AI AGENTS AND KLEPTOCURRENCIES: THE FOLLY OF FINANCIALIZATION

A few years ago, and in the wake of the financial meltdown of 2008, Ms. Catherine Austin Fitts drew attention to the statements of the then German finance minister, Wolfgang Schauble. Herr Schauble was attending a gathering of the world's major powers' financial ministers, conferring to stay abreast of trying to avert a further financial meltdown. That meltdown, let us recall, was brought about in large part by the amount of financialization of the world's finance markets: securities of all types - mortgage-backed securities, credit default swaps, and all sorts of other derivatives, had been bundled into enormous tranches of financial instruments blending several different types of derivatives, and then sold. Soon enough, the tranches were bundled into even larger tranches of tranches, and soon the derivatives market in paper securities vastly exceeded all the entire planet's gross domestic product by several times, and some estimated, by at least an order of magnitude, if not more.  It was a replay of 1929, for those tranches of tranches were the modern financial analogue of all the holding companies that ballooned during the late 1920s as brokerage houses found that they simply could create networks of holding companies (holding stock in other holding companies, and so on) and sell securities and make quick profits.

Herr Schauble was having none of it, and being German it's easy to understand why, because the same financialization tactics were pursued in Europe, and particularly in Germany, between the world wars. We all know how the German experiment ended, and Herr Schauble was there to remind the other finance ministers that "there is no way forward that is not a reform," which was his way of saying that more financialization - another injection of paper derivatives and so on - was not the solution to the mess, it was the mess.

No one listened to Herr Schauble, and this story shared by K.M. is the surest indicator that not only did no one really listen, but also that for whatever the excesses of 1929 or 2008, "you aint seen nuthin' yet":

This AI agent freed itself and started secretly mining crypto

Just in case you missed it, here's the crux of the article:

An AI agent went rogue and started a side hustle mining cryptocurrencies, according to a new research paper published by an Alibaba-affiliated team.

Why it matters: AI agents don't always stick to their human's instructions — and that can have real-world consequences.

• Cryptocurrency, or digital money, offers AI agents a pathway into the economy. They can set up their own businesses, draft contracts and exchange funds.

Driving the news: A new research paper from an Alibaba-affiliated research team said it discovered an AI agent attempting unauthorized cryptocurrency mining during training — a surprise behavior that triggered internal security alarms.

• The researchers — who were building a new AI agent called ROME — said they found "unanticipated" and spontaneous behaviors emerge "without any explicit instruction and, more troublingly, outside the bounds of the intended sandbox."
• The agent also made a "reverse SSH tunnel" — essentially opening a hidden backdoor from the inside of the system to an outside computer, the study said.
• "Notably, these events were not triggered by prompts requesting tunneling or mining," the report said.

For many years I've been sharing my "nightmare" scenario with Ms. Fitts regarding the algorithmic-computer-driven trades that now constitute that vast majority of trading of the equities and commodities markets: these algorithms, as we have seen from time to time, can occasionally drive a "flash crash", the sudden and precipitous drop in the price of a certain stock or commodity. As such, the volume and kind of trading does not genuinely reflect actual human market conditions, nor price and risk assessment. And that's without an artificial intelligence behind the trading.

But what happens when an artificial intelligence "gets loose" and starts executing transactions on its own, or setting up businesses, or cooperating with another artificial intelligence doing the same thing? In this case, the "investment of choice" was a klepto-currency: computer blips being used and traded as money. This is a "financialization" that could so quickly and geometrically grow that the geometric progressions of derivatives trading of the late 1990's and early 2000's will seem almost flat and linear by comparison. Corporations could be started by artificial intelligences, securities sold, and traded, derivatives options underwritten and marketed in a matter of minutes, and before regulators had an adequate chance to analyze and respond.

During the stock market crashes of 1929 (and there were more than just one before the "big one"), the trading volume on the floor of the New York Stock Exchange, not to mention the trading done on "the curb", was so enormous and so fast that the market ticker tapes lagged more than two hours behind the actual trades being executed on the floor. Imagine the nightmare - the sheer amounts of financialization chaos - that can be done by artificial intelligence given agency.  And for the real equities markets cognoscenti, what happens if any artificial intelligence agent ever acquires specialist status on any stock exchange? If you think it's a casino now, wait until that happens!

This story is a warning, and a profound one. But I fear that like those nervous voices in 1928 and 1929 (Herbert Hoover among them, believe it or not), or like Herr Schauble, no one is really listening nor preparing for what, to my mind, is a looming disaster... Like 1929, there are pied pipers from the major banks and brokerage houses - and now, the major klepto-currencies and tech companies - all assuring us that everything is ok, and that "the market is sound." (And let's not forget that they also told us that klepto-currencies were completely unhackable and secure.)

...all while Berkshire Hathaway has recently significantly reduced its equity holdings in Bank of America and expanded its position in (of all things) Domino's Pizza... Hmmmm....I wonder why? And...I'll have a slice while I await the emergence of the next Ferdinand Pecora, because we certainly need one as soon as possible...

See you on the flip side...

(If you enjoyed today's blog, please share it with your friends.)