The New York Times Calls Crypto “The New Subprime”

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Economist Paul Krugman, writing for The New York Times, drew parallels with crypto and the 2008 subprime mortgage crisis.

In his scathing op-ed, Krugman referenced the nearly 50% drop in total market capitalization from November 2021 highs, saying uninformed participants are suffering the most.

“But there is growing evidence that the risks of crypto fall disproportionately on people who don’t know what they’re getting into and are ill-placed to handle the downsides.”

From there, he compares the subprime mortgage crisis to digital currencies, while taking the opportunity to rehash some dubious arguments, including the role of crypto in money laundering and tax evasion.

Krugman’s main point revolves around “excluded groups” who find themselves in risky financial situations, for which they are neither prepared nor have the financial security to bear.

But what Krugman fails to grasp is why “excluded groups” are willing to risk it all in the first place.

The Subprime Crisis

The subprime mortgage crash is widely considered to be the triggering event of the 2008 global financial crisis.

Several factors were at play, but the two most important were the rise in subprime lending by banks and the collapse of the housing bubble in the United States.

Subprime refers to a below average credit classification due to poor or limited credit history. Borrowers in this category are considered high risk and are subject to higher interest rates.

Many subprime mortgages were structured with a variable interest rate served by low repayments in the first few years, but became expensive after the first three to five years. This made them unaffordable for many after adjustment.

Anxious to maximize revenue, banks would pool these subprime loans and sell the proceeds as mortgage-backed securities (MBS).

As subprime borrowers defaulted, the ripple effect also saw the MBS market crash.

So who is to blame? Undoubtedly, the banks are the biggest culprits because they were willing to lend to high-risk borrowers. But buyers, stimulated by the “dream of home ownership”, also played their part.

Crypto as a way out

Many people choose to invest in crypto to achieve financial freedom. From this perspective, taking on the risk of home ownership has some parallels.

However, what is fundamentally different about hardcore crypto investors is that many see it as an escape from a system that is strongly opposed to them. For this reason, they are ready to participate in the crypto experience.

Of course, all the time the prices go down and up in dollars. And maybe some runaway investors aren’t “for the tech” and maybe haven’t done their research.

But instead of assuming the majority are unsophisticated investors who need government protection, Krugman should consider the factors driving people’s desire to escape.

If he did, he would understand that crypto offers hope, which is all it takes to take a chance.

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