Top Economist Mohamed El-Erian Says Crypto Is A Canary In The Coal Mine For An Era Of ‘Irresponsible Risk-Taking’ And Fallout Could Lead To ‘Financial Crashes’

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Crypto investors have collectively lost $2 trillion since November last year, and the list of victims of the ongoing crypto winter continues to grow.

The downturn was only made worse by the collapse of the world’s second-largest crypto exchange, FTX, which went bankrupt last month, leading to accusations that its former CEO was running a Ponzi scheme, which which he denied.

Now, Mohamed El-Erian, President of Queens College, University of Cambridge, warns that the lack of risk management seen in the crypto space could be a canary in the coal mine that has wider economic implications.

What if the irresponsible risk-taking we see in crypto also happens elsewhere and crypto just happens to be the most fragile structure in those cases? he asked New York Times reporter Ezra Klein in an interview on Friday.

El-Erian believes that crypto’s dark days do not yet pose a systemic risk to the financial system or the wider economy, but says there are signs of distress everywhere, including the market’s near collapse. government securities in the UK and the emerging market debt crises in places like Sri Lanka. .

What worries me is that they are simply canaries, he told the New York Times on Friday. These are small fires, but the risk here is that these small fires will start to spread and grow into something bigger.

El-Erian argued that the Federal Reserve’s near-zero interest rates and willingness to support markets during difficult economic times gave some investors the idea that markets were only going up, creating a aggressive and dangerous risk appetite.

The economist, who once served as CEO of PIMCO, said that after the great financial crisis of 2008, the banking system was tightly regulated, but the risk in the whole financial system did not simply disappear.

He migrated. It migrated from banks to non-banks, he said. And non-banks are less well understood by regulators, less well regulated and less well supervised.

The Bank for International Settlements warned earlier this month that pension funds and other non-bank financial institutions owe some $25 trillion in debt that is mostly hidden from regulators.

This off-balance sheet dollar debt poses particular policy challenges because standard debt statistics miss it, the BIS researchers wrote. Thus, in times of crisis, policies aimed at restoring the fluidity of short-term dollar flows in the financial system are obscured.

El-Erian said his biggest fear is that financial crashes caused by reckless behavior at nonbanks will spill over into the real economy.

We saw how bad this world could get in 2008 in the banking system, he said. I don’t think it’s getting that bad, but I’m afraid it’s yet another obstacle to high, sustainable and inclusive growth. And we desperately need high, sustainable and inclusive growth.

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