The Subprime Crisis and Crypto

Neither this nor any other post on cryptofal.com should be taken as financial advice. It is not.

In a recent op-ed from the New York Times, Nobel Prize-winning Economist Paul Krugman compared the crypto industry and its volatility to the subprime crisis that resulted in the recession of 2008. On the surface layer, it's easy to see how Krugman could speculate such a parallel–leading up to the subprime crisis, predation was rampant and the loans that would inevitably go into default were carefully packaged up into mortgage-backed securities and sold to every corner of the globe. When the shoddily built house of cards fell, those left among the rubble weren’t bailed out like the institutions who were the originators for the loans. The consequences were overwhelmingly felt by the victims.

While Krugman distinguishes that a cryptocurrency meltdown would not be nearly as impactful to the global economy as the subprime crisis, he does say 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.”

The people to whom he is referring are a comparable demographic of those who fell victim to subprime loans. According to his article, “44 percent of crypto investors are nonwhite, and 55 percent don’t have a college degree” drawing the conclusion that crypto is “popular among minority groups and the working class.” Subprime loans were similarly celebrated as giving opportunities to underserved communities, but this is where Krugman’s parallel ends.

Unlike subprime loans, cryptocurrencies may (sometimes) be recognized as securities. They are purchased and held or sold at a profit or loss and do not require a contract or broker to do so. Additionally, almost all mainstream cryptocurrency platforms, media outlets, investors, brokers, banks, and influencers alike will warn of coin volatility. It is a universally understood fact that crypto prices fluctuate akin to stocks so it’s sensible to invest what you can afford to lose.

The same widespread acknowledgment wasn’t true for the subprime crisis. Banks, thrifts, and other financial institutions that brokered the loans were aware their clients would likely default and foreclose on the homes they just purchased. To this point, Krugman says that regulators are making similar mistakes with crypto by not policing the space, however, the predation of subprime loans occurred under the watch of the government and within a centralized and heavily regulated system. 

This type of comparative from such a high-profile and celebrated economist draws attention to the glaring gaps that exist in understanding cryptocurrencies and their utility. Krugman exposes that he, and others like him, “can’t see what cryptocurrencies are good for other than money laundering and tax evasion.” Perhaps the disconnect has less to do with educational pedigree, class, or race and more to do with culture and generational gaps.  

At best, this comparative is lazy and made to grab the attention of those skeptical of crypto, but at its worst this type of comparative is misleading. Yes, cryptocurrency and the industry lack legal clarity and oversight, but if the subprime crisis left behind any lessons, it's that government regulation does not prevent predation.

Furthermore, the fact that such a financial crisis could unfold without punitive action against those culpable exposes how many allies centralized financial institutions maintain within the government. If a call to regulate is what Krugman offers as a solution, better he and those like him take an active stance to understand the industry they criticize and refresh themselves on how the subprime crisis subsequently unfolded before touting their influence.