Central banks around the world have done a great job of protecting western economies from the worst effects of the “Great Financial Crisis” and, a decade later, Covid.
As banks gazed over a chasm in 2008 and the financial system descended into chaos in March 2020, the US Federal Reserve, Bank of England and finally the European Central Bank turned to economic history.
Interest rates were cut to the bone and currency wizards invented quantitative easing (QE).
All of this glitters: the bubble is now bursting and even the more respectable side of the crypto market – dollar-pegged stablecoin – is in deep trouble
Avoiding a burglary and loss of Argentine-style life savings became a goal.
The rescue did its job. Major banks were rescued and emerged stronger from the crisis.
Greece and Italy avoided bankruptcy in the euro turmoil of 2010 and when the Covid shock wore off, the US bond market, the world’s most important, did not melt. The Great Depression anthem of the 1930s “Brother, Can You Spare a Penny?” was not repeated.
Central banks were so convinced that they were the ultimate saviors of the world that super-low interest rates and monetary roosters lingered long after prudence was exercised. The Bank of England participated in a £895 billion bond-buying spree (nearly half the national debt).
And the Fed’s balance sheet has grown nearly ninefold, from $1 trillion in 2008 to $9.9 trillion (£8.1 trillion) in April this year.
The lifeboat, launched by Chairman Ben Bernanke, kept afloat by Janet Yellen and then reinflated by Jay Powell, did what it was supposed to do. But when such large sums are pumped into the monetary system, some of them inevitably end up in the wrong places.
Share prices on the technology-dominated Nasdaq stock market shot up.
It’s down about 25 percent this year. Meme shares recommended on sites like Reddit skyrocketed and could be bought on Robin Hood, seemingly commission-free.
Celebrities have put their names on Special Purpose Acquisition Vehicles (Spacs) without realizing what they are signing up for.
And most toxic of all, ordinary investors (and a growing number of professionals) believed in the idea that crypto — money minted in the metaverse — was as good, if not better, than gold.
When Bitcoin surged to its peak price of $68,000 in November 2021, there were undoubtedly professional investors, savvy amateurs, and newbies who got very rich by buying the dips, selling the highs, or trading derivative products.
Occasionally I think of my cab driver from a few years ago who, after dropping me off in the City, was on his way to visit a tobacconist in the East End that sold virtual currency.
It would be great if, despite my Luddite advice to stay away, he had his own fleet of rental cars. The bubble has now burst and even the more respectable end of the crypto market – the dollar-pegged stablecoin – is in deep trouble.
Bloomberg reports that backers of Terra USD, an algorithm-powered stablecoin creator, are on the hunt for a $1.5 billion (£1.2 billion) bailout to prop up its currency, Luna, after they has fallen 50 percent from its dollar peg.
It’s not alone.
When crypto exchange Coinbase went public in New York just over a year ago, shares rose 25 percent above the asking price in minutes, valuing it at $86 billion (£70 billion).
That made it worth more than the $56 billion Intercontinental Exchange, the owner of the New York Stock Exchange, and more.
While Bitcoin has fallen in value, down 35 percent year-to-date, Coinbase shares are down 80 percent.
The retreat of monetary largesse by the world’s central banks is having dramatic consequences.
Coinbase Chief Executive Brian Armstrong sounded like a Premier League football executive on the eve of his sacking, tweeting “your funds are safe with us”.
The crypto craze may well have beneficial implications, including the widespread use of the blockchain digital ledger.
Central banks are also acknowledging that officially supported cryptocurrencies could be a better way to conduct monetary transactions as cash goes out of fashion.
Investors have been drawn to Bitcoin and other cryptos because they are super safe due to the limited computer mining capabilities. What they learn is that it no longer shines like gold.