Jonathan Kirshner is Stephen and Barbara Friedman Professor of International Political Economy in the Department of Government at Cornell. I interviewed him about his new book, American Power after the Financial Crisis.
HF: Some people argue that international institutions dealt quite successfully with the crisis. You evidently disagree. What do you see as the fundamental problems that manifested in the crisis, and why have they not been addressed?
JK: First, let me ask: What institutions? The IMF did not see the crisis coming, favored the ideas and policies that made the crisis more likely, and was not a key player in containing it. The G20 and the Financial Stability Board? I don’t see the crucial role they performed. It was probably a good thing that the WTO existed – its presence was probably one of the many reasons we saw much less self-defeating protectionism during this crisis then we did during the Great Depression. But that’s about it.
The only “institution” that really mattered in dealing with the crisis was the U.S. Federal Reserve System, which not only flooded the American economy with liquidity, but also provided emergency currency swaps to European partners. But this latter contribution, although crucial, was an ad-hoc improvisation by the agency of a great power, not the functioning of international institutions. As for the core problem: the crisis was caused by too-large, too-interconnected financial institutions engaging in reckless behavior that generated “systemic risk.”
Systemic risk is a crucial part of this story, because even if individual actors are engaging in behaviors that are not reckless (which was not the case here), in finance, individually rational behaviors can produce extremely dangerous risks to the system as a whole. Finance is different, and requires public oversight, regulation, and supervision to a much greater extent than any other sector of the economy. But, in the United States at least, Washington and Wall Street, buttressed by academic economists, fell in love with ideologies such as the “efficient market hypothesis” which suggested that unfettered financial markets would lead to optimal outcomes and could best govern themselves. This is wrong. And these fundamental problems have not been addressed. The American economy is still characterized by a financial system that is too large, too concentrated, too interconnected, and dysfunctionally regulated. These problems persist because of the enormous political power of the financial services sector. Additionally, because adequate public policy stopped the financial crisis from causing a second Great Depression, opponents of fundamental reform were able to argue that real changes to the financial system were not necessary.
HF: Your argument suggests that the global economic order that the United States made rests on monetary hegemony, ideological homogeneity, and shared security concerns and that all three are being eroded. Are the twin threats of Putin’s Russia and a more assertive China helping to some extent to bring U.S. allies back on board, or are they secondary to the forces that you identify?
JK: These behaviors matter, but yes, at the moment, they are secondary. The foundations of any economic order – especially with regard to international money and finance, areas where cooperation is especially difficult to establish and maintain – rest on the distribution of power, common ideological commitments and beliefs about how to best organize international economic affairs, and shared, salient security concerns. This latter factor can be crucial, because if countries agree that they face a common, serious, security threat – such as the Soviet threat to western Europe during the cold war – they can be motivated to overcome even bitter disagreements over economic policies. So to the extent that Russia or China look more threatening, economic cooperation between the United States and those countries who view themselves as urgently dependent on an American security guarantee becomes more likely. Will this hold together a U.S.-led international economic order? My view is that what I call the “second postwar American economic order,” which was forged in the early 1990s, came to an end with the Global Financial Crisis, and what we are seeing now is the emergence of a less coherent, more heterogeneous, more contested international economic order.
HF: You suggest that the United States is in for a tough time, as it is forced to recognize international economic constraints on its domestic policy for many decades. Why has the United States gotten away with internationalizing its problems for so long, and what has changed now?
JK: The extraordinarily exceptional position of the United States in the world economy rested on a number of factors, including the overwhelming dominance of the American economy, its role as the world’s “safe heaven” (the idea that although financial crises happened all over the world, the Unite States was invulnerable to them), and a shared belief that its economic ideology (especially as pertaining to unfettered finance) was correct, and one to which all countries aspired. These factors have all now changed. The U.S. economy remains enormous, robust, powerful, and essential – this cannot be emphasized enough – but as a general trend, it dominates the international economy somewhat less now than it did in the past, and most plausible scenarios suggest that this general trend will continue. Also, it is now clear that the U.S. economy is not exceptionally exempt from debilitating financial crises, and many countries and other actors now view its financial model with greater wariness. Thus, although the U.S. economy will likely remain more privileged than any other, it will nevertheless look more and more like a “normal” economy – that is, one that is subject to external pressures generated by the international economy, and less able to easily force burdens of economic adjustment abroad.
HF: You see the seeds of a new order as having been sown in the Asian financial crisis. How are the disagreements that started to emerge back then shaping international economic politics today?
JK: The United States, and its ally, the International Monetary Fund (which failed to see the Asian Financial Crisis coming and whose subsequent prescriptions made a bad situation worse), attributed that crisis to poor public policy (and “crony capitalism”) within the affected Asian economies; many if not most actors in Asia (and elsewhere) recognized the crisis for what it was – a standard, garden variety international financial crisis – common throughout history, especially during periods of capital deregulation. (Both China and Japan, for example, interpreted the crisis in that way.) There was also, throughout East Asia, bitter resentment at the way the United States and the IMF exploited the crisis to extract concessions from vulnerable economies in exchange for emergency assistance.
But this resentment was muttered through gritted teeth – in the late 1990s, there was little alternative to American power: American hegemony at that time was simply unprecedented and irresistible. There was also, then, a grudging sense that there was no alternative to the American model of ungoverned, uninhibited finance. The Global Financial Crisis matters, therefore, because for most of the world (not just Asia, but in Latin America and elsewhere), it was the second crisis of unregulated capital within ten years. Outside the United States, therefore, the wheels of resistance to unfettered finance had been greased by the memory of recent upheavals . Moreover, the fact that the U.S. financial system stood at the epicenter of the crisis fundamentally delegitimized the idea that the U.S. financial model was singularly correct and the one towards which all economies must converge.
HF: You suggest provocatively that the euro, despite its current problems, may well emerge as a major competitor to the dollar. How might this happen, and do the internal politics of the European Union seem likely to lead to it in the foreseeable future?
JK: Again, to be very clear (and similar to my expectations regarding the U.S. economy more generally), my expectations are for the relative diminution of the international role of the dollar – not its eclipse. That is, even as someone considered a “dollar pessimist,” I nevertheless see the dollar remaining predominant, and eventually settling into a role that can be described as “first among equals” status among a number of international currencies. (My argument is that even such relative diminution will have political consequences and affect American power.) So my expectation is that the euro will come to serve as one of those currencies.
I think it is obvious that the Global Financial Crisis revealed that the limitations of the Euro as constituted were even greater, and more profound, than most people thought – although the basic structural flaws and contradictions of the euro were long and well understood. And, from an outsider’s perspective, the internal politics of the European Union simply do not seem up to the task of solving these profound problems. But the current system seems unsustainable, and in the longer run, the euro system will need to either move forward (becoming more capacious) or take a step back (devolving to a smaller group of core members). In either case the euro will, eventually, likely play a role as an important international currency. But that is not to say that the euro’s problems have not helped sustain the reach of the dollar’s international role.
Let me put it this way: the extraordinary extent of dollar’s international dominance used to rest on four pillars: the hegemony of the American economy, a belief in its invulnerability to financial crisis, the fact that all the world’s major monetary players were political allies and military dependencies of the United States, and the lack of plausible alternatives. Three of those pillars have been shaken – the lack of alternatives is the only one left standing. And many important players in the world are now keen to find such alternatives, and prefer that the global economy not be so overwhelmingly dollar-centric. These preferences will matter.
Earlier book interviews on the politics of the financial crisis: