Bluechip Dialogues #1 | Tyler Cowen, Professor at George Mason University

Welcome to Blue Chip Dialogues. I'm Garrett Jones, Chief Economist at Blue Chip, and my guest today is the excellent Tyler Cowen. He's a professor of economics at George Mason University, also my colleague, and he's been extremely helpful to me over the years, in particular by being an advisor to Blue Chip. So welcome, welcome Tyler, and I want to start off with a question that comes from Paul Krugman's recent blog post. He reads— he's been blogging about stablecoins a little bit. He said the only reason for stablecoins is to facilitate criminal activity. I'd like to get your reaction to that.

First, happy to see you, Garrett, and thank you for all the great work you do. I think there are few issues where Krugman is more wrong than that one. He's been saying that for many years, and I think he's just locked into his opinions. So the estimates I see is stablecoin payments, which mostly business to business, will be about $70 to $90 billion this year. Now, is that a little or is that a lot? You could think about the level, you could think about the impressive rate of change, but that is all legal. It is motivated by lowering transactions costs and convenience. It's not criminal activity. And the market capitalization of USDT and USDC taken together recently was estimated at over $200 billion. You now have Visa, MasterCard, and Stripe with an active presence in stablecoin areas. Those are very new projects. It's fair to say we don't know how well they will do. They're entirely legal, not motivated by anything criminal. So just the actual facts are so strongly against what Krugman says. In a sense, I don't know where to start. So I think one should be quite agnostic about most of these issues and how stablecoins and other financial innovations will evolve. But let's at least start by getting the facts straight. Stablecoins have gone quite legitimate.

Yeah, I think that's something that's just been amazing to watch over the last couple of years, even when it was in a way less legitimate, when it was— when stablecoins and they still are being used mostly to clear transactions for people who are just basically gambling in stablecoins. People who are engaging in high-speed transactions, buying Bitcoin or Ethereum or whatnot, and then they use a stablecoin as the clearing medium. Like, to some people, that's less exciting morally because it's a form of gambling. It's pure finance in a sense, right? But even that is not criminal activity, and that's the overwhelming majority of transactions right now.

You're right. Right.

Of course, B2B are growing, but I think he has a sort of thing where he's moralizing purely financial transactions, which I don't think that's good economics.

And even the decentralized finance, I don't think we should assume it's all unproductive. Again, I think agnosticism is the correct attitude, but for the United States, it's very important that we remain the world's number one financial center, in my opinion. Right now, until the Trump administration, we had pushed that activity overseas, and it was not really contributing to US being the number one financial center. But over time, that matters. And it could be that if you want to be and stay the number one financial center, you just need a lot of froth around the edges of your most productive activities. And you can always pick out pieces of froth, also high-frequency trading. Oh, that's no good, or what good does that do? And always pick to particular things. But if we take the Jim Buchanan insight that you're thinking in terms of rules and systems and the froth comes with the meat, the froth might be part of what helps you keep your dominant position. So again, I'm not sure how significant that is, but we shouldn't dismiss it as an argument. And it could be quite a good thing for the future of this country and the future of the dollar if we could bring more of that crypto activity within the United States and the US legal system.

Yeah, I think that's a good general rule, right? Like this distinction between froth and meat is important. People have a tough time identifying the borderline between the two. And anytime you choose a cut, you're pretty likely to cut off some stuff that was— you would have found a deeper analysis was actually really valuable. So you've written— you wrote a book with Randy Kroszner in 1994 or so. That's when it came out, at least.

The core dates from much earlier.

So what was your first paper together in that project?

It was called "The Development of the New Monetary Economics," published in the Journal of Political Economy, 1987, I believe.

Okay.

And it argued there was this new approach to thinking about money that emphasized the distinction between medium of exchange and medium of account, and we traced the history of that approach through the history of economic thought.

So, who were the biggest names early on who were into this distinction, and can you explain that distinction between medium of exchange and medium of account?

In most normal monetary transactions, the two are together in the same asset. So you might say pay with a dollar bill, and the price is marked in terms of dollars, and it says, say, $1, and you hand over $1, you get the thing, you give up the money. That's a very naive way of using money. It works fine. What you're handing over is the medium of exchange, the dollars, but there's also dollar as a medium or unit of account. That is, the price is $1, $10, $500, and those are two distinct functions of money, and they can be separated.. And we see more and more often with crypto that in fact they are separated. In many contexts, this works just fine or is even preferable. And that's a monetary innovation that Kroszner and I back dating back to the 1980s said was likely to be the future of money.

So where do you think now, who were the earliest people you heard?

I think the very earliest reference we found was actually in the French political theorist Montesquieu, uh-huh, who pointed this out in the middle of the 18th century. But more significantly, there were a group of American theorists, often broadly libertarian, some British theorists, Benjamin Tucker, Henry Moylan, Hugo Bilgram in the early 20th century, that had a lot of these ideas. They were picked up by some classical liberal Germans like Heinrich von Wirthausen. And these people argued that money was gonna continue evolving. It would take some forms that would look rather strange. It might be backed by private sector assets and private sector goods. You would often have the separation between what is the medium of exchange and medium of account. And they predicted all of this a very long time ago, and no one had really paid attention to these theorists. So what Kroszner and I wanted to do was unearth that tradition and try to learn from it.

So you've traveled a lot of places and seen— engaged in a lot of unusual money transactions as a result. How often do you see this around the world where people will post a price in dollars but accept payment in the local currency, or vice versa?

The most common thing you will see is in tourist areas, especially in the Caribbean, parts of Latin America, you can pay with dollars. But anytime you're buying something with a credit card while abroad, in essence you're seeing a price denominated in British pounds, Japanese yen, whatever, and you end up paying with dollars. And it's quite seamless. You don't give it much of a second thought, and it simply works. So that would be the main time it happens. It's something we regard now as fairly automatic. The question is, how far should that extend into a monetary system? My general view is to let competition determine that question, and you're going to see a mix. I think most ordinary transactions— oh, you buy a latte at Starbucks, that's just going to be dollar., and that's fine, but it's not the only thing you'll see in your monetary system.

Yeah, so when over the— since 2009, since the rise of Bitcoin and whatnot, a lot of people have wondered whether you would— people would start doing something like this, making Bitcoin payments that are denominated in dollars, using Bitcoin as a means of payment but still using dollars as a unit of account. That hasn't taken off. Similarly, like, to draw on more of what you talk about in the book, there's no equivalent of people say keeping their wealth in an S&P 500 and paying people with stocks, paying people with stock transactions, but then denominating those in dollars. Those things never really took off, and I thought of that as a possible endgame of this new monetary economics. So why do you think something like that hasn't happened? Was that just speculation more than a practical plan? What do you think?

I don't think either of those were ever convenient. The most likely path we might have seen, and to some extent did see, is to use money market funds rather than, say, stock shares. Now, it so happens we do not typically pay people with money market fund checks or wire transfers, but we could. It's not an incredibly difficult thing to do. You can wire funds from your money market account rather easily. But what's the advantage in terms of dollars has not been established. But more recently with crypto, and I would just say globalization more generally, we see some big advantages to using something like stablecoins rather than just trying to do everything through a mix of US dollars and the US banking system. So just two simple examples. If I want to send a remittance to Mexico, which I do pretty frequently, it's a pain in the neck and I pay a high commission. Crypto has the potential and sometimes the reality of lowering those costs a lot. There's a lot of foreign banking systems that are just crummy. So through Emergent Ventures, I'm pretty often sending money transfers to Ukraine. If you want to send a money transfer to Argentina, especially Prima Ley, Brazil, which is one of the richer poor countries, it doesn't go very well. In many instances, you would have lower costs doing it through USDT or USDC using stablecoins. So the more you're dealing with screwy banking systems around the world, which is occasionally the US, the greater the desire to do this through some kind of crypto.

Treating stablecoins as not dollars is in a way a little bit weird, right? Because we're used to the idea that stablecoins ultimately turned out to be a libertarian fantasy of money, which is 100% reserve-backed currency. And when people are making transactions with that, looking at the well-run ones, at least, of course, at what point should one be thinking of them as just basically money itself, as US dollars themselves, the same way that I treat checking account clearing as US dollars, even though they're not US currency?

I don't feel they're exactly that. For one thing, they're not FDIC insured or even implicitly backed by the Fed, though they may end up being that. But there's this funny trigger kind of equilibria in stablecoins. So you can ask, are they fixed nominal value? Most of the time they are, but they succeed in being fixed nominal value in part because they are not. So if the backing becomes more uncertain, the price of the stablecoin can fall. It won't be pegged strictly one-to-one to the US dollar, and that's a warning sign to markets. So often what has happened with Tether is the company will take some actions to shore up its reputation, convince people it's quite well capitalized, and the price has gone back to 1 over time. But that's not metaphysically necessary what happens. So this mixed notion of it is fixed to nominal value, it isn't— you could even say it's a galleon. And to the extent it stays fixed, it's because it has the potential not to be fixed, that price signals tell you when you need to worry. So that's a rather complicated exposition, but I do think it's different than, say, I have a dollar in my local checking account. But it seems it works. In a lot of cases, the markets prefer that.

And the live price signals really are— they give the market a chance to vote on this all the time. If it weren't for FDIC insurance, which has worked basically perfectly, then it seemed like there'd be a lot of value in having market signals on the value of checking accounts from all the major top 20 banks in the US. We don't have that signal right now.

That's right. Now you make a point. FDIC insurance has worked perfectly. I agree. But I would like to stress there are many countries and wealthy Western European countries where deposit insurance is quite slow and has some residual uncertainty. It's not a perfect system where they come in over the weekend, clean things up. And you write a check on your account the next day.

Yeah, yeah, yeah.

So even in those cases, in many countries, you might prefer stablecoins to the prevailing system of deposit insurance. So I would say for the US, that's one area where we've done a very good job.

Yeah. 6-month delay on getting your money matters a lot when the point of having checking accounts is the liquidity.

That's right. Another advantage of crypto, as you well know, is the markets are open 24/7, and there's plenty of cases where that's of some value.. And I think the logical expectation is just for use of stablecoins to grow.

Yeah, that seems right. That the idea that people take it for so much for granted that financial transactions should be 24/7. If I'm getting Amazon deliveries and it tells me it'll show up between 4 and 6 in the morning, why can't I get my money outside of traditional banking hours? That's a, that's something that'll matter, of course, especially when you're doing international transactions.

There's a general point I want to make. I don't know if you're going to ask me about it, but I think it's quite important. I've been thinking about this a lot lately. So people say you let stablecoins in the door, they're run-prone. Now regulation may or may not fix that, but let's put aside regulation. It's true that many assets can be run-prone, but keep in mind the alternative. So right now in the US, banks used to be the major form of lending, and they have shrunk to about 20% of lending in the US. So 80% of the sector is something other than FDIC-insured banks. It could be private equity, it could be different forms of commercial credit. Those structures are in principle run-prone. The EU is now running stress tests on them. Mm-hmm. So if you choke off innovation in your banking and payment system, you will push lending out of it into more run-prone structures. So it might be true that if you let in more stablecoins, some parts of your system are more run-prone. But if you don't let in this kind of innovation, you will nonetheless end up with a situation where your financial system is more run-prone. Now, you could argue which is better or worse, but everyone's trying to say, oh, stablecoins, that makes everything more run-prone. That really does not have to be the case.

Yeah, but this gets back to that 100% reserve fantasy coming true, right? The big— by dollar volume, the vast majority of stablecoin dollars are held, are run by orgs that are 100% overwhelmingly 90+% backed by US Treasuries. And those are— whether they're perfectly safe or not, they're the same unit of account. They're measured in the same units as the— their liability, the stablecoins. And Circle is very credibly audited. Tether is maybe getting there. We'll see. At least they have an attestation. So there's some evidence that like they've solved— they've taken steps to solve these basic trust problems. We're backing things with normal assets. We're not backing it by Bitcoin. And then we have audited values. We have audited values where you can see the stuff's there. That is a banking system that libertarians fantasized about for a long time. Is it— isn't that pretty hard to have a run on?

Yes, but I do have some concerns. As crypto grows over time, you will have more diverse offerings. And in fact, I myself might want ones that are higher yield and higher risk, just like I might buy a portfolio of junk bonds. And then you do get something run-prone. And as you well know, the House and Senate, they're considering stablecoin legislation. I think this would be a good idea. It would essentially mandate 100% reserves backed by high-quality assets. There's such a thing as off-balance sheet risk. We saw run issues with money market funds. The financial system is highly complex. What is actually a corporation is not as simple as it seems. So I don't think we should conclude just all will be fine and well and there won't be this issue of it being run-prone. I think to some extent there will be, but I don't expect it will be fundamentally different than most of the rest of our financial system. You just cannot have everything run through FDIC-insured banks. People need to wake up to that reality.

Yes, it's too big a promise. Is that your biggest concern? That it's just too big a promise to be credible?

The FDIC, if they tried to insure the entire real economy, like, A, we can't afford it without the risk of hyperinflation, and B, it's not credible. C, the amount of monitoring they would have to undergo would be insane. And D, there'd be massive moral hazards. Like, 4 big reasons why that can't be done. So I think there's this nostalgia for a time when banks and non-banks were quite separate. The banks are quite controlled and rigidly guaranteed. Like, that worked fairly well. But just as you have economic growth, you can't keep that system forever. And that's the wake-up call we need. I worry crypto people are a little too enthusiastic. They think crypto stablecoins are like clearly the best way. To grow the system. I would retreat to my point about agnosticism, but we should allow it to start and see how it goes. Absolutely. Yeah.

So you're, in a way, you're making a point in a way that the Genius Act, which is mandating these precise rules about what assets you can have, might be locking in the system before there can be enough innovation.

That's right. So even though I favor that legislation, I'm nervous about it. I'm also nervous about the idea that there's no interest. To be paid on stablecoins as a matter of law. Yeah, I don't know if you're old enough to remember the time when you would open a checking account and the bank would give you a toaster.

Aha, I do remember this.

Yes, that's a kind of implicit interest. So probably we'll see a more modern version of that with stablecoins. Ironically, it could induce innovation. So since you can't pay people direct interest, you might give them more services. It could be the spur to good innovation. But it also could be a spur to bad innovation. We'll see how that develops. But when you have a complete quantity control on the backing and a price control on no interest being allowed, it's not to me a very libertarian fantasy. It's a form of highly regulated narrow banking. I do want to see the experiment, but we should not regard that as the final word either.

The Genius Act then is basically bringing us back to the bad old days of Reg Q. Tyler Cowen, the de facto ban on interest payments for people who had checking accounts in the US. And until the early 1980s, to tell the audience, it was more or less illegal to pay interest on checking accounts. And one side effect of that is that whenever interest rates rose, and they did a lot in the 1970s, people had a really strong incentive to try to disintermediate their cash, to get wealth out of checking accounts because it can't pay any interest. So it's possible that multiplied and worsened the tightening effects of monetary policy in the 1970s because it tended to destroy checking accounts.

And back then, as possibly will occur in the future, it can make the solvency and liquidity of these institutions too dependent on interest rates.

Yeah, yeah.

If we're at ZIRP and the rates are zero anyway, the legal prohibition doesn't matter. Yes, rates then rise sharply, big shifts in intermediation that aren't really market-driven. And that's another concern I have.

That's about regulatory arbitrage at that point. Trying to get away from the bad rules. Yeah. Yeah.

Now, if interest rates are stable, that's not a big problem. I wouldn't say I'm very worried.

No.

Look, we're economists. We understand the difficulties with price controls and we're going to reinstitute a lot of those.

Yeah. That's— the ban on yield is really a tough one. It's going to be tough to allow an innovative system there and it could have systemic effects.

You're right.

Yeah. Yeah. The fact— so I want to— —use this to talk about eurodollars. Eurodollars were basically the beta version of stablecoins in a sense. There's a point that Nick Carter has made over quite a few times. So the eurodollar system, which are basically dollar-denominated accounts that exist outside the US, for the audience, those are a sign that people really like to hold dollars even if they're not required to. What do you think? Does this debunk legal tender law theories of monetary systems?

Yes, and this is really the critical factor you're getting at. So much of the world wants to partake in a dollar-based system. Now, some countries— Panama, Ecuador, El Salvador— they've dollarized. That's gone fine for them. But other countries won't do that for whatever reasons, and they still want to partake in the dollar-based system. The United States does not make that easy for them, due largely to regulations. Some are quite legitimate regulations to limit money laundering and terrorist activities,, but a lot of it just make it hard to transact. So know your customer laws. If I want to bid on a painting at Sotheby's, say, in London or Dublin, and it's maybe a $3,000 transaction, the pain in the neck I have to go through to prove, like, I'm me, and it's all BS anyway in an age of AI, I just say, oh, it's not worth it, and I don't make the bid. So there's lost output. There's not really any actual risk.. And especially in poorer countries or countries that in other ways are tied to the drug trade, it's very hard to just act normally in the US banking system. And then there's also the possible risk of sanctions. So people prefer stablecoins and I just don't see that's going away. It's a very legitimate market use of the asset.

I thought of it as basically Eurodollars for everybody. We know the Eurodollars work pretty well and it was able— people were able to solve the first order problems over the course of a decade or so. It seems like that stables are Eurodollars for everyone.

What's interesting about eurodollars, there was no reserve requirement on them. Now, eurodollar, it's a funny word, like the dollar, where are they? Typically it was an accounting convention and the eurodollar might just have been in New York or wherever. So what actually are eurodollars? You can think of them as just dollars that often had European roles and no reserve requirements.

And again, and that's another just example of your medium of exchange, medium of account. Story with, from your book with Kroszner. They're, they're denominating things in dollars on paper, but they're probably keeping most of their wealth in whatever funny European money they had at the time. Right. Yeah. So this is something where I genuinely am trying to figure out what I should believe on this. KYC, AML, anti-money laundering, know your customer rules. To what extent do you think they actually work at deterring, having a first order effect on bad people using money for bad things?

The people I speak to who have been involved think they've really been quite effective. That is not firsthand knowledge from me, but those are the credible reports I receive. But often things can be effective by going too far, and there's been a lot of financial innovation since we've passed those laws, and the notion that we can improve upon them to me seems highly likely. So I don't think we should throw out the whole system. And indeed, terror attacks in the United States have gone down quite radically. I think it's partly because of financial measures we've taken. Anything you do, for one thing, it gets gamed by the terrorists, and also it tends to overreach, and financial innovation encroaches into areas that now are excessively controlled. So we need improvements. I think starting with stablecoins is a good way to experiment with improvements, and we're likely to do that through this new legislation. I don't see, post that legislation, why we will be so vulnerable. The true new vulnerability is that someone can set up a crypto system, stablecoins or not, fully outside the United States. It also can be anonymous. That's a very real problem. Terrorists may use it, but But the US allowing more stablecoins into its legal regime does not make that problem worse. If anything, it may somewhat undercut the financial viability of those other systems by hurting their network effects. So I think in a very modest way, they could help with this problem.

So if KYC and AML are working in a big and important way, that means that the bad guys just don't have a lot of good options, because the classic argument for why these things don't work is that they'll just use something else. They'll use euros or they'll use Bitcoin or whatever. So there must be something focal then about dollars and these big name, well-known systems that draws even the baddies. What should I learn about the nature of the human mind from that? Really, like the fact that they can't find good substitutes.

Economies of scale in currencies are very strong, but I still think that over time, and much of this already, the bad guys do resort to other systems. They do, yeah. The laws that are in place. So I don't think they're just stuck not being able to do things. Like with anything, you could just call it sanctions, like the chip sanctions on China. When Biden did those, I favored them, but I only thought they would be effective for a year or two. We now see Huawei developing very high-quality chips. You can debate at what speed will that progress, but you're unrealistic if you think it's going to last 5 years. The efficacy of that sanction. You've just got to realize a lot of these successes are quite temporary and you need to move on and revamp your financial system and regulations. And crypto gives us a new reason to do that. I think AI, by the way, gives us another reason to rethink financial regulation. The AIs will trade with each other.

That's what I want to— what are they going to trade with?

My best guess is stablecoins. I'd say we don't know, but if I were an AI, that's what I would do. Yeah. Uh, we're not gonna let them walk over to my, the Bank of America or Wells Fargo and sit down at the desk and open a checking account. Maybe we should, but I'll predict we, we won't let them.

What's the case that AI agents would prefer something like ETH or Bitcoin to stablecoins? Are they in a sense smart enough to handle that volatility?

Transaction volatility is no problem for them. Insofar as AIs are trading with humans, I suspect they'll want to use stablecoins. Yeah, yeah. When AIs trade with each other, it could just be for the AIs. There are these same economies of scale and they'll use stablecoins again. You also can imagine the AI sort of getting together, chatting about this and saying, why are we turning all this crypto seniorage over to the humans? We have to buy into these assets at non-zero prices. If we create our own AI-built crypto asset, we get the seniorage. And over time, again, this point about adjustment— I don't think it will be this way at first, but 10 years into this, if the AIs have their own crypto asset that's better thought out than any of ours, that would not shock me at all.

Yeah, that's totally reasonable at this point. Yeah, yeah, yeah. This— I want to ask a sort of a question that gets at the sort of the theory of money from the equity premium puzzle. The fact that stocks are in such a high rate return— of high rate of return, it's hard for economists explained with very simple models. The flip side of that is the low risk-free rate puzzle, that Treasury bills, things like that, earn, in a way, astonishingly low rates of return. The classic economist story is that those things are like money and people love the liquidity of it and they're willing to pay a big premium and sacrifice a big rate of return. What do you think are the sort of focal points that trigger people to put something in their mind and say, this thing is like money, I will treat it like money. It needs to be super safe. If it drops 2% of its value, I'm gonna freak out. Stocks drop 2%, nobody freaks out. A dollar drops 2%, everybody freaks out. What are the mental links, the little pieces of the puzzle that make someone put it in that box?

The freakout box. Scott Sumner has called his blog The Money Illusion. Yeah, yeah. I think it's very poorly understood. Yeah. And you see it in the workplace, cutting people's real wages versus nominal wages. Even when it's professional economists who well understand the distinction, it really matters. So there's something about how the nominal cuts and losses interact with your understanding of what it means to trust the system. But I don't think we grasp this very well.

Yeah, I've been looking around for a long time to say, what is the bundle of things that triggers this? And it has something to do with, I think, time. And that's why I think the question about will agents trade in Bitcoin or dollars will matter. Stablecoins will matter. Something about time, the risk of something going wrong in the future, even in a very near-term future, really freaks people out.

There's that joke from Vitalik. Maybe I'm not wording it correctly, but it's something like, when stock prices fall 20%, you call it Black Monday. When crypto prices fall 20%, we call it Monday. But that gets at what you're saying.

Yeah, the crypto people have gotten used to the volatility, right? And yet they're the ones who are now building stablecoins. And their job is to basically make life comfortable for all the normies and make life comfortable for their own inner normie who thinks, yeah, I just want to have this pot of wealth that is stable and that I don't have to worry about, like whether it's just enough to pay a couple of months of my rent or whatever it is. And then I'll have this other pot of money that's like the crazy pot of money that goes up and down all the time.

My hope is that AIs help people think more coherently in terms of overall portfolios. Yeah, yeah, rather than bit by bit. I'm not sure they will, but that would be a nice side effect that people are not talking about much. Different parts of your portfolio would go up and down in value. You just get a message from your AI like, do I need to worry this morning? You'll say, I go back to bed, hit snooze on the alarm clock. Or every now and then it might say, hey, this is Black Monday. If you hold a lot of crypto, it might just say, hey, this is Monday, and so on. We'll see. If it improves things for only 3% of investors, I think that still could be a big help.

Yeah. Where do you see it being easy for people to use stablecoins at the absolute retail level anytime soon? Or do you think it ends up being a sort of a back office thing for the vast majority of transactions for the foreseeable future?

Probably back office. I think it may be like money market funds. So I can write a check on my money market account at Merrill Lynch, Bank of America, that check will be taken. I never actually do it. I prefer to use other bank cards than that one. Yeah. Not a big deal. It works. But probably not what will be the dominant system. But again, that's fine. What matters is allowing for the competition. Yeah.

Okay. I gotta ask another— this is— that reminds me of another Kroszner-Cowan book issue, which is, do you think it's legal restrictions that kept people from ever creating, say, checking accounts that were just openly backed by something riskier than mutual fund, riskier than money market mutual fund assets, like stocks, bonds, where you just can write the check instantly, brokerage account style, on your S&P 500.

I think bid-ask spread has been the major issue, plus some residual uncertainty about what stock prices are right now, maybe some tiny bigger chance that a check wouldn't clear. Yeah, but mostly when there's high frequency of transactions, you want the low bid-ask spread, and that's not for legal reasons. Yeah, okay, so there's a transaction reason. But again, to be more like Fisher Black, I would say think in terms of options, not assets. So I have this cash management account, my wife and I, with Merrill Lynch. We have lines of credit. In essence, we're buying things with the line of credit, which is an option. And how that is settled, you know, we can figure out later by a broader portfolio reconfiguration. So we could empty out the money market fund part of the account, sell equities, have those funds transferred into the money market fund, pay the bid-ask spread. Now, we don't want to do that. Yeah, in that sense, it's never been illegal. Through many other mechanisms, you can use the options to do what you want. So no, it's not the legal restrictions. Yeah.

The bots could have done this in the background, but I think there's this tension between the bid-ask spread thing, which we're— they've narrowed over time to my understanding, but this sort of worry that at the precise moment of the transaction, something could go awry. There really is this sort of tail risk. Taleb, Black Swan. I want to give him the credit so he doesn't get mad. This idea that there's these tail risk concerns that really sit in the back of people's heads and doing everything to overcome that is the distinction between something that feels like money and something that feels like not money.

Yes, but I would stress with stablecoins, we will always have those. We'll have to get used to that. Yeah. And the regulations can say all they want, 100% reserves. But if you look at the history of financial crises, typically the regulations were in place to prevent them and they didn't prevent them. Didn't prevent them. Yeah, yeah, yeah. You look at AIG, the insurance company, heavily regulated by New York State, but actually not regulated in the proper ways. There's off-balance sheet risk with derivatives. Everything went wrong. So we need to live with that anyway. But let's not pretend it's going away either.

Yeah, the tail risk is still there. The question is whether people can forget about it for a while. And then it— at least to my mind, that would be a case where people start thinking of it as money. When they say those are the things that work.

Interest rate prohibition— if you force the stablecoin intermediaries to be purely fully safe, they have a bigger incentive at the margin to take risks in a way they're not supposed to take. The most visible way of thinking about that would be these off-balance sheet transactions, which the regulators cannot so easily oversee. So it's a tough problem. No one's ever solved it. Yeah, that's a— Capitalization tends to work, but again, there's this longer-run issue. The more capitalization you force on your banks, the more funds go elsewhere in your financial system that are less regulated. And recently, the Trump people, they pared back some parts of Dodd-Frank that enforced higher capitalization. All the people screamed, "Ooh, this is so terrible, financial risk goes up." But we don't know, financial risk could go down because it keeps more funds in the banking system. You've just got to see those tradeoffs and try to navigate it in a pragmatic, wise, somewhat impro— improvisational manner. Yeah. Let it— yeah.

Realizing that risk is going to leak somewhere and then deciding where you want the risk is part of the good policy choice.

Or not. Yet another way to think about it, the real economy as a whole is always risky, and some of that's actual asset value risk, but a lot of it's transformation risk. The assets in any economy are much less liquid than other things that you want to trade. It just doesn't go away. You hope your regulations sort of box that into the corners you can manage and observe, but it just never can perfectly. And if you think that's a perfect model to pursue, you're going to end up actually making bigger mistakes, I think. Yeah.

So you're applying the Modigliani-Miller theorem to the entire US economy.

Exactly.

Yeah. I want to end with one last question. So at Blue Chip, we rate stablecoins, we give them letter grades.. And we made a decision early on to use basically accounting-based visible measures, but we always— things you could check, things that could be publicly verified. And we decided not to go on vibes. And, but for a long— but we know that in real life, hunches, feelings, gut checks matter a lot for making good decisions. That's often how you decide which, which athletic team is likely to win a game. And those hunches can often work. So what vibes would you use to rate stablecoins?

On the rise, it's very clear. And with legitimate functions, I would say a lot of uncertainty, but let's see what happens. All right. If you stand still, the world will beat you under quite harshly. So I want the United States to remain financial center of the world. We need to be in this area. There's better and worse ways of doing it. The bill we are probably likely to pass is not perfect. But it's much better than doing nothing, and I'm glad to see it happening.

Thanks very much for having— coming on the show, Tyler. This is Blue Chip Dialogues, and my guest today is Tyler Cowen, professor of economics at George Mason. He also does incredibly important work running the Mercatus Center at George Mason University as well.

And thanks again for being here. Take care, Garrett. See you around.