Back then, the practice of subprime lending and repackaging of bad debts to be resold along with other toxic derivatives got out of hand before banks’ lack of confidence in each other’s balance sheets froze credit markets, toppled Lehman Brothers, and the public surrendered to mass unemployment and a global recession.
Under political pressure during the GFC, governments unsurprisingly hesitated to bail out bankers fearing it would be unpopular with voters, but the health crisis caused by COVID-19 poses no such problems.
On the contrary, the life or death crisis of the pandemic gives governments and central bankers every stimulus and moral dispensation needed to launch untested, runaway stimulus programs while bringing cash rates to virtually zero to prevent another crash . In addition, the lessons of the GFC have already been drawn to go hard and early.
It’s the virtual zero interest rate policy (ZIRP) worldwide and the stimulus money that has put Bitcoin and other cryptocurrencies in bubble-like ratings.
Younger, less discerning and less experienced generations of investors have no incentive to leave cash in the bank, as it is now anything but useless as an asset class. So they traded the fun central bank money for other useless asset classes that have skyrocketed.
If the risk-free return on cash around the world were closer to 5 or 6 percent, bitcoin would undoubtedly still be a marginal value considered worthless by amateurs and professionals alike. But its ZIRP-driven rise means that now – unprepared for regulators and in the dark – the horse has amassed a ton of toxic derivatives as it did before the GFC.
Banks are now facing new moral risks in trying to earn fees on Bitcoin and other cryptocurrencies, knowing that it could all collapse again.
Fiduciary issues also exist for directors tempted to follow provocateurs Elon Musk and Jack Dorsey to invest corporate funds in digital currencies that are only backed by leaps of faith.
There is no way to put the Bitcoin ghost back in the bottle as its convenient apolitical and decentralized nature leaves plenty of room to wash your hands when the rising systemic risk causes markets to crash again.