Across the globe, central banks did a great job pin protecting Western economies from the worst impacts of the ‘Great Financial Crisis’ and, a decade later, Covid.
As the banks looked over a precipice in 2008 and the financial system fell into chaos in March 2020, the US Federal Reserve, Bank of England and, eventually, the European Central Bank were mindful of economic history.
Interest rates were cut to the bone and monetary wizards came up with the tool of quantitative easing (QE).
All that glisters: The bubble now has burst and even the more respectable end of the crypto market – stablecoin with a dollar peg – is in deep trouble
Avoidance of slump and an Argentine-style loss of life savings became the goal.
The rescue did its job. Significant banks were saved and have come out of the other side stronger.
Greece and Italy didn’t tip into insolvency during the euro imbroglio of 2010 and as the Covid shock was absorbed, the US bond market, the most important in the world, did not melt down. The anthem of the Great Depression of the 1930s ‘Brother, can you spare a dime?’ was not repeated.
So convinced did the central banks become that they were the ultimate saviours of the world that super-low interest rates and the monetary taps remained in place long after it was prudent. The Bank of England engaged in an £895billion bond-buying spree (almost half the national debt).
And the Fed’s balance sheet swelled nearly nine times from $1trillion in 2008 to $9.9trillion (£8.1trillion) 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 is meant to do. But when such large sums are pumped into the monetary system some of it is bound to end up in the wrong places.
The prices of stocks on the Nasdaq tech-dominated exchange rocketed.
It has nosedived some 25 per cent this year. Meme shares recommended on sites such as Reddit soared and seemingly could be bought free of commission on Robin Hood.
Celebrities put their names to Special Purpose Acquisition Vehicles (Spacs) without a clue of what they were signing up to.
And most toxic of all, ordinary investors (and an increasing number of professionals) bought into the idea that crypto – money minted in the metaverse – was as good, if not better, than gold.
Doubtless as bitcoin soared to its peak price of $68,000 in November 2021 there were professional investors, smart amateurs and newbies who became very rich by buying the dips, selling the highs or trading in derivative products.
Occasionally, I think back to my taxi driver of several years ago who, after dropping me off in the City, was heading to visit a tobacconist in the East End who sold the virtual currency.
It would be great if, in spite of my Luddite advice to steer clear, he owned his own fleet of hire cars. The bubble now has burst and even the more respectable end of the crypto market – stablecoin with a dollar peg – is in deep trouble.
Bloomberg reports that the backers of Terra USD, a stablecoin creator driven by algorithms, are in search of a $1.5billion (£1.2billion) bailout so as to shore up its currency Luna after it crashed 50per cent from its dollar peg.
It is not alone.
When crypto exchange Coinbase floated in New York just over a year ago the shares soared 25 per cent above the offer price in minutes, valuing it at $86billion (£70billion).
This made it worth more than the $56billion Intercontinental Exchange, the owner of the New York Stock Exchange and more.
As bitcoin has tumbled in value, falling 35 per cent since the start of the year, Coinbase shares have plummeted by 80 per cent.
The withdrawal of monetary largesse by the world’s central banks is having dramatic consequences.
Sounding like a Premier League football manager on the eve of being sacked, Coinbase chief executive Brian Armstrong tweeted ‘your funds are safe with us’.
There may well be some useful fallout from the crypto craze, including widespread use of the blockchain digital ledger.
There is also recognition by central banks that officially-backed crypto may be a better way to conduct monetary operations as cash becomes unfashionable.
Investors have been drawn to bitcoin and other crypto on the grounds that it is super-safe because of the limited computer mining opportunities. What they are learning is that it no longer glisters as gold.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.