What is money? It’s a time-honored question in economics, and the stock answers usually involve such phrases as “a medium of exchange” or “a reliable store of value.” But the definition seems increasingly up for grabs in the twenty-first century, as central banks undertake experiments to keep economies stable and cryptocurrency innovators launch new products like stablecoins that promise to upend the fiat money system. Perry Mehrling, a professor of international political economy at Boston University’s Pardee School of Global Studies and the author of several books and journal articles, uses what he calls the “money view” to make sense of the contemporary monetary landscape. On this episode of Risk Talking, Mehrling joins Allison Schrager to discuss how understanding the basic features and hierarchy of money can help us understand the cryptocurrency crash of 2022.

Audio Transcript

Allison Schrager: Welcome to Risk Talking, a podcast about economics. I'm your host, Allison Schrager, and I'm delighted to be joined today by Perry Mehrling. Perry is a professor of international political economy at Boston University's Pardee School of Global Studies and the author of several books and journal articles, including the forthcoming Money and Empire: Charles P. Kindleberger and the Dollar System. He's taught for 30 years as an economics professor at Barnard College and he's an advocate of what he calls the money view. It's a way of explaining the monetary landscape and its central role in financial markets. And I've been wanting to speak to him for a long time. Really, just because, and I've got to be honest here, I don't really understand anything about crypto. I don't know why it exists, I keep waiting for it to go away, but it won't. I'm not sure what value it serves, what purpose it has. And I can't think of a better person to talk to about this than Perry, because he is an expert on what money means and its role in the financial system. And I'm glad I waited because this is a particularly good time to be speaking with him.

I would've expected, I was always told, that the role of crypto and why it's so useful is that it was an alternative to the currency that we were debasing. Well, I mean, we just printed a lot of money to give everyone checks and now we have really high inflation. So you would think this would be crypto's time to shine, but really the opposite is happening. So I can't think of a better person to explain to us exactly why this thing exists and what's going on and how it fits into this larger system. And if this is the end or just a blip in crypto's trajectory and being a big part of our lives and part of the financial system.

So if nothing else, hopefully you'll walk away having a better and deeper understanding of the global financial system, in addition to maybe now understanding what crypto is all about. So thank you so much for joining us, and welcome.

Perry Mehrling: Happy to be here, Allison.

Allison Schrager: So to get started, let's just sort of explain to listeners your framework of how you think about the global financial system and money. I know that sounds like a lot, but you do have something I find very useful when I think about things: a very sort of neat logical framework that really sort of well explains everything. You call it the hierarchy of money. And we think of money as just something in our pockets, or even our credit cards now, but it's really part of a much larger financial system. Can you please explain it to us?

Perry Mehrling: Yes. The hierarchy of money is a good place to start because it emphasizes the qualitative difference between money and credit. That credit is a promise to pay money, and money is a way to cancel credit or to cancel debt. So, money is better than credit. So the second piece of that is to appreciate that what you and I experience as money is actually the debt of banks, in typical. So it's promises to pay other banks, but we use it as money to cancel our own debts.

So there's the hierarchy in practice. Whereas banks use the debt of central banks to cancel debt to other banks. So there's three layers of the hierarchy, already. And you asked about the global system. There is international version of this at all as well, which is that the global system is basically a dollar system. So, the dollar is hierarchically superior in this system to other currencies. And there are various layers of that as well. It's not just the dollar and everyone else, but the dollar and the Global North, and then the Global South, and they're keyed into the system in different ways and backstopped in different ways. And you mentioned crypto. Crypto is actually not keyed into the system, sort of at all. It's the newcomer. And it had, as you say, the ambition to replace all of this, which is being stress tested right now.

Allison Schrager: So when you say better, you mean less risky, more widely accepted?

Perry Mehrling: Neither of those things. What I mean is that the hierarchy is about a means of payment. In the money view, which is what I advocate for, the central defining quality of money is that it is a means of payment, meaning a means of settlement. That if you have a payment due, this is the most acceptable form of payment that there is. It may be that your creditor is willing to accept something else or that your creditor is willing to roll over your debt for another day, but not necessarily. If they insist on payment, then they get to choose what it is that counts as payment. And that's quite different, Allison, from other ways of thinking about money. I know you yourself are an economics PhD, and so you may be aware that most of economics and finance sort of abstracts from the payment system, abstracts from liquidity provision, and so does crypto. So I think in a certain way, crypto and the mainstream economics have a similar problem that they have an inadequate theory of money.

Allison Schrager: I mean, one, I think, weakness of economics is it doesn't really adequately integrate the financial economics, which sort of in some ways, sounds similar to what you're saying, which is different assets have different risk profiles and that makes them more or less valuable. How is this different?

Perry Mehrling: Well, the kind of risk that is analyzed in asset pricing in financial markets, which I think was your specialty, is sort of variation in value. So fluctuations in value. And the ability to buy and sell these assets for money, is what's up being abstracted away from, so it's fluctuations in value. Now, the money view has a contribution there, however, as well, because thinking about the world as a series of promises to pay going into the future, that's what financial assets are. They are promises to pay going into the future. And there is some question about whether they will or not, and there's default and possibility, but the question is, what are those promises worth now? If you wanted to convert them to money now, how does that work? And that works through the dealer system. Through dealers who are willing to take these assets you want to sell onto their balance sheet and give you money for them. So that settlement aspect is important for maintaining the price of those assets as well. If no one is willing to give you money for them, then their value is zero. Even if the future payments are completely certain. If no one is willing to give you money for them right now, you can't sell them.

Allison Schrager: I see. So you, when you're describing this hierarchy, also talk about the role of credit. I mean, in fact, I think credit is actually central to this. So, credit conditions change a lot and that also adds a lot of financial fluctuations. So, I mean, where do you see the world right now, especially with the role of money with rising inflation?

Perry Mehrling: Well, so credit is a promise to pay. And as I mentioned before, if you're facing a binding settlement constraint and you don't have money, one way to keep from getting eliminated from the system is to roll over that, is to borrow short term in money markets. That is to say, I will pay you today with a promise to pay you tomorrow. Is the elasticity of the system. And in boom times, the system is very elastic. It's very easy to roll over promises. What we're experiencing right now, and we have been in elastic times basically because of the pandemic. You were mentioning that all of these constraints were relaxed by the official authorities, by the Fed, but also by every other central bank in the world. And we are shifting now into a discipline mode where the settlement constraint is binding. And we're finding out where the weak points of the system are. So we're moving from elasticity to discipline. And you mentioned before about crypto. So crypto is now being tested. That's the stress test. In global liquidity, we're discovering that actually the weakest point in the global system is in fact crypto. That's what's failing first.

Allison Schrager: So, I mean, what does that say? I Crypto, you said, is outside the system. You said it's an alternative to the system. So I mean, why is it failing, then?

Perry Mehrling: So there's a link between the crypto world and the money world I was describing, and that link is stablecoins, which are promising a par relationship with the U.S. dollar or with other currencies, but most of them are promising par with the U.S. dollar. And it is a kind of crypto, the stablecoins, but it's a bridge. It's a bridge between crypto world and our world. It has played an important role in the evolution of the crypto world in the last couple years.

When I first started looking at crypto when I was teaching at Columbia, and Bitcoin was coming up, and it was promising to be this outside money, this sort of digital gold, an outside money that was nobody's liability, I wrote a little blog post saying, "This is never going to go anywhere because credit is a feature, not a bug." And the original creators of crypto were trying to get rid of credit. They were trying to make a system in which you didn't have to trust anybody. And I said that's never going to work. Monetary systems are inherently credit systems. Since I wrote that, the crypto world has become all about credit. But it's promises to pay stablecoin, that are at the core of it.

So this hierarchy that I talk about in the world we live in is also a version that has been built in crypto world. Where all of DeFi and all of that, that's the credit sort of layer. And stablecoin is intended to be the reserve asset in crypto world, that if you have a gain in your speculation on Bitcoin or something, you can convert it into something that claims to be a dollar, and so you can realize that gain in stablecoin.

The problem comes if you want to realize that gain in actual dollars, that is convert the stablecoin into deposits in the U.S. banking system, say. Because the stablecoin issuers do not have large quantities of reserve assets. They may have, in fact, almost none. And they rely on new money coming in in order to pay redemptions, largely. And they certainly have no access to the discount window at the central bank or anything like that. And so they have to sell crypto assets that they might own in order to sell them for real dollars, if they want to raise assets. And that's the kind of thing that has been causing the fall in Bitcoin prices, for example, because that means somebody has to buy it with actual dollars, not just with stablecoins.

Allison Schrager: So, effectively, did stablecoin just bring crypto into your hierarchy with money at the top still?

Perry Mehrling: Well, in terms of the hierarchy, stablecoins are above most other crypto assets. In my framework, I would treat stablecoin more akin to the offshore dollar system, where there's Euro dollars that are promises to pay dollars, but they're issued by European banks, which have no explicit backstop from the Fed at all. Okay. That evolved over the last 30 years, this offshore dollar system, they're promising par, right, deposit accounts at Deutsche Bank, or promises that are in dollars or promises to pay dollars. And so maintaining par between the offshore dollar and the onshore dollar is a serious problem. And they have to have mechanisms for that.

The crypto world is now confronting that same fact, that stablecoins are like offshore—let's call them cloud dollars. Okay. And they have basically made very inadequate provision for maintaining what they're promising. It's not even clear that they're promising in the sense that can you actually take them to court. Particularly in DeFi, where it's not clear who you would ever sue in many of these mechanisms, so it's analogous.

So just as I said stablecoin within crypto world is analogous to bank notes in Wildcat banking in 19th century United States, you could also think of them as offshore dollars or cloud dollars in terms of relating to the dominant monetary system, the dollar system. And there, the question is par, whether you have the ability to defend par or not. And we've seen that, of course in various ways, and some of these promises to pay have gone away. They were empty promises.

Allison Schrager: Yeah. If people weren't losing money, this would actually be sweet. It's like all these crypto optimist are just discovering banking or learning what we learned studying Kindleberger, it feels like. I mean, aren't these just like old fashioned bank runs?

Perry Mehrling: Well, so they are a bank run. I would agree with that. Let me divide that into two pieces, though. One piece to appreciate, which we haven't mentioned yet, is that there's more than one kind of stablecoin. So, one bank run is happening entirely in crypto world, which is a run from bad stablecoins into good stablecoins, as perceived. So the money that's fleeing from Terra might be fleeing to Tether, okay. Or the money that's fleeing from Tether might be fleeing to USDC or something. And so that's what's happening is a shakeout in this crypto world. Which are the good stablecoins? Which are the bad stablecoins?

That's very similar to what happened in Wildcat banking in U.S. history, where the good banks tried to challenge the Wildcat banks, which were promising to pay dollars by insisting that they redeem their bank notes in actual reserves, in actual gold. And when they couldn't, they had to close. So the whole term Wildcat banking comes from the idea that they set up these banks out in the middle of nowhere where the Wildcats are, so that it was very difficult to bring the notes to the bank for redemption, because they're in the middle of nowhere. Well, these Wildcat banks in crypto land are in the cloud. And so we are finding out how easy it is to redeem these notes or not. So that's one aspect of the bank run that's happening. It's happening within crypto land, it's happening from one stablecoin to another stablecoin.

There's another kind of run, however, which from the point of view of the global system, is more important. And that's a run from stablecoin into actual U.S. dollars, into bank deposits, mostly. And that's what's breaking par between Tether and the U.S dollar and others. The question then becomes what assets do these stablecoin issuers have to make good on their promises of par redemption in U.S. deposits? So, that also is a bank run. If you think that the stablecoin might break par, okay, then of course you want to be the first out the door to get almost par, to get 99 cents on the dollar instead of 10 cents on the dollar, which the later redemptions will be forced to accept. And that has happened to some extent.

So we've seen two things. One is that the value of crypto assets like Bitcoin has fallen by 50 percent or so, depending on which crypto asset you're talking about. The other thing that's happening is that the quantity of stablecoin has been reducing. So that means there's redemptions. The quantity of stablecoin outstanding, which are pegged to the dollar, has been falling. That means that on net, there are redemptions out of crypto land into what I call real dollars. And that's putting stress, that's discipline, that's settlement. That's the discipline that the crypto land is experiencing right now. So, that's the sense in which it's a stress test. It's a bank run, yes.

Allison Schrager: So what kicked this off? Was this inflation? Was this just an asset bubble that all of a sudden people lost confidence in? How does any bank run start?

Perry Mehrling: That's worth study, and it's an important question. In my own hypothesis, which I said at the beginning, this has to do with the shift of U.S. monetary policy, believe it or not. That the liabilities of the Fed are the best money in the global system. And those liabilities are becoming scarcer in the sense that monetary policy is becoming tighter, that interest rates are rising, the short-term interest rate is rising. So, the cost of rolling over your promise to pay is rising. Crypto, a number of these stablecoins, were fine when basically we had zero interest rates in the dollar system, the real dollar system, and there were zero interest rates in crypto land. They looked competitive.

Now there are positive interest rates in the U.S. dollar system. And I think that is what's putting stress on the global system where we are creating discipline, where it's becoming more expensive to roll over your payments. And so people are saying, I want out. I want to cash in my chips. I made money in crypto land. Let me now use it to pay off my mortgage in real land. And that's a withdrawal, that's a redemption. Those kinds of stresses are what is driving all of this. So I do think it has to do with monetary policy and the signal that Powell has been giving, that this is not a short run thing, that we're really going to see this through.

Now, you asked if this was about inflation. I believe that the decision to move from elasticity to discipline mode happened before there was actually recognizable inflation. In fact, before the pandemic, the Fed was trying to start to move from the elasticity, which was the response to the global financial crisis 10 years before. And it was trying to make that shift. The pandemic put all those plans on hold, but after two years of the pandemic, those plans were revived and the Fed was moving in that direction. Inflation, in some sense, has provided some political cover for that, that now everyone's worried about inflation. So it's actually much easier to raise interest rates politically than it would've been if there was no inflation.

Allison Schrager: So, what set this off, this stress test? Why is stablecoin experiencing this run? I guess the question is, why does any bank run start? Why is the price of crypto falling? Why is stablecoin under stress? All bank runs start with something, but what's going on here?

Perry Mehrling: Well, to some extent, I think you can understand this as the collapse of an asset bubble in crypto world. That asset bubble has been fueled by the very, very easy monetary policy in the real world where we live, which people didn't have lots of money that they didn't know what to do with. So they were flowing into crypto world where they were promising 18 percent return on things that looked like deposit accounts. And I heard some very sad stories about people taking out home equity loans in order to earn the differential between the equity loan and this 18 percent in crypto land. So in elasticity mode, there was a bubble that was fueled in crypto land, and the shift in the real world from elasticity mode to discipline has moved that in reverse now.

In the last couple of months, that's what we have seen, that people who have gains have been cashing out and trying to get dollars again, and people who have losses are getting margin calls and are forced to liquidate at any price. So, there's a bank run happening inside crypto land. That in itself is isolated from the real system. The part I want to draw your attention to is the flow of funds out of crypto land.

Just as when U.S. monetary policy was elastic, funds were flowing into crypto land, and that was fueling its asset bubble, now, when Powell is raising interest rates in the United States and we're restoring discipline in the real world, money is flowing out of crypto land, and the asset prices are falling, and stablecoin issuers are going bankrupt, and there's these collateral calls. So it's a wider stress test of the whole crypto land apparatus. The credit that has been supporting these asset prices and the stablecoin-par relation. It's a stress test of the entire thing—this parallel in the cloud banking system that's based on stablecoin, and it's responding to that stress test in a way that makes you realize they’ve got a lot of work to do. It's pretty fragile.

Allison Schrager: Yeah. Maybe this is just me, but I feel like part of this was being sold as, this is a safer alternative to this dollar we’re debasing. Stablecoin—the word stable's in it, which I guess should always be a red flag—sort of sold itself as a safe alternative, but could this ever be as safe as the dollar, when you have what effectively are these little banks that don't have access to the discount lending window? They don't have FDIC guarantees. I mean, isn't this just always inherently going to be more risky and therefore sensitive to credit conditions?

Perry Mehrling: Yes. I'll just stop there. You said it well.

Allison Schrager: So what purpose does crypto serve? What was wrong with the dollar? Why did we need an alternative?

Well, that's a very interesting question. Maybe that's a sociological question. I think from an economic point of view, from my point of view, at any rate, I would say there are discontents with the dollar. The hierarchy of money is something that people at the bottom of that hierarchy aren't very happy about. Those discontents create a sort of eternal demand for alternatives, and a group of people who are discontent and therefore vulnerable to people trying to sell them on false promises. But I think that's an economic origin, but then sociology sort of kicks in, and by buying crypto, you're sticking it to the man or whatever.

So the people who are losing money in this are actually some of the most financially vulnerable in our society because they were snookered into this. They were snookered in by people who made money at their expense, because the ability to get your money out of crypto depends on money coming into crypto. So advertising and attracting new money allows the whales to cash in for real dollars, and since they got their Bitcoins at 10 cents, even if Bitcoin falls to $20,000, they have huge profits. So that's one of the reasons why crypto has stabilized a little bit, because there are still people who want to keep the game going.

But stablecoins are basically casino chips. When you go into crypto land, you buy these chips and you use these chips to play these wonderful games inside the casino. The question is, if you even have a win, can you cash these chips out? Or has somebody been to the casino cage before you and taken all of the dollars?

Allison Schrager: So it seems like some of the problem is this introduction of stablecoin. One issue with crypto was that it was so volatile, so it couldn't really be used as a currency. I guess stablecoin was supposed to solve that problem. But as you point out, now you're integrating it into our monetary system, and this whole credit issue comes along, and it exposes what a risky asset it is. So if stablecoin is the problem, could crypto just exist and provide value as this sort of standalone thing where there is no credit, it's just money? Is that useful? Is that workable?

Perry Mehrling: Well, there's a more general question. What's going to happen to all this stuff that's been built up? Not just Bitcoin and other crypto assets, but also the whole protocols, and DeFi, and all that stuff. I am impressed by the argument of another former student of mine, Daniel Nielson on his blog, Soon Parted—as in money and a fool are soon parted, that one way to understand what's happening in crypto land is that this is a kind of sandbox for experimentation with these new sorts of technologies, and blockchain, and all that stuff. What's probably going to happen is that some of these things will migrate into the real world.

So, we will get central bank digital currency, and we will get J.P. Morgan Coin, and so forth. So that the things that are useful will find a home, not in crypto land, but in non-crypto land. That will be true of the protocols, that will be true of the digital assets themselves. That process of migration is happening now. You can see with all the discussion about CBDC—and J. P. Morgan Coin is a thing already—then we will see people will have a choice. Do you want a digital currency that is inside the regulated dollar system? Or would you prefer one where you have no idea who to sue if it fails? I think people will see the logic of that decision.

Allison Schrager: Yeah. Regulation is useful. FDIC guarantees are useful. So, I guess people will see why we want all those things, and they're very nice. You talk a lot in the monetary hierarchy about the role of market makers and how critical they are to making the whole system work well. There's been a lot of technology in recent years to make market-making more efficient that's brought down spreads, especially a lot of the high-frequency trading. So in some ways, do you see sort of the blockchain as just maybe potentially helping the monetary hierarchy and this whole system work more efficiently?

Perry Mehrling: Well, the logic of money is a thing. We know a lot about it from the dollar system, and how it works, and how regular old dealers work in the stock market, and in the bond market, and so forth. There's a particular sort of theory of the dealer function that Jack Treynor developed that I've used a lot in my work that speaks about the dealers as making the inside spread, i.e. the bid-ask spread, and value traders making the outside spread. So if the dealers run out of balance sheet, where do prices move?

What's going on in DeFi is they've created these automated market makers where, as there's imbalance between demand and supply, the price moves automatically. In fact, the outside spread in those kinds of protocols are zero in infinity. As we've discovered with Terra. That in fact there is nothing nailing down the value of this if it comes under stress. So we've learned that that's not a good way to make markets.

Those of us who know how markets are made in the real world always knew that was not a good way to make markets, but there's learning been going on, I think in crypto world and pain and sadness. That's painful, but the learning is useful because we're trying to find in that sandbox, is there anything there that could make the financial system in the real world more efficient, or help us with cross-border remittances? Which are currently very inefficient and expensive, and other such problems. There's lots of problems. When you discover something like that, then there's a profit to be made in the real world, and so it will be adopted in the real world.

Allison Schrager: So I feel like my line about crypto, which is a lot of people's lines about crypto who don't understand it is, well, I don't believe in crypto, but I believe the blockchain is valuable. So it sounds like that might be true, but in that case, does crypto as a commodity in itself have value? A technology and a commodity the same thing?

Perry Mehrling: Well, I think that an outside money—let's just say Bitcoin, which is an asset that is nobody's liability. Well, a hundred years ago we had an asset. We were building our international monetary system on an asset that was nobody's liability, i.e. gold. But in fact, if you look at how the sterling system worked, the important part of that system was not so much the gold reserves. It was in fact the sterling balances at the Bank of England and other of the banks at the core of the global system in London.

Similarly, we kept that gold thing in at Bretton Woods, and when we leaned hard on it, the gold part just collapsed in 1971, but the dollar went from strength to strength, and the dollar has gone from strength to strength in this pandemic

That tells you that the market wants dollars. It's not the US government that is driving this. It's the users of the currency that are driving this and they want dollars. Now, you ask about the technology of blockchain. There's permissioned blockchains and non-permissioned blockchains. I think the world does not want mining. This particular way of validating transactions seems incredibly expensive and inefficient. And so it probably has no place in the real world. But there are permissioned blockchains and that possibly does have a place in the real world. And this technology is not something that I'm an expert on. What I'm an expert on is how money works. So what you will see once all the dust is settled is something that looks a lot like the system we have right now in the real world. What you would learn if you took my online course will be valuable to you, even as the world has changed.

The world has changed a lot since it was filmed 10 years ago. But the basic principles, I think, have been borne out, and I think they will be borne out in the next 10 years too, as we figure out what place this new technology has in the real-world monetary system.

Allison Schrager: Why has the dollar stood the test of time? Why is it proving to be more valuable than gold? I can see why it's proving to be more valuable than crypto, but even with high inflation, the dollar has never been higher. What explains the dollar’s appeal?

Perry Mehrling: So, go back to the hierarchy and remember I made the distinction between credit and money and seeing money as a means of settlement. And so your question is, "Why is the dollar the best means of settlement? Why is it chosen by traders and merchants?" Some of this has to do—we haven't even touched on this—with globalization and the globalization of supply chains, and of trade, and so forth. And the rise of shadow banking, even—my definition of shadow banking, meaning money-market funding of capital market lending. So you have a global trading system, and what you need for a global trading system is a global money. And what gets chosen as the global money?

Now, there's certain network externalities that mean once you've chosen something, everyone wants to choose the same thing, because you want to be part of this game. You want one money. One money is a global money, not multiple monies, and they've chosen the dollar. So you could tell a little historical story about how the dollar was once the best money and that has sustained itself. But I think it's even stronger than that, okay, that what makes for a good money is an agent. Any agent in the society that has structural cash flow surpluses, so that more payments are being made to that agent then that agent is paying to other people, okay. You can see how any agent like that, their own liabilities, promises to pay, would be acceptable as money because you have to make a payment to that person anyway. You can always make a payment to that person by giving them back their IOU.

And so you need to look at the flow of cash between the dollar system and the rest of the world and see the patterns of inflows and outflows. That's what supports the value of the dollar, and that's evolved over time. It used to be something that had to do with the balance of payments of the United States. And that's why people were freaked out in the late '60s when the current account of the US went into deficit and so forth. They thought, "Oh, that's the end of the dollar." No, that turns out not to be true because it's not just the current account. It's also the capital account.

People want to hold dollar assets, they want to buy dollar assets. And the '70s proved that. The dollar got reinstated as the global system. This is what my new book talks about, the vicissitudes, the ups and downs of the dollar system, as it reaches beyond the U.S. as a nation first to Europe, then to Asia, and after the global financial crisis, basically to the Global South. So it is a more global currency today than it's ever been, actually.

Allison Schrager: So it seems like it would've been a bad time to decide that you were going to launch an alternative to the dollar. It seems pretty audacious to think that you could launch this alternative currency and it would take hold when the dollar has never been stronger.

Perry Mehrling: I'll accept that. But remember the little sociological theory that I proposed that it's the discontents who are doing this launching, who are providing the demand for this thing. And it is basically people who know how the system works but are willing to exploit these discontents who are providing this alternative. And if the dollar is stronger than ever, the discontents will be stronger than ever. So that sociological pressure makes a certain sense, sociologically maybe, or even economically. As globalization brings international hierarchy, which, before there was globalization, you could imagine the Westphalian sovereignty. Every nation has its own currency. They're all equal, one nation, one currency. You can't see that anymore. There's a global currency, and the politics of that are difficult to work out. And the people who are not near the top are not so happy about it.

Allison Schrager: I read a quote by you that said, "Every generation has to figure out the financial system, because the world's always changing. So you have to update your views. You can't just rely on history." But it seems like when it comes to crypto and stablecoin, a lot of the history was there. Maybe I was always skeptical because I'd read a lot of Kindleberger at one point in my life. Do you think a lot of the lessons were there and they just weren't heeded?

Perry Mehrling: Yes, I think so. It's not surprising to me that crypto is having struggles facing this stress test. It was surprising to me that it did so well for so long, actually, because I was looking through the asset bubble to the ultimate conclusion. So I never made any money on crypto, I never lost any money on crypto because I never actually joined the game. I didn't buy a single casino chip. I didn't drop into any slot machine or play any of the blackjack games because I didn't think they were going to last. And it occupies attention, and I'm a professor. I want to write books. I don't want to be speculating. So this would be very distracting. And it was very distracting for very many people who are now going to have to find something else to do with their lives. And that would be quite good for the economy, I think. Casinos do not produce value.

Allison Schrager: So you think this is the end, maybe it won't go back? This isn't just a blip, this is really the end?

Perry Mehrling: I don't know. As I say, I underestimated how long it would last. And there are certainly strong forces that are interested in keeping it alive for a while and bringing in new money. So I don't know if this is the end of it. It could have another bounce. It surprised me before. But I would be very surprised. But what I say is, the migration of all the good things that were developed in DeFi into the real world—I think that process is already ongoing and 10 years from now it will look different than it does now. And so the use case for crypto, which has always been rather dubious, will become even less because why do you need a sandbox that's separate from the real world if you actually have a sandbox in the real world?

Allison Schrager: So I think we'll leave it here. This has been fascinating. As I said, I still don't understand why crypto's a thing, but now I feel more confident in my confusion, or justified. So that is all, Perry Mehrling. You can find a link to his work on the City Journal website, including many of the references he made here. And you can also find City Journal on Twitter, @cityjournal and on Instagram, @cityjournal_mi and Perry is on Twitter, @PMehrling. And as always, if you like what you heard on this podcast, please give us a five star rating on iTunes. Perry, thank you so much for joining us.

Perry Mehrling: You're very welcome. It was enjoyable.

Photo: piranka/iStock

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