Transfers of Wealth and Snake-Oil Promoters | What's Left

by Editors (What's Left) last modified 2017-12-20T10:09:04-05:00
There is something not quite right with the regulation of the financial-technology world. The focus of regulation since the financial crisis was on risk (even if these have since been rolled back). However, the main problem in the end might have not been the high risk, but that the negative consequences of high risk are not borne by those taking the risk.

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After the financial collapse, instead of becoming less risky and speculative, finance capitalists seem to have learned that people are easily manipulated in large groups and the costs of risk can be offloaded to this manipulated public. Now, a lucrative market in type of "pump-and-dump" scams in under-regulated markets that helped support the collapse is in full swing.

These scams are made even more lucrative by advancements in sophisticated social engineering through fake news, social media memes, hive mind tendencies, and a broad misunderstanding of how things like investments, tech, and finance really work.

In many ways, the money being made selling this new type of snake-oil is made possible through this new type of scammer promoting the snake oil. Snake-oil promoters have always operate in the grey market, but have found a new home in "innovative" tech-finance services.

Bitcoin, Uber, Snap Inc., Solar City, Tesla are all -- to different degrees -- part of this nexus facilitating the new scammer culture. To be clear, they are not inherently scams themselves, but have been used by scammers to enable huge wealth transfer from working people to the already rich.

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Hype over The New is common throughout history, but significant parts of Western society are meeting or surpassing caricatures drawn only decades before. The Simpson's monorail episode is no longer funny because it represents exactly what has been going on in the world of tech finance over the last decade. No one wins in the end.

Bitcoin is probably the most hyped new, innovative, product/service/thing being promoted these days. People are talking about it in hushed tones in cafés, online, and at work. When confronted, most cannot describe it or know exactly what it is, but they say the word a lot and they know the hype-generated talking points and how to push back against naysayers.

People have always been inclined to this behaviour -- taking about popular topics in the dominant narrative, repeating them back in conversation with others. It is what "small talk" is driven by. When these conversations are taken online, this self-enforcing narrative are more easily exploited by snake-oil promoters.

It is an old trick, but with new powerful tools.

The use of tools like online chat forums, video sites like YouTube, social media ranking sites, and sophisticated social aggregators like Facebook have been honed by these snake-oil promoters for years. Looking back, the original testing grounds for the perfecting of these techniques were crowd-funding sites. These scams started almost as soon as these unregulated markets became popular.

The crypto-currency trend, currently featuring Bitcoin, might be the crowning achievement of these sophisticated techniques.

Like most pyramid and/or pump-and-dump investment schemes, the system at play is not a new one for large-scale scams:

  1. A legitimate and innovative sounding idea: "You are among the first to hear about it."
  2. A complex system that makes this innovative idea possible, meaning the general public does not actually understand how it works: "People do not know what we know because they do not understand how great it will be."
  3. The way to "win" means getting the most number of people onside: "We just need to spread the word, once lots of people see how great it is, we will be rich."
  4. An exponential growth in value resulting from the short-term fulfillment of the promise: "It's happening, we were right to believe.”

At a fundamental level, the internet is a wonderful thing. However, like all good things that involve a lot of people, the internet is being abused by individuals who see it as an opportunity to make a quick dollar. Pickpockets in town squares, scalpers at concerts, and stock market speculators all have one thing in common, they make money by facilitating the movement of wealth from those who have little to those who have lots. These scams are the reason working people push for government regulation. They are also the reason those in power oppose government regulation: they need the scammers to make their system of power (to make money) operate more efficiently.

A pickpocket in a town square works best when in cahoots with an unscrupulous haggling merchant. Concert scalpers work to drive up ticket prices creating false scarcity. Speculators take money from retail investors by having more information. Unfortunately, new tech bubbles are not regulated to suppress this kind of behaviour.

The floating of the company Snap Inc. (owners of SnapChat) on the stock exchange is a good example of promoters using these new online tools to generate hype to make lots of money and facilitate the wealth transfer from working people to the rich.

  1. The social media threads were full of discussions about how Millennials knew better than anyone about the new technology -- because they used it.
  2. These same folks were taken-in by the promise that this time it would be Millennials who would profit from the magic of the market because of this unique knowledge.
  3. Market value growth was explained as a complex process, but that it was going to work as long as "we all -- and our friends -- buy in".
  4. The explosive financial growth at the beginning helped confirm people's beliefs that they made the right choice, with many investing more -- unknowingly buying stock that more savvy investors were selling.

It all looks like it is working up until the stock value collapses, resulting in Millennial retail investors losing out, while many high value investment firms had accounted for the risk and made money. The end result: a transfer of wealth from less wealthy Millennials to well-off investors.

Similar to a casino, the system is set-up and regulated to keep the people playing and losing. The process repeats itself with any new hyped tech stock, crypto-coins (through initial coin offerings), and other Millennial-focused opportunities for "investment".

This is not to say that all these systems are set-up as scams from start to finish. The fact that many are legitimate makes them more effective for by snake-oil promoters to exploit, but they are currently structured so that people can be scammed openly.

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So, what is the solution?

Unlike in the Tragedy of the Commons, where the right-wing answer is to privatize the commons and reward the scammers, the real answer is public regulation and democratic, constitutional frameworks.

Unscrupulous people will always try to take advantage of those who just want to go about their lives. Luckily, systems that ensure "fairness" work as a strong counter-balance to snake-oil promoters and the powerful elite that benefit from their methods.

The call for socialists and others who do not think people should have to be experts in everything to avoid being scammed is to:

  1. Demand an end to making huge profits through mass transfers of wealth.
  2. Levy a heavy tax on any ill-gotten gains.
  3. Regulate entry into these systems so that wealth transfer is limited to between those who are already wealthy.
  4. Limit abusive behaviour of the scammers by addressing their existence.
  5. Structure regulations so that the system of wealth transfer does not become more efficient through increased scamming by making profit-seekers fund the regulation of their own markets.
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