The economist Charles Kindelberger suggested that what the world benefits from a hegemon that provides a stabilizing influence on the international order. Besides providing for collective security and the enforcement of a rules-based world order, the hegemon also furnishes deep capital markets to enable investment and risk transfer, as well as a stable, liquid currency to facilitate trade. The existence of the hegemon resolves collective action problems by shouldering a disproportionately large share of the provision of this public good—one enjoyed by the whole world.
In this way, the ‘exorbitant privilege’ the US enjoys via its reserve currency status and its role at the center of global finance is also an extraordinary obligation. It is not clear what country or countries could or would take the place of the United States should it continue to choose—as it has thus far indicated—to abdicate its role as global hegemon. Therefore, the most likely outcome of the US’ withdrawal from the world is not only a reduction in economic activity but also increased potential for armed conflict. Strategic miscalculations of the type described by the Oracle at Delphi become more likely. Much more than the continued financing of excessive fiscal deficits depends upon the US realizing that the strength of the dollar is just as much an American problem as it is a global one.
But two other developments are perhaps more immediately concerning. The first is that the administration announced that it would no longer enforce the banking regulations developed in the wake of the Global Financial Crisis to prevent financial catastrophe from recurring. These regulations were meant to repair the failure of prudential supervision by the third Bush administration and the Federal Reserve’s unwillingness or inability to compensate for it. This change invites fragility into the American banking system and reintroduces the same principal-agent and moral hazard problems that caused the greatest financial crisis the world had seen since the Great Depression—the privatization of gains and the socialization of losses. The nomination of the unqualified Michelle Bowman to head bank regulation as Vice Chair of the Federal Reserve for Supervision is another. The lunatics are running the asylum.
The second concerning development, the contemplated introduction of legislation to legitimize "Stablecoins” and enable their integration with the financial system, undermines the state monopoly on currency. This not only allows for the creation of a private money that is difficult to supervise and control but effectively creates a parallel banking system without the necessary mechanisms—capital sufficiency or reserve requirements—to prevent moral hazard. That these parallel systems are being created and flogged by members of the Executive at the Presidential and Cabinet levels alike and from which they directly stand to benefit effectively guarantees state capture.
The seeds of each financial crisis are sown in the aftermath of the last. The emergence of cryptoassets as a techno-utopian response to the failures of the global banking system has now developed into the next great threat to financial stability. The economist John Kenneth Galbraith said it best: “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.” Money and banks likely don’t need and haven’t thus far benefited from reinvention, and cryptoassets have their uses to establish chain of custody; but insofar as they are an end-run around regulation and an enabler of public corruption, we should expect to reap the whirlwind.
Share this post