[vba616]

Matt Levine had an aside in one of his recent columns about how ironically, "safe" investments are frequently the most un-safe, because the tiniest crack in the faith people have in them leads to panic.

For instance, the stablecoins.

Bitcoin itself doesn't seem to be vulnerable, exactly because there's no particular objective value. If it goes down 90%, well, nobody promised it wouldn't.

[dredmorbius]

Link to that?

Sounds as if that's somewhat related to J.K. Galbraith's variant of Gresham's Law, in which "bad assets drive out good", during a crash, as the need to cover obligations as bad assets tank leads to sale of quality assets / securities.

From The Great Crash: 1929. One of my favourite books.

[hagy]

https://www.bloomberg.com/opinion/articles/2022-05-13/elon-m...

> Safe assets are much riskier than risky ones. This is I think the deep lesson of the 2008 financial crisis, and crypto loves re-learning the lessons of traditional finance. Systemic risks live in safe assets. Equity-like assets — tech stocks, Luna, Bitcoin — are risky, and everyone knows they’re risky, and everyone accepts the risk. If your stocks or Bitcoin go down by 20% you are sad, but you are not that surprised. And so most people arrange their lives in such a way that, if their stocks or Bitcoin go down by 20%, they are not ruined.

> On the other hand safe assets — AAA mortgage securities, bank deposits, stablecoins — are not supposed to be risky, and people rely on them being worth what they say they’re worth, and when people lose even a little bit of confidence in them they crack completely. Bitcoin is valuable at $50,000 and somewhat less valuable at $40,000. A stablecoin is valuable at $1.00 and worthless at $0.98. If it hits $0.98 it might as well go to zero. And now it might!

[dredmorbius]

Thanks!

[gralx]

Holy crap I had no idea this was Galbraith's insight. I've heard William K. Black talk about Gresham's dynamics a few times, but always wondered why his use of the term didn't comport with Wikipedia's article on it. It's because he's using it in Galbraith's sense. I'll be checking out the book for sure. Thank you.

[dredmorbius]

Do read the book, it's excellent. I'd finally done so myself only after the 2007-8 meltdown and found it hugely useful.

The passage I reference is toward the end of Chapter VI:

Never was there a time when more people wanted more money more urgently than in those days. The word that a man had "got caught" by the market was the signal for his creditors to descend on him like locusts. Many who were having trouble meeting their margin calls wanted to sell some stocks so they could hold the rest and thus salvage something from their misfortunes. But such people now found that their investment trust securities could not be sold for any appreciable sum and perhaps not at all. They were forced, as a result, to realize on their good securityies. Standard stocks like Steel, General Motors, Tel and Tel, were thus dumped on the market in abnormal volume, with the effect on prices that had already been fully revealed. The great investment trust boom had ended in a unique manifestation of Gresham's Law in which the bad stock were driving out the good.

-- John Kenneth Galbraith, The Great Crash: 1929, chapter VI

NB: In re-typing the above passage, I managed to render "hold" as "hodl". I've fixed that, but note the fact here...