Collapsing Crypto Bubble Was Larger Than Subprime Mortgage Bubble

June 20, 2022 (EIRNS)—Before the 2008 global financial crash, shadow-bank lenders issued about 12 million subprime mortgage loans totaling a bubble of roughly $2 trillion, made much larger by mortgage-backed securities (MBS) and other derivatives. At the end of April 2022, total global investment in crypto instruments was about $2 trillion, but had been about $3 trillion at the end of 2021, according to the estimate of a firm called CoinMarketCap. An end of May 2022 estimate by Statista claims that crypto “market cap” is actually now down to $1 trillion or less, so that nearly two-thirds of it has vaporized.

Thus cryptocurrencies have been the objects of a debt bubble larger than the size of subprime mortgages in 2007-08, and which is collapsing under the first rise in interest rates. Moreover, it is becoming clear that based on this bubble there has been an unknown but large volume of derivatives, super-leveraged collateralized credit products, and repo lending. There are now runs on these products as well as on the underlying crypto holdings from which investors are trying to escape.

So while private cryptocurrencies are now being shown to be just another, completely unregulated securities bubble, it is also being shown to be a shadow-banking sector which was expanding very rapidly from early 2020 until the early spring of 2022. It is one of the “locks of the approaching storm,” in Shelley’s phrase.

In an interview posted today by the Mercatus Center at George Mason University, law professor Lev Menand of Columbia University locates referenced cryptocurrencies as just one element in the Federal Reserve’s early spring 2020 bailout of the entire shadow-banking sector as well as the banks. Menand doesn’t locate the start of this huge bailout correctly in September 2019 with the Fed’s takeover of repo lending, but his point is important: Runs on shadow banks produced an immense global demand for dollars, exploding with the February-March pandemic-related collapse, and the Fed provided the dollars by buying debt of every conceivable kind worldwide. This made the money-printing spree from late 2019 onward much larger and more purely speculation-oriented than all the Fed’s previous decade of quantitative easing programs aimed at big banks, so that it fed a runaway inflation. “And so this is the second time the Fed has done this,” he said. “In some ways, it was on a greater scale this time. The runs were fiercer.... It did trillions of market functioning purchases, which was not something really that it did in 2008. It tried to heal the shadow bank balance sheets by pushing up asset prices to strengthen their financial position, to quell the run.”

(This is why so much of Wall Street believes that the Fed’s current qualitative tightening and interest rate raising will reverse into mass money-printing again soon—after destruction of developing nations.)

Menand also perceptively located the CARES Act, passed by Congress on March 25, 2020, as part of this unleashing which he calls the “unbound Fed”—Wall Street called it “regime change.”