Crypto collapse has 'echoes of the subprime crash,' says Nobel laureate: Risks 'disproportionately' fall on those 'who don't know what they are getting into'
By Frances Yue
Economist Paul Krugman, a Nobel laureate and a longtime crypto skeptic, said he is seeing "uncomfortable parallels" between cryptocurrencies and the subprime crisis of the 2000s.
"There are disturbing echoes of the subprime crash 15 years ago," Krugman wrote in an op-ed in the New York Times on Thursday.
Crypto isn't big enough to cause an overall economic crisis, Krugman conceded. That said, he explained that the recent downturn, where the crypto market has lost about $1.3 trillion in market capitalization, equal to about 6% of U.S. gross domestic product, has had damaging effects on those who can ill-afford to risk big losses. "That's an order of magnitude smaller than the effects of falling home prices when the housing bubble burst," Krugman wrote.
The economist said the risk of a crypto collapse are landing "disproportionately on people who don't know what they are getting into and are poorly positioned to handle the downside," Krugman wrote.
As the crypto market goes down and bitcoin loses 50% of its value from its all-time high, Krugman said the losses are borne by minorities and financially disadvantaged groups, citing a survey that 44% of crypto investors are nonwhite, and 55% don't have a college degree.
Krugman compared the impact of crypto declines on marginalized and less-affluent Americans with the subprime mortgage-lending crisis, which was initially celebrated for opening up benefits of homeownership to previously excluded groups. However, "many borrowers didn't understand what they were getting into," Krugman wrote.
"If you ask me, regulators have made the same mistake they made on subprime: They failed to protect the public against financial products nobody understood, and many vulnerable families may end up paying the price," he wrote.
This isn't the first time Krugman has written on the nascent digital asset sector. He referred to crypto as a Ponzi scheme this past May and back in 2013, he wrote an op-ed titled "Bitcoin is evil," making the case that it doesn't have any legitimate purpose.
The Nobel laureate has previously been lambasted for forecasts that didn't pan out. Often cited among Krugman's out-of-step calls is a 1998 article where he predicted that, "by 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."
A Princeton scholar and columnist for the New York Times, Krugman was awarded the Nobel Prize in economics, back in 2008, for his work in analyzing "trade patterns and location of economic activity" and integrating "the previously disparate research fields of international trade and economic geography."
(END) Dow Jones Newswires
January 28, 2022 13:18 ET (18:18 GMT)
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