- Crypto has a lot of parallels with the subprime mortgage crisis of the late 2000s which led to the greatest economic disaster since the 1930s.
- This is according to Paul Krugman, a Nobel-winning economist who believes that the crypto bubble will burst soon and millions of people will lose their investment.
The 2007-08 financial crisis was one of the worst economic events of the past 7 decades and the worst since the Great Depression of the 1930s. And according to one famous economist, the current crypto-economy has great parallels with this disaster and millions of people will lose their investment once the bubble bursts.
Paul Krugman, a Nobel Prize-winning economist has given the ominous warning in an op-ed for the New York Times. He claims the crypto market is similar to the subprime mortgage crisis, which is what triggered the ’08 Great Recession.
Krugman is an American economist who won the 2008 Nobel Memorial Prize in Economic Sciences for his work on the New Trade Theory and New Economic Geography. He has been a professor of economics at distinguished institutions including MIT, Princeton, and the London School of Economics.
In his opinion piece for the NYT, he claimed:
Well, I’m seeing uncomfortable parallels with the subprime crisis of the 2000s. No, crypto doesn’t threaten the financial system — the numbers aren’t big enough to do that. But there’s growing evidence that the risks of crypto are falling disproportionately on people who don’t know what they are getting into and are poorly positioned to handle the downside.
Risky investment for the least sophisticated investors
Krugman believes that cryptocurrencies are taking on the same path that the subprime mortgage sector took – complicating basic products for the least sophisticated investors who can’t comprehend just how much risk they are taking on.
In the 2000s, the U.S financial market was at its prime, leading banks to become more reckless and lend to subprime borrowers, or clients with low creditworthiness. It was under the assumption that the housing prices will always go up and they can recoup their investment. From 1980 to 2007, housing prices had gone up 130 percent. But the bubble burst, starting in 2007 and the effect was disastrous.
Krugman is warning of a similar phenomenon with crypto. He believes that the crypto bubble will burst and many will be left holding worthless tokens. But crypto, unlike the ’08 crisis, won’t take down the entire economy.
Crypto is unlikely to cause an overall economic crisis. It’s a big world out there, and even $1.3 trillion in losses is only about six percent of U.S. gross domestic product, a hit that’s an order of magnitude smaller than the effects of falling home prices when the housing bubble burst.
Unlike investors in stocks who are predominantly white and college-educated, 44 percent of crypto investors are non-white and 55 have no college education. While this is celebrated and seen as giving investment opportunities to minorities, Krugman believes it’s because this group of people can’t comprehend the amount of risk they’re taking on.
“But I remember the days when subprime mortgage lending was similarly celebrated — when it was hailed as a way to open up the benefits of homeownership to previously excluded groups,” he wrote.
It turned out, however, that many borrowers didn’t understand what they were getting into.