolishly, but they'd bought all of these US government treasuries, which are marked as very, very low risk by the regulators.
Hmm. So they rather do that . Yeah. But so they, so they owned all these treasuries. [00:34:00] And the problem, the problem with fixed income securities is that if interest rates rise, the amount that people in the market will pay for them falls because people expect a higher coupon rate. So it will fall until the revenue stream coming from the bond looks like a bond that has a lower face value.
But you know, and it has an implied interest rate, like current interest rates. So they, if they had been able to hold those treasuries to maturity, they wouldn't have had any trouble. But, you know, the bank runs started, they had to be able to liquidate a lot of assets. They certainly had no ability to function as a going concern.
But in terms of rescuing the depositors, it wasn't such a bad situation. And in terms of people saying, oh, you know, but there are all of these uninsured depositors and you know, and these, the thing is that uninsured depositors are always rescued in F D I C actions.
Divia Eden: Yeah. Remember seeing your thread about this, you felt very confident because it's very rare.
Perry Metzger: Yeah, it's very rare. I mean, I think Freddie [00:35:00] Mac, some of the uninsured got screwed, but it's a very rare event. Like over the last 70 years, I think there have been a handful of instances where all of the depositors were not made whole. And it's, and, and the FDIC doesn't have a guarantee on that, but they are explicitly supposed to try to do it to the best extent that they can
Divia Eden: And so you see them as actually following their directive?
Perry Metzger: Yeah. They followed their normal playbook and there was also, there was no chance that the White House or the Fed were, or anyone else was going to allow this to come down in such a way that all the depositors got screwed.
The other thing that I see really weird is all of these people in places like Twitter who are like, well, if you're the CFO of a company, why would you deposit that much money in a bank?
Where are you supposed to put it? You know, there's, right, is there a mattress in, in the corporate suite that you're supposed to put the cash under?
You know you're supposed to buy bonds or something. Like, [00:36:00] do, are these people listening to themselves? So how do I go out and decide and buy a bunch of treasuries? Well, what I do is I go to say Morgan Stanley or Goldman Sachs, and they buy treasuries for me, and they hold them in my account.
And if Goldman Sachs goes under hopefully , I get all of the bonds that I bought. Right. It's turtles all the way down.
Divia Eden: You're putting out that all of the sort of normal responsible things that companies do with money, in fact do involve these sorts of risks.
Perry Metzger: Yes. It’s true.
Okay. So I had a startup. In around 2000 and, and our CFO, Jeremy, happened to personally enjoy buying treasuries in our company's name and rolling them. Right.
Divia Eden: So if you have someone who's willing to do an additional job -
Perry Metzger: But in practice almost no one does this. Yeah. And, and no one should have to, I mean, the whole point of having banks is they are supposed to be a safe place that you park [00:37:00] large amounts of cash and in exchange for making sure nothing bad happens to it, you know, they give you all of these convenient ways to deal with the money.
Like, you can pay people without having to reach under the desk for dollar bills and, you know, and such. It's the system we've evolved over a long period of time and the responsible thing people are supposed to do with large amounts of money is put them in the bank.
And, and admittedly like, you know, if you, if you want to get more out of it, maybe you put it into money market funds or something. In 2008, one of the most famous money market mutual funds broke the buck for a while. That means that it was not able to give back to investors the exact amount of money that, you know, had been deposited with them.
This was because almost everything stopped working for a while in 2008.
Ben Goldhaber: You're bringing up [00:38:00] 2008. Cause I wanted to ask about contrasting this with the 2008 bailout.
Perry Metzger:I had seat in 2008. Right, right. Yeah. So I think, I think that part of the reason that this isn't going to look much like 2008 is that no one was willing to have a Lehman Brothers happen.
And probably no one is. And you can argue that this has created all sorts of moral hazard in the system. Now we have these systemically important financial institutions that everyone kind of understands are not going to be allowed to go bankrupt. But also, you know, we have the regulators, you know, fist inserted completely in their nether orifice or perhaps the other way around.
I mean, it's a little difficult to tell at times. But I think one of the reasons SVB was not allowed to go was because 2008, instead of being 30 years ago or, or beyond the working memory of most of the people who are currently in the business, was recently enough that everyone remembers it.
But like 2008 was a [00:39:00] nightmare for me personally, on all sorts of levels. You know, and, and it was also sad because I'd once been a Lehman Brothers employee. Mm-hmm. And yeah, another thing I did not know, and, and, I knew and loved the firm and they screwed and Dick Fold screwed the place like really, really, really badly.
Divia Eden: It seems like you think maybe that, well this is a whole different conversation, but it seems like you think that should have gone a different way?
Perry Metzger: No.. Okay. Or, yes. I mean, the thing is the system we have built is intimately dependent on state guarantees, and that's bad, but it is the system we are living under and it's, you know, and you can say things like that, the Fed is a terrible abomination that screws everything left and right, but we don't have a free banking system in which you've got like, you know, the excess clearings rule and all sorts of other things in, in order to assess the financial health of other institutions and in which there are other mechanisms by which systemically important [00:40:00] institutions can be rescued.
Right. The system as we have it, we've got the Fed, we've got, you know, we've got, you know, the FDIC and the OCC and the SEC and the CFTC and what have you. And, and this is the system we have. I don't think that this is good, that we live in a good system at all. I think that the system we have has incredible risk.
You think it should all be private, basically. I don't, I don't only think it should all be private. I think that if it was all there, there, by the way, so George Selgian and I felt really, really happy when, he tweeted at me the other day. Oh yeah. Cause this is a, I'm a Selgian fan. This is a man who has, who had an enormous influence on my thinking about banking and finance because his, his, his PhD thesis is just fascinating and, and wonderful.
You know, I, I highly recommend it. It's called the Theory of Free Banking. And it describes all of these interesting things that you don't necessarily think about. Like in a market-based [00:41:00] system, the supply and demand of money have to cross just like in the supply and demand for pizzas or you know, or, and this isn't, this isn't theoretical.
Divia Eden: He's actually studied free banking systems that did, that people did have.
Perry Metzger: Yes. And, and he's written a lot of papers that aren't, that like go beyond the stuff that's, that's, that's in the dissertation. And it's, yeah, it's not theoretical. In fact, many places in the world used to have free banking systems and the US didn't really fully have a free banking system before the Fed, but it was, it was better in the, it was closer.
Now, it did
Divia Eden: include the banks issuing their own
Perry Metzger: their own notes. Yes. One of the things that people forget, by the way, is that the Fed was not cre. There's this myth that the Fed was created because there were too many bank runs, or the private system couldn't cope or what have you. This is not why the Fed was created.
If you read the Puo committee hearings, this was the senate committee that convened to de to, to decide about, you know, [00:42:00] the, this horrible, horrible plague called the money trust that the politicians at the time were beating their fists about at any given time. The money trust. Yes. Which was, I haven't they ever heard of this?
This was what they referred to the House of Morgan and the other big New York banks. And their concern was that the 1906, maybe it was 1907 Nicker Blocker Trust run, which was created by, which was the result of one of the last big market corners in the US history the fascinating story. There was a railroad, which two different groups of people were attempting to buy, and they managed to buy several times more shares than existed because of all the people who were shorting it, thinking that it could not possibly go any higher.
I see this resulted in a chain reaction. The Nicker Bocker trust went under, you know, was, was going to go under and JP Morgan like, you know, organize the rescue. Of, of, of the Knickerbocker and [00:43:00] everything, you know, and everything went back to normal. And there were people in Washington who were horrified by this because of the amount of power and influence the big banks of New York were in, were exerting over the economy of the entire country, the money trust.
Right. So
Divia Eden: you're saying there's a much more obvious realpolitik story here than people normally
Perry Metzger: talk about? Oh yeah. I by the way, I very much encourage people to, to look into the history of these things because they're often not quite what you were given to believe. You know, the history of, of everything from child labor laws to, you know, to, you know, people forgetting for it.
You know, that Sinclair's the jungle was was a work of fiction and not a description of the conditions in actual slaughterhouses, you know? But anyway so, you know, the Fed got created and then eventually we went, moved from a fake gold backed system into one in which everything is simply the imagination of the Fed.
And that is the system we have, and that's the [00:44:00] system we work with. And we don't have all of these free market mechanisms to deal with what happens when there are systemic disruptions. The mechanisms we have intimately involve all of these state created mechanisms. And, you know, do I believe that those state created mechanisms should be used?
What else do we have? If all you've got right, is a government fire department in your town, should you let your house burn down right out of, you know, an excess of moral compunction? Right. And so
Divia Eden: you see, for example, making the deposits whole as, okay, well, the government fire department came.
Yeah, you can try to say there shouldn't be a
Perry Metzger: government, but I think the whole thing is distortion and causes all sorts of problems, but, you had lots and lots of people who expected that they would be able to pay their employees the following week. They weren't the ones gambling incorrectly with the money.
It was the, it was the executives at the, you know, at, at, at SVB who, and it, they went under and they're [00:45:00] all losing their jobs and, you know. Right.
Divia Eden: Which, I mean, this is, this is probably sort of obvious, but just to name it, it seems like some of your moral intuitions are something like, well, people ought to be able to make plans and have expectations about the future and all else equal, being able to living in a world where people can plan
Perry Metzger: is a good thing.
There's, there's also the other element of this, which is that I think that a lot of the moral hazard argument against a government deposit insurance is, well then the bank will just offer outrageous interest rates and gamble with the money and the government will have to come and bail people out and people will simply go to the place paying 19%, even though that's unreasonable because, you know, they have no fear that they will lose their deposit going to a bunch of villains.
But the problem is that we're talking about zero interest rate business banking accounts here. Yeah.
Divia Eden: You know, and so you don't actually say, it seems like another part of your moral intuitions is, is in fact to look out for moral hazard problems, but not to do so