Paul Krugman’s Weird Opinion About Cryptocurrency and the Subprime Loan Crisis
On January 27, 2022, Paul Krugman expended his valuable column inches in the New York Times to compare cryptocurrency to the subprime mortgage crisis. It’s a cute idea that might be interesting if the conceit weren’t so trite for opinion writers past a certain age — this new thing I don’t understand is like this thing that was really bad! But, not to be outdone, Krugman’s article is both unbearably simplistic and fallacious.
After first acknowledging that the cryptocurrency market is too small to “threaten the financial system,” Krugman presents the following paragraph, which, apparently, is the grand sum of all cryptocurrency:
What’s this crypto thing about? There are many ways to make digital payments, from Apple Pay and Google Pay to Venmo. Mainstream payment schemes, however, rely on a third party — usually your bank — to verify that you actually own the assets you’re transferring. Cryptocurrencies use complex coding to supposedly do away with the need for these third parties.
Paul Krugman, New York Times, Jan. 27, 2022
In Krugman’s mind then, cryptocurrency is nothing but an expensive system for payment.
Krugman has no column inches to describe the almost 3,000 applications on the Ethereum network. In the face of inflation at 40-year highs, Krugman also has nothing to say about Bitcoin as a supply-restricted store of value, deciding instead to deride El Salvador’s adoption of the coin as legal tender. Krugman condescendingly even writes off cryptocurrency as a system of payment, refusing to describe the abilities of Ripple or Stellar, which allow us to send currency around the world instantaneously for fractions of a penny. Krugman, I suppose, prefers the good-ole stability of Western Union.
Krugman’s understanding of the cryptocurrency market, or, at least, the understanding he adopts in his article, is not honest. Crypto is not Venmo. But that’s the impression he leaves on his readers. And that’s a shame.
But the failures of Krugman’s column do not end with the short-shift he affords cryptocurrency.
Krugman conjures up only one comparison between cryptocurrency and the subprime crisis: the racial and educational makeup of the investors. “44% of crypto investors are nonwhite, and 55% don’t have a college degree,” he writes. Because these facts are viewed as “opening up investing opportunities for more diverse investors” by NORC, the group that conducted the study, Krugman is harkened back to the subprime crisis that “was hailed as a way to open up the benefits of homeownership to previously excluded groups.” Ipso facto. Bada bing, bada-boom!
Krugman does have column inches for race! In his pained plea to protect “minority groups” and the “working class,” he fails to see the racism he suggests: that nonwhites are suckers. If enough nonwhites invest in an asset class, does it becomes dangerous? Why is it bad or scary if more nonwhites are in crypto than are in risky stocks? What is his point other than paternalistic racism? As 30 Rock’s Tracy Jordan once said: “It’s the subtle racism of low expectations.”
Of course, there is a massive difference between the housing market prior to the subprime crisis and cryptocurrency, and it has almost nothing to do with race. It is instead a matter of volatility.
Krugman, however, has no column inches for volatility. Nor does he have any for the deeply held assumption that the U.S. housing market would never break. And volatility is kind of the point. Because the lack of volatility in the U.S. housing market is what led to the pre-crash belief that home ownership meant you couldn’t lose.
In contrast, the intense volatility in the cryptocurrency market has bolstered the chorus of prominent skeptics, many of which have been scare-yelling since Bitcoin’s inception. Thus, cryptocurrency investors, even the “nonwhites” and degree-less, don’t have to travel far to find doubt. I mean, they’re even in the New York Times! Crucially, even investors with the most rudimentary knowledge of cryptocurrency should escape the tragic belief, so prevalent during the subprime crisis, that the investment can’t lose.
So in the most important way, Krugman is wrong. The “disturbing echoes” aren’t there if you dig just a little bit deeper. It’s the volatility that really matters because that’s what hurt people. But Krugman’s, I take it, innate skepticism won’t allow him to take cryptocurrency seriously. Cryptocurrency is an ocean full of features and creatures; it’s vast, dark, scary, brilliant. Krugman mindlessly lobs a rock into it and calls himself a marine biologist.
