A new financial crisis is threatening to dwarf the 'subprime' mortgage debacle, writes Paul Mobbs. Cheap money from central banks has fuelled some $1.3 trillion of risky investments in high-cost 'unconventional' oil and gas. Now, with oil sinking below $60, all that paper is turning to junk – and that's putting the entire economic system at risk.

Brought about by the recent fall in oil prices, investors are beginning to review the economics of unconventional oil and gas. For the last few years there have been a number of damning reports about the economics of unconventional fossil fuels.

Now it seems those long-ignored observations are being taken seriously by the money-lenders of Wall Street.

John Maynard Keynes was one of the most significant economists of the Twentieth Century, whose observations still draw the ire of pundits and politicians today.

One of his better-known economic aphorisms was, "If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has."

Sound advice, but what if you owe hundreds of billions? Then it becomes a problem for the whole economic system, not just the bank.

QE: Floods of funny money for fossil fuels

During the early 2000s a lot of Wall Street's 'funny money', based around complex investment schemes, flowed into unconventional oil and gas developments. It was seen as the new 'revolution' in America's energy system, and a new, politically approved path to energy independence.

When that funding stream collapsed, after the 2007/8 financial crisis, the number of drilling rigs operating in America collapsed too.

In the wake of the crisis the US and other governments instituted quantitative easing (QE) – in effect conjuring 'free money' from governments, given at near zero rates of interest to the major banks and finance institutions.

Problem was, in the wake of the crisis, there was little to invest all that 'new funny money' in. Throwing free money after bad, the US fracking industry mopped up a large wad of QE cash, and shortly after the number of drilling rigs in the US took off again.

Looking for a fast return, sections of the finance industry specialise in 'high risk' or 'junk' investments – which in America is reckoned to be worth $1,300 billion.

Over the last 10-15 years the global finance system has loaned the American unconventional oil and gas industry hundreds of billions of dollars. Today somewhere between $150 and $550 billion of those loans are considered to be 'junk'.