By PAUL KRUGMAN*
Cryptocurrencies could trigger the next financial crisis overall
remember The big bet? Michael Lewis' 2010 book, made into a film in 2015, told the story of the 2008 global financial crisis, following a handful of investors who were willing to gamble on the unthinkable - the proposition that the huge increase in housing prices in the years before the crisis was nothing more than a bubble, and that many of the apparently sophisticated financial instruments that helped to inflate housing would turn out to be worthless junk.
Why were so few willing to bet against the bubble? A large part of the answer, I suggest, is due to what we might call the disbelief factor: the size of the error in pricing that skeptics claimed to see. Even though there was clear evidence that home values were off the curve, it was hard to believe that they could be so far off the curve that $6 trillion in real estate wealth would evaporate, that investors in mortgage-backed securities would lose about $1 trillion dollars. It just didn't seem plausible that the markets – and the conventional wisdom saying the markets were fine – could be so wrong.
But they were. Which brings us to the current state of cryptocurrencies.
Last week, the US Federal Trade Commission (FTC) reported that “cryptocurrencies are quickly becoming the preferred means of payment for many scammers”, representing “about one in four dollars reported as lost due to fraud”. Given the small role cryptocurrencies play in ordinary transactions, this is impressive.
It's true that the amount reported by the FTC isn't that big – around $1 billion as of 2021 – but that just adds up to reported losses from overt fraud, where people were tricked into paying for non-existent assets. Unreported scams are not counted, much less money invested in assets that existed but were fundamentally worthless; assets such as TerraUSD, a “stablecoin” (“stable currency”) which was neither stable nor a currency. TerraUSD's collapse last month wiped out $18 billion in value, in some cases consuming many people's life savings. As far as we know, TerraUSD's founders really believed in their product and didn't just swindle investors' money. Then they would not be promoting fraud in the legal sense. Either way, their investors lost their savings.
Who will be the next one? As recently wrote Hillary Allen on Financial Times, TerraUSD may have proven to be exceptionally fragile, but the truth is that it is difficult to understand why, in general, stablecoins would need to exist. "To the stablecoins they start with an intricate and inefficient underlying technology, aiming to bypass the middlemen” – that is, conventional banks – “and then add them back in (often with apparent conflicts of interest)”.
Like many analysts pointedThe stablecoins may seem high-tech and futuristic, but what they most resemble are the banks of the XNUMXth century, especially the US banks during the free banking era[1] before the Civil War, when paper money was issued by largely unregulated private institutions. Many of these banks failed, in several cases due to fraud, but mainly due to bad investments.
Now, some modern economists are back in favor of the age of banking freedom. Perhaps not surprisingly, advocates of free banking, like cryptocurrency enthusiasts, tend towards a libertarian bent. your more ardent supporters are associated with think tanks right, who also promote environmental denialism and oppose health measures against covid-19. Yet, during the era of banking freedom, private currencies did circulate and function as a medium of exchange.
Arguably, however, this occurred due to the lack of better alternatives: the “green ones” (greenbacks) – dollar bills issued by the United States Treasury [from 1861] – did not yet exist. Today, dollars and government-backed bank deposits do exist. So, the stablecoins they play virtually no role in current business transactions. So what are these assets for?
The same question can be asked about cryptocurrencies in general. I have been to several colloquia where skeptics ask, in the most polite way possible, what cryptocurrencies do that cannot be done more easily with conventional means of payment. They also ask why, if cryptocurrency represents the future, Bitcoin – which was introduced in 2009! – has yet to find any significant use in the real world. In my experience, the answers are always a salad of words devoid of concrete examples.
OK, criminals seem to find cryptocurrencies useful. One recent journalistic investigation from Reuters found that over the past five years, cryptocurrency exchange Binance has laundered at least $2,35 billion in illicit funds. And at what level could licit applications be?
To suggest that cryptocurrencies are meaningless, however, runs counter to the awe factor. At its peak last November, cryptocurrencies amounted to nearly $3 trillion. Early investors had made huge profits; famous business schools offer courses in blockchain; mayors compete to see who can make their city more crypto-friendly.
It sounds extreme and implausible to suggest that an asset class that has become so large, and whose promoters have acquired so much political influence, can lack any real value, that it is a house built not on sand but on nothing at all.
Still I remember the housing bubble and the credit crunch. subprime. And in case you ask me, yes, it looks like we've gone from the big bet to the big con.
* Paul Krugman is a professor at Princeton University (USA). He was awarded the Nobel Prize in Economics in 2008.
Translation: Ricardo Cavalcanti-Schiel.
Originally published in the newspaper The New York Times.
Translator's note
[1] “Era of Banking Freedom”: from 1837 to 1866, a period in which permissive federal and state laws on banking allowed virtually anyone to open a bank and issue currency.
