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10 OPINION 29.6.2023 Steve Schifferes Steve Schifferes is Honorary Research Fellow, City Political Economy Research Centre, City, University of London The US role in the global financial system is changing – here's how it could affect the world's economy T he last-minute resolu- tion of the US debt ceil- ing crisis recently has led to a collective sigh of relief in global financial markets. But the way it was resolved has renewed concerns about the dominant role of the US in the world economy at a time of un- precedented challenges includ- ing low growth, high inflation and worries about the stability of the banking system. There is a high degree of uncertainty about how these issues will play out. But the political paralysis in Washing- ton, the rise of populism and a retreat from free trade means that the US may not have ei- ther the means or the will to deal with another global crisis as effectively as it once did. As a BBC economics report- er during the 2008 global fi- nancial crisis, I saw first hand the dominant role the US played, both domestically and internationally, in resolving the situation. There is little evidence of the same commit- ment from the US today. The US Federal Reserve Bank played a crucial role in 2008. It stabilised the glob- al banking system by lending over US$1 trillion (£796 bil- lion) to other central banks through so-called "swap lines", which pumped money into the financial system. This facilitated the bailout of the European banking system by lending much-needed dol- lars. This year, at the height of the banking crisis in March, the Fed intervened again to provide daily currency swaps to other central banks. During the 2008 crisis, the US was also the driving force behind urging the major in- dustrial countries to intro- duce expansionary policies to grow their economies in order to avoid a global recession. It also enabled the Interna- tional Monetary Fund (IMF) to make a further US$1 tril- lion available to stabilise the threat to the financial system and help emerging market and low-income countries. And the US took the lead, through the G20, in creating the global financial regulator, the Financial Stability Board (FSB), to ensure the stability of large global banks. More recently, the world's fi- nancial system has been shak- en by another financial crisis, although it has been smaller in scope: the failure of sever- al US regional banks and the rescue of Swiss bank Credit Suisse. The latter is one of only 30 global systemically important financial institutions iden- tified by the FSB as likely to cause a financial crisis if they fail. It is by no means clear that the latest banking crisis has run its course. There are concerns about the so-called shadow banking system, largely unregulated financial institutions that now make up half of all global financial assets. For example, in the US many people invest in mon- ey market funds, which pay higher interest than banks, but provide no deposit insur- ance. Meanwhile, the internation- al regulatory system created in 2008 has been either inef- fective or weakened. Political pressures led the US to re- duce regulation and capital requirements for its regional banks, during the Trump ad- ministration, while worries about their soundness remain. Internationally, geopoliti- cal tensions within the G20, due to differences between emerging market countries and G7 countries on Ukraine, have furthered weakened the impact of FSB recommenda- tions. The future of US global economic influence There are strong reasons to doubt whether the Fed would be willing or able to lead an- other large-scale 2008-style bank rescue. In the first place, in contrast to the relatively low inflation in 2008, the Fed is now facing conflicting pres- sures, having sharply raised interest rates to curb infla- tion. This might surge again if the Fed is forced to cut rates to save banks which lent heavi- ly during the recent period of low rates and are now seeing a rise in bad debts as rates rise and borrowers struggle to manage their repayments. For the same reason, the Fed would be reluctant to support a further expansion of the US economy, which could add to inflationary pressures. Finally, the US's ability to mount a major bank rescue, either domestically or inter- nationally, is limited by the fact that the Fed still has a huge balance sheet overhang remaining from the 2008 rescue, which it is trying to reduce by US$30 billion, and soon US$60 billion, per month. And the Fed's authority to issue swaps to other central banks could also be chal- lenged by politicians who might question the need to help the US's economic rivals. The twin threats of inflation and slow growth have not yet been tamed, either in Europe or the US. This calls the credi- bility of central banks – which is key to their ability to man- age the economy – into ques- tion as never before. Meanwhile, the value of fi- nancial assets that underpin the global financial system, particularly US Treasury bonds, have seen dramatic fluctuations due to the bank- ing and debt ceiling crisis, as well as concerns about the huge size of fast-rising US government debt. Recent attempts by right- wing House Republicans to block the passage of some spending bills could ulti- mately lead to a government shutdown. This would further weaken the US government's credit rating. All of this has put unprec- edented pressure on the sta- bility of the banks around the world. The growing tensions within the globalised financial system, coupled with a weak- ened US in retreat from its global role, could spell danger for world economy. There are strong reasons to doubt whether the Fed would be willing or able to lead another large-scale 2008-style bank rescue