Paul Krugman compares the crypto crash to the subprime mortgage crisis

  • Nobel laureate Paul Krugman said there are similarities between the recent crypto downturn and the subprime mortgage crisis.
  • He laid out his thoughts in an opinion piece published in The New York Times this week.
  • The famous economist also warned of the risks posed by a lack of regulation.
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Nobel Prize-winning economist Paul Krugman likened the recent cryptocurrency crash to the subprime mortgage crisis in an opinion piece published Thursday in The New York Times.

“I see uncomfortable parallels to the subprime mortgage crisis of the 2000s,” the economist wrote of the crypto market, which has seen $1.3 trillion of its market value wiped out in recent weeks.

“No, crypto does not threaten the financial system – the numbers are not big enough to do that,” he wrote. “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.”

The subprime mortgage crisis began in 2007, triggering a


recession

. A huge housing bubble fueled by loose mortgage lending standards burst, creating a domino effect of underwater mortgages, foreclosures and widespread downgrades of mortgage-backed securities that had been peddled by the biggest lenders. Ultimately, many borrowers lost their homes, while investors who bought those downgraded mortgage bonds — including pensions and pensions — ended up with the bag.

According to Krugman, a similar dynamic is at play in the crypto market today, and investors are sometimes caught up in the hype without fully understanding the associated risks.

While equity investors are mostly white and college-educated, about 55% of crypto traders don’t have a college degree, while 44% are non-white, the economist said, citing a survey from the NORC research organization. Just as in 2007, when the borrowers least qualified to pay a mortgage were sold the most complex loan products, it seems that the riskiest financial assets are now being sold to the least sophisticated or vulnerable investors.

Krugman, who in the past has said bitcoin is a more obvious bubble than housing, doubted a claim by NORC that digital assets pave the way for more diversified investors.

“I remember when sub-prime mortgages were celebrated in a similar way – when they were hailed as a way to open up the benefits of home ownership to previously excluded groups,” said- he writes. “It turned out, however, that many borrowers didn’t understand what they were getting into.”

While the Nobel laureate said he didn’t believe crypto would lead to a deep economic crisis the way subprime mortgages did, he gave an ominous warning:

“If you ask me, regulators made the same mistake they made on subprime: they failed to protect the public from financial products no one understood, and many vulnerable families could end up pay the price.”