March 22, 2018

Breakingviews: Facebook leads Silicon Valley to its Minsky moment

by Breakingviews.

Facebook is leading tech to a Minsky moment, much like the one finance faced a decade ago. Since then, Mark Zuckerberg’s social network feasted on burgeoning data and devices, just as banks gorged on easy money. Society’s focus on benefits over risk gave them free rein – until the resulting abuses couldn’t be overlooked. As user trust in Silicon Valley evaporates, regulation beckons, as it did for Wall Street.

The financial crisis showed how boom conditions can make almost everyone complicit. Consumers and lawmakers were too beguiled by the prospect of extending home ownership and driving up household wealth to ask what might go wrong. That onerous subprime loans could trap people in underwater mortgages appeared theoretical enough to ignore.

Facebook, Google, Twitter and Snap have relied on a similar calculus. The benefits of a free entertainment and online community, or in the case of Amazon.com limitless and nearly effortless shopping, enticed consumers by the millions. Few bothered to notice they were handing over data about their relationships and preferences, making them targets for precision ad campaigns – or hostile states.

Market stability can sow the seeds of instability by encouraging reckless behavior, the late economist Hyman Minsky wrote. Lehman Brothers, Countrywide and others collapsed when trust in these financial institutions and their holdings disappeared. Regulators clamped down on lending and politicians enacted new rules, limiting growth.

Reports that a UK political consultancy harvested private data from more than 50 million Facebook users in an attempt to sway the 2016 U.S. presidential election may be that moment the music stopped for tech’s giants. Consumers rightly wonder if free IQ tests in exchange for personal data are the equivalent of a negatively amortizing mortgage.

Tech firms don’t have to worry about bank runs. But Facebook has seen more than $50 billion of its value vaporized. And signs of disappearing trust are multiplying. Advertisers are questioning whether they should be digital counterparties. The number of North American daily Facebook users declined in the fourth quarter for the first time. And the Federal Trade Commission is investigating whether Facebook violated a consent decree on handling user data.

It’s been a stable, upward march for America’s dominant tech giants since Wall Street’s comeuppance a decade ago. They needn’t look far from finance to see what’s in store.

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