Paul Krugman, an American economist and public intellectual, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, has warned consumers about the volatile virtual currency markets.
Krugman, a Nobel-prize-winning economist, has compared the fast-evolving cryptocurrency markets to the subprime mortgage crisis from the late 2000s.
In an Op-Ed for the New York Times, Krugman noted that he’s seeing “uncomfortable parallels” between crypto-assets and the US subprime crash, which led to the entire housing market experiencing a major crash and also resulted in the 2007-2008 Global Financial Crisis.
Krugman claims that there are “disturbing echoes of the subprime crash 15 years ago.”
Regulators took their eye off the ball, and as usual, vulnerable people will pay the price 1/ https://t.co/WCtlU8C0M7
— Paul Krugman (@paulkrugman) January 28, 2022
The subprime crisis was the result of banking institutions issuing loans to consumers who were classified in the higher risk group. This was at a time when interest rates had been historically quite low and property prices had been surging.
After the market became really saturated, homeowners realized that they had gotten themselves into negative equity and were not in a position to pay back their loans. This led to huge losses for lenders.
Krugman says that digital asset investors could be in a similar position right now, as they are being sold highly speculative financial assets without really understanding all the serious risks involved in gaining exposure to such assets.
Notably, Krugman is a well-known Bitcoin (and crypto) bear, having compared the cryptocurrency market to a large Ponzi scheme.
He added that many borrowers “didn’t understand what they were getting into.” He also noted that cryptocurrencies, “with their huge price fluctuations seemingly unrelated to fundamentals, are about as risky as an asset class can get.”
Krugman isn’t really convinced digital currencies could pose a significant systemic risk.
That’s because the numbers “aren’t big enough to do that,” he explained. The crypto-asset market is valued at around $1.7 trillion, and had peaked at nearly $3 trillion a few months back (before going through a huge correction).
Bitcoin, Ethereum and other cryptocurrencies have dropped considerably during the past few weeks.
At a price of around $37,000, Bitcoin is presently about 50% off its November 2021 record high of almost $69,000. Meanwhile, Ethereum, the second-largest crypto, had reached a price of around $4,500 but has fallen to approximately $2,500.