In fixing the next financial crisis, the U.S. may be missing in action

Barry Campbell is principal adviser to StrategyCorp, a former legal counsellor at the International Monetary Fund and a former Member of Parliament.

Washington’s unreliability is not just a problem for trade relations – global financial stability could be its next victim.

The prospect of another sovereign-debt crisis or financial-sector meltdown is on the minds of financial regulators. There are flashing lights everywhere. We need to consider how the next crisis would be contained, given the world’s unruly geopolitical context.

The U.S. Federal Reserve and the Treasury have always played the galvanizing role in global financial crisis resolution. The trade interdependence that the U.S. fostered for decades was a guarantee of postwar peace, and underpinned American economic growth and political dominance in those years. The economic and monetary superstructure that the U.S. sponsored and financed with the U.S. dollar was an additional guarantee. Keeping these systems functioning smoothly was understood in Washington to be very much in the country’s interest.

The current administration, however, may see all this as just another way that the United States has been “ripped off,” as U.S. President Donald Trump often puts it. The U.S. now demonstrates little interest in formal arrangements and practised norms in the trade sphere.

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In this zero-sum world, the underpinnings of global financial architecture are at risk, too. The financial superstructure is supported by certain financial stabilizers, such as currency swap lines, which are triggered in an emergency. Will the U.S. honour these commitments? Will it be able to? Just like trade interdependence, financial interdependence may provide another opportunity for leverage by an aggressive United States.

Orderly resolution of a financial disaster has always required co-ordinated and sometimes selfless actions by a number of national players. When the crisis hits, American leadership may not be on offer – particularly if the crisis originates in Europe or Asia. Furthermore, in the next crisis, the U.S.’s credibility to play a constructive role will be very much in question.

Like the tech bros who make a virtue of breaking things, destabilizing the world is celebrated by some in the Trump administration – less so keeping the financial system carefully calibrated. The next financial crisis may be misread by Washington as another opportunity to reach for dominance and to cement dependency.

Even if American willingness and credibility to resolve a crisis weren’t in doubt, the country’s very capacity to help is in question. Historically high government debt and the fiscal dominance of monetary policy will complicate the funding and resolution of the next financial meltdown. In this atmosphere, serious questions are being raised about the appropriateness and sustainability of the U.S. dollar as the primary global reserve asset.

When the time comes, who will lead the necessary “coalition of the willing” to rescue and restore the international financial order? Trust in constructive American leadership is waning. In global regulatory circles, the riverboat language of the U.S. President about the Iran war (“I have all the cards”) and threats from the once-credible Treasury Secretary to bond traders (“I am the house”) have registered.

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Should it choose to play a role in resolving the next financial crisis, Washington’s goals may be nakedly transactional and not driven by any sense of responsibility to restore stability. The recent intervention by the U.S. Treasury to support the Japanese Yen was unlikely a selfless act.

Japan holds more than one trillion dollars in U.S. debt (two times what China holds). Washington’s extraordinarily high government debt is leading some countries to trim their U.S. holdings. Japan selling U.S. bonds would be unhelpful to the U.S. in the current atmosphere.

Can global financial order be restored and maintained without the leadership of the U.S.? Probably. Can it be restored without the participation of the U.S.? Probably not.

During his World Economic Forum speech in Davos, Prime Minister Mark Carney named this geopolitical moment as a rupture, outlining a framework for middle powers to move forward in the face of a mercurial U.S.

There is another rupture brewing if the country’s once-benign global financial leadership is turning malignant.

Doubts about Washington’s leadership in the next crisis requires that work start now on a new global financial framework. Primacy of the U.S. dollar, like British sterling in the waning days of the Empire, is at the core of a now-risky financial interdependence. That may be why Mr. Carney and others are musing about the hegemony of the U.S. dollar. Addressing that reality is essential, but a tall order.