On October 14, The Capitol Forum held a conference call with Graham Steele, former Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury and current Academic Fellow at the Rock Center for Corporate Governance, to discuss his paper “Financial Statecraft.” The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good afternoon, everyone. And welcome to our Conference Call on “Financial Statecraft.” I’m Teddy Downey, Executive Editor here at The Capitol Forum.
And today’s guest is my good friend Graham Steele. He is the former Assistant Secretary for Financial Institutions at the U.S. Department of Treasury. He is currently an academic fellow at the Rock Center for Corporate Governance at Stanford Law School. This comes on the heels of being in the Senate for many years and working for Sherrod Brown, and is probably, I think, best known for authoring the breakup the banks legislation and being part of that conversation. We’re going to be talking with him about his recent paper, “Financial Statecraft,” and a bunch of other really interesting topics in the discourse today.
Graham, thank you so much for doing this today.
GRAHAM STEELE: Absolutely, Teddy. Thanks for having me.
TEDDY DOWNEY: And before we get started, if you have questions, we’re going to take questions towards the end. Submit them to the questions pane of the control panel. We’ll try to get them at the end of the conversation.
First, “Financial Statecraft,” very interesting. Walk us through why you wrote this paper.
GRAHAM STEELE: Yeah, it kind of came out of some things I was seeing during my stint at Treasury. I mean, initially, the ideas and the kernels of it came from an article I wrote a few years ago in the Chicago Business Law Review about this law called the EDGE Act of 1919, which was this pretty obscure banking law passed after World War I, where Congress was sick of spending money, of making fiscal expenditures to finance the war effort and to help, in particular, its European allies. It didn’t want to absorb the cost using public funds anymore.
And so, the idea that came up with this law was let’s deregulate the banking system. Let’s let U.S. banks do more activities abroad over in Europe. They’ll be the ones to finance all of this European reconstruction and the fallout from World War I. And we won’t have to pay for it anymore, in the first instance. And when there are profits to be made, they redound to the benefit of these private banks, and that’ll be good for the U.S. economy and U.S. economic competitiveness. So, this was sort of this old law that I had heard a little bit about that I wanted to dig into its roots and found that that was the sort of motivating factor behind why Congress passed that law.
And then I went to the Treasury and was watching. I was on the domestic finance side. And so, I had one particular set of interactions with financial institutions, which was mostly the way that domestic financial regulators interact with them and think about how to make sure that they are safe and sound, that they are serving their communities, and they’re not creating financial instability that causes financial crises. But there are other offices in the Treasury that have their own agendas that are doing different things with these banks.
So, there’s an International Affairs office that is trying to enlist these private financial institutions in international economic development programs, like the sustainable development goals through like the World Bank and the IMF. So, it’s trying to get them to invest abroad consistent with a set of geopolitical and social goals that the government had on one hand. But then you also have a Terrorism and Financial Intelligence office that administers anti-money laundering and sanctions rules that is using that same set of financial institutions, like when Russia invades Ukraine, to try to cut Russia out of the U.S. dollar-based system.
And so, what I wanted to do with the paper was sort of flesh out like what is this partnership between the U.S. government and financial institutions where the U.S. uses these sets of institutions to further its geopolitical interests. Like how does that operate through these private banks in the first place? And then sometimes there are other public authorities that are brought to bear too, like the Federal Reserve and some of its emergency lending and its dollar swap lines. Treasury Department has some funding mechanisms like its Exchange Stabilization Fund.
Like I just wanted to set up a framework to try to fully capture how the government uses money, credit, and financial institutions to project its geopolitical prerogatives, in particular in the global dollar-based system where the U.S. has what’s called the “Exorbitant Privilege,” where the fact that the U.S. dollar is a reserve currency sort of puts it at the center of the economy and geopolitics. So, that was part one of the exercise was like what is the government even doing here when it’s trying to deploy financial institutions like that?
TEDDY DOWNEY: I feel like the Trump administration is like the perfect time to be looking at this type of framework in a sense that you couldn’t get more aggressive geopolitical goals and that sort of diverge from historical norms, which I’m not saying they’re beyond critique those norms. I find them objectionable on many levels, but we don’t need to get into that right now. I mean, well, I guess that’s what I’m trying to get at is you have these sort of ways of doing things that are sort of established norms that have had catastrophic outcomes. And then you have Trump coming in doing something that’s seeming like really different. But I’m not sure the outcome is really any better necessarily.
Tell me about what were the highlights from your paper and how it sort of fits into what we’re experiencing today?
GRAHAM STEELE: Yeah, I mean, one part of the framework I’m trying to construct here to really understand this sort of partnership arrangement as it applies across administrations, and just applies to the normal way in which most administrations have tried to use this system. And a couple of things that I try to focus on are the idea of a push and a pull between the way that the U.S. tries to deploy dollar-based finance for these purposes.
So, sometimes it is trying to provide as much access as possible to these financial resources. Sometimes it’s flowing directly through well-regulated banks that might be “Too Big to Fail” but are globally dominant. And so, trying to get everyone to rely on U.S. financial institutions. Sometimes it’s channeled through other sort of dollarbased markets that operate offshore, like the eurodollar market. Sometimes it’s trying to preserve U.S. Treasuries as the global safe asset that all investors want access to. But all administrations have sort of had this policy of trying to make—or at least since the Bretton Woods Agreement—of trying to maintain this dollar-based system and have the U.S. be central to it.
On the one hand, provide access to everybody, but sometimes they also want to choke off that access and control it and turn off the spigot when they’re having a conflict with someone who they’re trying to create leverage over them. And even under what I’ll call “normal times”, managing that balance between when you give access and want all of this financing to sort of spread across the globe, but how you can suddenly turn on a dime and turn that spigot off without creating financial instability, to me, is one of the central tensions in trying to administer this system.
And if policymakers don’t understand what they’re doing and aren’t thinking intentionally about how they manage that tension, about how to provide access but also shut it off and sort of moderate it, they’re going to create a whole set of byproducts of things like financial instability. They’re going to defer the Too-Big-to-Fail problem. They’re going to have to bail out some of these markets and institutions if they mismanage it. We’ve seen episodes dating back to the 70s, 80s, even after things like the Russian invasion of Ukraine, where financial stress and instability has sort of weakened the ability of the U.S. to use some of these financial tools.
So, that’s point number one is like even when you have an administration that understands what it’s doing and trying to accomplish and all trying to act in a concerted effort, it’s really hard to manage this tension between access and control.
But then you look at what this administration’s trying to do in particular, and it’s further complicating a lot of those dynamics and those tensions. Because you got one camp, like the “Mar-a-Lago Accord” group here, that wants to do protectionist stuff, that said that maybe the U.S. should step back from this Exorbitant Privilege of having the dollar be in the middle of this system, wants to do things like impose fees on holders of U.S. Treasuries to try to sort of back off from this centrality. So, it’s like a protectionist version here that wants to do tariffs and wants to do sanctions and wants to use a lot of these tools in sort of the coercive way.
But then you’ve got a separate camp—I guess you could think of them as “globalists” in some sense—but who want to continue using some of these tools expansively, might want to continue something like a strong dollar policy. You can look at what they’re doing in Argentina, for example, instead of helping the regime there, like they’re still wanting to provide access to dollar-based financing.
So, there are sort of two camps with two different theories about whether the U.S. ought to stay in the middle of this system or not, where you don’t really see a coherent theory coming out about, number one, what should the role of the U.S. dollar and U.S. finance be in this system? But also, if we’re going to move to a different system, how do you transition that? What does the governance of that look like? Who are we collaborating with? And so, that just creates a lot of uncertainty about the way this policy itself is supposed to operate. That raises the stakes of the whole enterprise.
But then a second piece of this is that they also want to—a central part of their economic theory and how to make the U.S. globally economically competitive is we’ll deregulate the financial sector and we’ll unleash our global systemically important banks and they’ll leverage themselves up. And again, they’ll make profits and that’ll be good for us. But again, you mismanage this statecraft, you’re going to create financial instability and then you’ve deregulated the financial system and made it less resilient and you’re going to end up with this sort of doom loop of bad statecraft creates financial stress which then creates crises which then lead to bailouts. And so, one of the arguments I’m making in the paper is like there’s got to be a coherent theory here. And the way in particular they’re thinking about financial deregulation is only going to undermine this system of statecraft over the long run.
TEDDY DOWNEY: This gets me to a broader question and then let’s dive into all the—you just covered so many interesting timely topics, we’ll dig more into that. But from a broader standpoint, what I find troubling about the way that financial statecraft works is that it feels profoundly undemocratic. It feels profoundly unaccountable.
And so, I just read this book about Chile, for example. You get a democratically elected socialist leader and they just cut off the economy to Chile, destroy the economy. It creates a coup and you get Pinochet. I mean like with no—it’s just like a couple of people in the U.S. government making that happen, determining that. And so, that idea that who gets rewarded or punished with this financial statecraft to me feels deeply problematic and something probably Congress should need to get involved in, not really the purview of a random bureaucrat or a Larry Summers type who’s just thinks they’re very smart or someone in the State Department or whatever who is just unaccountable and willing to punish an entire society for their political views. I’m not saying Chile was doing a good job at being a socialist or whatever. But you’ve got this democratically elected government that’s just being unilaterally punished. And then we can come up with a million other examples of that, how financial statecraft has either been misused or used to punish societies unjustly or what have you.
But what’s your overall take on the accountability or lack of accountability and sort of is that a problem when you’re talking about this system?
GRAHAM STEELE: Yeah, wow. There’s a lot there to unpack in your question. I think the first component of what you’re saying is that the goals of this regime get muddied a lot of the time. Like what the U.S. government is actually doing when it’s deploying these tools, they sort of deploy different arguments at different times to try to rationalize the reason in which they’re bringing these tools to bear. But the common theme across most of them when you really unpack them and sort of get beneath the surface and look through some of the superficial arguments is the U.S. is doing what it thinks is in its own national self-interest globally. There’s not really a lot of the time a coherent thread that is like they’re promoting democracy necessarily or they’re always promoting capitalism or fighting something like communism or socialism.
At various points when these tools have been deployed, they’ve been used to sometimes prop up dictators. They’ve been sometimes used to support governments that don’t ostensibly share the values that the U.S. has. But in strategic moments, the U.S. government has felt like we need to support these other enterprises and one of the ways in which we do that is we use financial tools.
The flip side of that is certain entities or countries need to be punished for a variety of reasons. So, sometimes the arguments are couched in something like financial stability or systemic risk. If there’s a currency crisis in a particular country, you’ll have international spillovers. But you look through that rationale and you see, well, no, it’s just the U.S. government probably likes the government that’s in this country and so it wants to support them. And it will provide financing to them on largely favorable terms.
The other side of that, the other version of that, is there are some countries that the U.S. disfavors for a variety of reasons. You can think of global south countries in this category where financing will be provided to them either directly or through international financial institutions like the IMF or the World Bank, but there’ll be harsh punitive financial terms that are applied to that financing that require political reordering, debt restructuring, things that have to do fundamentally with them restructuring their own domestic politics in a way that the U.S. thinks it likes and is consistent with what the U.S.’s global project is. Again, couched in things like fiscal discipline and having them get their house in order, but that are deeply political and about geopolitical prerogatives more so than something based on some sort of principles of good finance and good financial management.
Pulling up one level from that then, one of the points that I think is worth exploring in some of my own future projects at least is in which finance is a tool that is seen by, in particular, some of these technocrats that are responsible for financial governance as sort of being a costless enterprise in a way. You can create leverage over these societies without having to deal with a lot of the messiness of foreign policy or direct military conflict. But that view obscures the way in which finance itself can further a lot of harmful projects.
The deprivation of financial resources means countries can’t feed their own citizens or can’t build out their own infrastructure or sort of further some of their own projects. So, the way in which human rights and finance actually have these deep connections, just thinking about it as a purely financial enterprise obscures a lot of the moral stakes of some of this broader project.
Yeah, and then there’s a question about like the actual legal mechanisms through which these tools themselves are operating. So, some of the Federal Reserve and Treasury tools are off-balance sheet. They are not appropriated through the congressional appropriations process. And so, it sort of feels costless to the United States government and a lot of the officials that run it because it’s like we’re just creating money using the central bank or using the Treasury. And Congress really can’t tell us what to do because there aren’t a whole lot of oversight mechanisms there.
A second problem for Congress is that a lot of the emergency statutes the president uses to administer this system, like the International Emergency Economic Powers Act, the law he’s used for tariffs, which we use for dollar sanctions and some other measures, are just very, very broad delegations of authority that don’t have a whole lot of oversight and a whole lot of checks on them.
Some of it’s being litigated right now, but one of the proposals I make is that Congress really needs to rein in some of these powers and take back some of the role about who ought to be at the table in making these decisions and the basis on which the decisions themselves ought to get made. So, they’re just ripe for abuse. And some of it is just like overuse and using it in ways that are not consistent with what Congress wants them to do. But the really robust version of this is the President starts channeling it to businesses that he owns or friends of his or the Treasury Secretary. Sure, it wants to help Argentina, but it also wants to help his friends who run investment funds that have a lot of exposure to the Argentine peso. So, there are ways in which it can be used inconsistent with congressional objectives and prerogatives or just totally used as a tool of corruption and personal enrichment.
The last thing that I would also note is there’s an interesting balance between the distribution of power between the government and private financial institutions in this system. If large global banks and other financial institutions become so central to the way that the U.S. government transmits geopolitics, then I think you could rightly question at what point do private institutions have all the leverage in this situation? But they become the tool of first resort and the first set of instruments the government goes to when there’s an armed conflict is we want to use dollar sanctions. We want to use some of these anti-money laundering tools. Or we want private banks to finance a lot of our social goals and social objectives. Who really has the power in that relationship in that moment? And what leverage does it give to private financial institutions?
There have been times in our history where private banks—you can think of J.P. Morgan prior to World War II—it was one of the biggest bankers for the Axis Powers leading into World War II. And the U.S. government was not a fan of that, but what were they are going to do to rein in the most powerful bank in the world? And how are they really going to push back and pull them in?
So, part of it is the way that the government can use these tools. But also, part of it is a question about at what point does the government cede power to private actors who are really getting to do their own version of private foreign policy in this relationship?
TEDDY DOWNEY: On top of that, I would also add, what are they asking in return? If you’re running a bank, you might be like, yeah, sure. I’ll cut off Russia. But I want deregulation. I want no oversight of derivatives. And I noticed during the Obama administration, I wonder, I mean, that’s the time I have the strongest memory of how all these rules were being rewritten. There were just a lot of times where it felt like—because you mentioned that there’s not a huge—it’s not really coherent between the State Department and these policies and the domestic priorities. It can be incoherent at times. But what was coherent was anytime the banks were doing something for the government, they were looking for something in return, I think, favors.
And so, I want to ask you directly about that. Is that an issue also? Is that like, hey, they think they’re earning goodwill and they want to get a return on their doing what the government wants?
GRAHAM STEELE: Yeah, yeah. So, I think there’s three different ways in which you can think about that dynamic operating—and again, that balance between public and private power.
One is just the general argument—which you’re referring to, and when you referred to my prior work dealing with “Too Big to Fail” banks—one of the arguments that you hear a lot, when you talk about more regulation of the financial sector, is, well, if you rein it in too much, if you regulate it too much, the activity is going to go overseas. We’re not going to be globally competitive. And we’re not going to be central to this entire system anymore.
So, it’s like a general argument of we’ve got to have the biggest banks in the entire world, because that redounds to our benefit when it comes to economic competitiveness, but also for some of these foreign policy purposes. We’re not going to be central to this system anymore if government takes too heavy of a hand here. So, it’s like a high-level, we’ve got to have these globally dominant banks. And that is that it is an unmitigated good to have a lot of US-based finance. My argument is that actually the quality of that finance matters a lot. And then really a sort of out-of-control financial sector has more costs than it does benefits in this system.
A second argument or a second move that the banking industry will make when it’s presented with some of these policies is like a direct connection between some of these statecraft activities and specific regulations. So, you will see them say, “Okay, you want me to do more of this financing activity. Well, let me point you to a specific part of the risk-based capital rules or leverage requirements that we are subject to or derivatives regulations that are hindering our ability to specifically do cross-border activities, or to operate in London, or to offer some of these derivatives to some of these other counterparties that are part of the statecraft toolkit that you want us to be doing.”
So, an explicit connection of: “This specific regulation is hindering our ability to do this kind of work.” And it’s a move they make when it comes to some of these kind of statecraft-related considerations. They’ve also done it in the climate space sometimes, too. Like, “We’ve wanted to do more climate financing, but the capital rules are so onerous, we can’t do it. You’ve got to roll these back for us.” So, that’s about specific rules that are directly tied back to some of these statecraft purposes.
There’s a third move, which I did not put in the paper, because it’s hard to actually pin down. You don’t see it talked about publicly, but which I think happens behind closed doors in some of these conversations where you have a political agency, like let’s say the National Security Council, hypothetically, or like the Treasury Department, that cares about statecraft first and foremost, approaches one of these financial institutions and says we want you to help push back against China or help respond to the Russian invasion of Ukraine.
And then the institution will say, “We’d love to. But also, like our supervisors are really on our backs a lot. And if you could just get them to ease up on these other rules that are unrelated or more generally just kind of give us a break, that’ll give us the operating space to then think about how we administer these anti-money laundering rules or how we can comply with the sanctionsregimes.” So, it ties unrelated regulations and supervisory policy, but just sort of says in a soft quid pro-quo kind of way, like, “You give us our deregulation, we’ll get onboard with your project, we’ll all be happy, win-win, and then we can all get what we want out of this regime.”
And that really then puts pressure on fundamentally the political agencies in the first instance to then turn around to the independent financial regulators who’ve got to be thinking about the safety and soundness of these financial institutions and the stability of the entire financial system to then turn around and say like, “You’re getting in the way of our foreign policy prerogatives. Can’t you lighten up, what’s the big deal here?” And so, it puts political agencies at cross purposes to some of these independent financial regulatory agencies that care about things like financial stability. And so, there’s sort of three ways in which this can work, some of which are sort of explicit and out there, and some of which work in a sort of softer way where these partnership dynamics come into play a little bit.
TEDDY DOWNEY: And so, in terms of—and I promise we’ll get into the meaty topical things in a second. But just think about the paper, and in terms of what is a system that is like—I think there are two things that kind of stand out, the lack of transparency and lack of accountability when it comes to these financial decision makers. Listen, I do investigative journalism for a living, and as many times as I’ve tried to crack the Fed, and I’ve tried to get people to go crack the Fed, it continues to be tricky. Treasury, the same way.
I mean, you honestly are better off just talking to these Wall Street participants than you are trying to figure out what’s actually going on at the Fed, because they’re calling up the Wall Street people more than they are talking to anyone else. What is your view of creating more transparency? Or does there need to be more transparency? Does there need to be more accountability? How do you do that?
And then on the flip side, how do you make it so that the whole—let’s say there is a more coherent structure to this financial statecraft where you are integrating with the State Department, with your human rights goals in a coherent, holistic way, where that whole strategy makes (a) more sense, and (b) feels more democratic, that there aren’t just these arbitrary people when it comes to different government kind of doing things in their little orbit where they have power, with the Fed having the most leeway with their own money, like you’re saying, just sort of going off and doing their own thing?
GRAHAM STEELE: Yeah, I mean, one of the first things I was trying to do with this project, in addition to the reform suggestions that I had, and some of the specific case studies that I try to unpack about how the system operates, was just in the first instance to lay out a framework where I’m trying to say, here’s what I think all these agencies are doing. Here’s the comprehensive framework I’m trying to put out there about the ways they’re using deposits, payment systems, theprovision of credit. Here’s all the different laws that apply here, the agencies that are involved, and the way they deploy these tools as part of what is a comprehensive framework that isn’t explicitly connected and isn’t sort of put out there by the government as like, “Here’s what we’re trying to accomplish and all the ways we’re trying to accomplish it.”
So, step one for me is to put out here’s what I think that they’re doing. I hope that there will be some dialogue now. Where, if some of these agencies, they’re like this is not actually what we’re doing. We’re doing these two other things over here. I would love to have them be explicit about it, to be more transparent about it.
I think one of the issues in this space, because it straddles the worlds of independent agencies who are financial regulators that have one set of statutory missions and purposes and authorities, and the political agencies that have a separate set of missions around economic competitiveness and foreign policy, is that these goals are not stated and they’re not explicit about it.
The relationships are sort of soft and informal in a lot of cases. Agencies that feel like they’re getting up to the line of where their responsibilities end and someone else’s start, and particularly I think the independent regulators are a good example of this, don’t want to be explicit about how they view what authorities they’re using, when they’re using them, and how they’re using them, and sort of which category it falls into, versus financial stability, regulation, or statecraft. They want to operate in a world of what they view as constructive ambiguity.
But my argument in the paper is that ambiguity is creating a whole set of problems. It’s a lack of clarity about what this system is and does and is trying to accomplish, but then also it’s going to create a whole bunch of these other byproducts, including financial instability, but also inequality. It’s going to lead to bad statecraft. It’s going to have a whole lot of these other consequences that are going to be really bad for a lot of stakeholders–the government itself that’s trying to do this stuff included.
And so, one of my goals here is to have more transparency, to have these agencies be more explicit about what they’re trying to do. And then have Congress oversee that and have them come up and talk about it and be clear. Because my theory here is step one is acknowledging you have a problem. And then step two is thinking about what you’re going to do about it and how you’re going to address that problem.
And so, I’ve got some reforms. I mean, Congress has acceded to this structure a lot over the recent decades, I think, because it has similarly viewed this as, in some sense, a little bit of a low-cost regime. Like I said, they’re not having to appropriate dollars to do this to fund foreign policy. It can happen off balance sheet in a lot of ways. Institutions will govern it. Or some of these agencies will use regulatory tools or just create money in order to do it. So, it seemed convenient. In that way, it was, again, also seen as a costless way, a way to avoid having direct military conflict.
When I was working in Congress, I was as guilty of this as anybody else. I was the Chief Counsel for the Democratic staff of the Banking Committee, in years when we expanded tools like economic sanctions to be used against Iran or Russia. And there was a sort of ratchet effect where more and more authority is being delegated to the Executive Branch to use these tools. Because Congress didn’t want to be in the business of having to weigh in the first instance and acknowledge what was happening in this regime and the costs of it.
And so, part of my argument here is, Congress, you’ve got to get back in the game here. You’ve got to rein in this structure. You’ve got to have more of a balance between what your prerogatives are—because you’re elected by the people—and not just let either the President have all the power here or have a bunch of unelected technocrats be the ones that are making the decisions in the first instance.
So, part of this is what is really going on in this regime? And then step two is have more robust legal controls and guardrails around it so that agencies are not abusing their powers and getting out of what the broader public wants to be done in this space.
TEDDY DOWNEY: One last question before we get into Argentina and other current topics in more depth. One assumption in all of this is that U.S. financial institutions are not predatory and punitive towards the citizenry. Because you could be a sicko and be like we’ll unleash our financial institutions on you if we don’t like you. That’s what I would do if I was some of these companies. But what is the need to have rules so that is not happening, that these financial institutions aren’t focused on predation and domination?
Because obviously, exporting that, first of all, having that in your own society is bad enough. But you start exporting that willy-nilly, you’re not helping anybody really in the long run. And so, unless you want them to be dominated, which I guess is another matter entirely, it’s not really within the scope of what they’re hoping to do. I don’t think. But this comes up with trade. And I think this is more well-known when we’re talking about Big Tech, because that’s part of the trade discussions now, and things like that, and regulation. But I think you could think of that more broadly as like, what’s the role of rules of competition and rules that regulate predation and domination?
GRAHAM STEELE: Yeah, I think you have to start with a fundamental question about what is the U.S.’s role in this dollar-based system? And how does it administer this idea of this Exorbitant Privilege as an idea where it is the global financial hegemon, and so, it’s just going to throw its weight around in this system? And basically, it will dispense benefits to its allies, it will kind of coerce its adversaries into this system. Yeah, so does it view itself as the singular global actor who can impose its will on others? Or is it trying to be a benevolent administrator of a multilateral global financial system that happens to use the U.S. dollar as a reserve currency?
So, does it see itself as having to do like coalition building, and thinking about how it’s dispensing the benefits, and trying to build goodwill? Or is it always just trying to impose itself on other geopolitical actors? And I don’t think there’s been a coherent view of that over time. Sometimes within administrations, there hasn’t been a coherent view of when it’s trying to use coercive measures versus supportive measures. And then certainly from administration to administration, they’ve had different views, I think, of what their theory is of how the U.S. is supposed to act here.
There are implications for the effectiveness of this regime. If there’s too much confidence, or you sort of overstate the ability of the U.S. to be a unilateral global actor, other countries will try to de-dollarize in some way. If the U.S. is just a bad steward of its own financial system, it will lose its centrality. Because it will show itself as not being capable of actually ensuring its own financial stability and its interest in preserving the rule of law. And being too much of a politicized domestic financial system, I think, will help cede its centrality here. So, the way in which the wrong theory about what the U.S. is trying to do will actually be self-defeating and lead to it ceding its central role in this entire system.
But then I think a thing you’re also asking about is how do the domestic dynamics of financial exclusion, or predatory inclusion, play out globally, when the U.S. is doing provisioning to other countries, and other regions, and other populations? And yeah, I think what policymakers think the U.S.’s role within this system is then translates into how they try to administer it exclude certain populations, because they view them as unworthy of having access to these financial resources, have no compunction about freezing assets in certain countries, because they want to turn the screws on them and don’t necessarily see their populations as being equal or worthy of having access to those resources, and having sovereignty in their own right. Or do they dispense subsidies and benefits to them and give them financing on really permissive terms because they see that the U.S. government sees those other countries and populations as part of the same political project?
And so, again, I guess another corollary to that is do they view the project as basically an extractive scheme, where U.S. financial institutions are trying to make maximum profit globally that will redound to the U.S.’s economic competitive advantage? Or it is a long-term issue of how you have global sustainable finance, that then sort of leads to a set of benefits that benefit the government geopolitically?
And so, I think which theory the U.S. government has leads to different outcomes in different situations and leads to certain countries and regions having the standing swap lines with the Fed, while others don’t. Certain ones getting financing from Treasury’s Exchange Stabilization Fund or from one of these International Financial Institutions on permissive terms, while others have restructuring and other punitive terms imposed on them. Who is seen as risky from a money laundering perspective, who is not? And therefore, who is de-risked from U.S. banks, while who has access?
There are a whole bunch of these value decisions about who ought to have access to U.S. finance that are not technocratic. They have deep political and geopolitical implications. But this system, and the way it’s administered, treats them as matters of just mere financial administration, as opposed to having sort of values embedded within them as well.
And it’s a sort of international corollary to the ideas of redlining that have happened here in the U.S. traditionally, or the kind of subprime predation that happened before the financial crisis. It’s just happening at a global scale internationally, instead of happening here domestically.
TEDDY DOWNEY: I could talk about that all day. That’s so fascinating, the different layers there. But I promised we would get into what’s going on with the Trump administration, and we are finally there, 40 minutes in. Thank you for staying with us. We are finally here.
Argentina, to your point, bailing out a government that is politically on thin ice, and that has the Treasury Secretary’s friends betting on it, seems deeply problematic. To me, we forgot to mention that soybean farmers in the U.S. are irate because Argentina is competing with them for Chinese purchases of soybeans. You couldn’t get a more toxic political mix here. And yet, the Trump administration, totally unfazed, goes in and bails out Argentina. Walk us through how that’s possible, and what your reaction to that is.
GRAHAM STEELE: Yeah, I mean, there are so many different threads to this piece that I think sort of highlight the issues with this regime of statecraft and the way that it operates. So, maybe I’ll talk a little bit about Argentina. Also, contrast it to what’s happening with Argentina’s neighbor Brazil, and some of the stuff that’s going on there.
I think the Treasury’s response to Argentina sort of highlights the way this regime operates, and sort of muddies the water around what the government is trying to accomplish in this. As you said, there’s one component of this. What the Secretary said initially was, there is a financial stability risk here. The U.S. does not help Argentina, help it to stabilize the peso, stabilize its economy and its politics. That’s the reason the U.S., and in particular Treasury, but also other technocrats, have intervened in Argentina in the past was it viewed as one of the heavyweights in Latin America. And if there were issues there, it would spill over into the U.S. But it is not the same, and not as connected to the U.S. economy as a Mexico would be in the peso crisis in Mexico that happened decades ago. But nonetheless, what the Secretary was saying was very much a technocratic argument. We’ve got to do this for financial stability purposes. We have no choice. It’s going to hurt us economically if we don’t step in and prop up these markets.
But then he also went on TV and basically said, “I’m trying to help get this regime through to the next election.” So, I’m making these technocratic arguments. But then the mask falls away, and I’m also helping this regime that the current U.S. government views as having values that are consistent with its own. The calculus is as simple as that. They are a libertarian government that shares some of our ideals and some of our politics. We want to help them. And there’s other countries we don’t want to help and won’t extend these privileges to. And so, that’s why we’re making this choice.
The third part of this that you’re talking about is, oh, and by the way, some of these connected financial institutions have connections back to the U.S. government and well-connected public officials. So, you’re helping your political friends abroad, but also your friends who are invested and speculated on the Argentine peso who are going to get help through this.
So, it’s the muddying of, are we doing statecraft? Are we doing financial stability? Who are we helping for what reason? And again, that’s why I think there’s got to be guardrails around these policies. Because officials can just do a lot of hand-waving about what’s happening here and try to justify it, but it is not being transparent about the mechanisms to which it is using. For example, the Exchange Stabilization Fund, how the structure of the financing arrangements are going to work, sort of the mechanisms, what the holdings are going to be within the ESF itself.
And so, there’s also a lot of opacity about the arrangement and the financing itself, when the U.S. committed these resources, what it intends to do in the future. Is it going to spend the full $20 billion it says it has committed? There’s just got to be more Congressional oversight of this to also sort of unpack what we’re even trying to accomplish here.
I don’t know how to get into the soybean stuff. But as you said, purely thinking about it from a these are political friends doesn’t represent the full way in which using finance has other implications for things like industrial or agricultural policy, but it highlights the point that who the U.S. chooses to finance has a broader set of economic implications.
Sometimes it will implicate strategically important industrial sectors. Sometimes finance is the tool to think about how you manufacture chips and some of these other sectors. Sometimes it has to do with agriculture, but that finance really sits behind a number of other strategically important economic sectors. And it’s really kind of unique in that way, in the way that it flows across the border, but also is created by the government in that first instance.
I mentioned Brazil. And I mentioned that because there were some reports a couple of weeks ago about the U.S. government also wanting to maybe impose trade-related sanctions on Brazil because Brazil created its own public, real-time, fast, low-cost payment system. That it forces banks to, if they want to operate in Brazil, they’ve got to sign up for this public payment system.
And ostensibly, what trade authorities are saying is this is anticompetitive for us. If you make our payment companies, think your PayPals, your Venmos, of the world, but also maybe Visa, MasterCard, or U.S. banks, sign up for this system, then it’s going to undercut them competitively, and it’s going to be bad for them. And this is a matter of trade policy.
But it shouldn’t be lost on anyone that this U.S. government has an issue with what is happening in Brazil and their domestic politics, and the fact that they are prosecuting the former president there, who is friends with the current U.S. President. And so, they’re trying to say we would bring trade sanctions against Brazil, because they have this public payment system. This should benefit U.S. financial institutions. But also, they have a beef with Brazil because they’re going after President Bolsonaro, too.
So again, are we doing statecraft here? Are we doing some sort of other kind of financial and trade policy? Or we’re just trying to help the U.S. President’s friends who are trying to punish its allies by using these coercive measures? Like what is happening here? We need more clarity. And these resources and tools need to be cabined in. Because any regime can come in and try to abuse them for their own ends. Right now it might be punishing Brazil and helping Argentina. In a future administration, the roles might be reversed, but again without any sort of coherent theory about why these tools are being brought to bear in the way that they are.
TEDDY DOWNEY: In some ways it’s actually nice that the Trump administration is so overt in like why it’s doing it. Even if they say some pretend stuff like we like these people. We’re going to help them. They’re our friends. Like. the Obama years to me were deeply frustrating because I think they were doing that too and using the technocratic excuse. But not lying about why or just not saying why really, just kind of putting the full technocratic exercise out. Or even the Biden administration has always said—no offense for when you were there—but there’s something refreshing about that. But then, on the other hand, you’re saying that the actual mechanism is still super opaque and it’s not really any more transparent except for the underlying politics, which I’m not sure gets us all that far.
GRAHAM STEELE: Yeah. No, I mean, you definitely saw this in the Biden administration for sure where there were concerns about certain strategically important industrial sectors. You could think of the steel industry in the U.S. Steel merger for example, where there were concerns about U.S. industrial policy, and sectors that are important here, and jobs for certain unions and workers within some of those industries. The tool they were using would sometimes be like CFIUS, which is supposed to be a national security process in the first instance. And so, there are questions of is this the right tool to try to accomplish this goal? Was this originally intended in this way? It might have been the best tool to be able to bring to bear because it was where the U.S. government and the President had the most leverage in those processes.
But then under the Trump administration, they’re using CFIUS in new and different ways. They’re doing these “golden share” arrangements now, too. They’re taking equity, again, a very sort of financially focused way of trying to have control over private industry. Each administration has tried to expand these tools in different ways for different purposes that I think then is useful for the next administration coming in to try to bend it to whatever their own purpose is. And so, it just raises the stakes of elections sometimes, and decisions about who the Treasury Secretary is, who’s running the National Security Council, the National Economic Council. Because what are they are going to want to do with these tools, how are they are going to want to use them, some of these folks are unelected. Some of them are even unconfirmed by the Senate. But they’ll have a lot of power in this regime, the more and more these tools get expanded.
TEDDY DOWNEY: We’ve got a couple issues to get to, want to make sure we get to them all. I saw an article in the FT, which I think is—besides The Capitol Forum—probably the best newspaper out there these days. But they had an article that was basically showing how much bank deregulation there was going to be in the U.S. and how that effectively was going to create a race with Europe on whether or not they were going to deregulate so they could stay competitive. Almost no ink given to financial stability, systemic risk, which is like ostensibly why these capital rules are in place in the first place.
What’s your sense of are we really going to get this sort of race to the bottom on bank deregulation? And maybe we could pair this up with the systemic risk stuff. Where do you see the most glaring cracks in the system? We’ve got private credit with the auto stuff recently. We’ve got crypto creeping into the banking sector. We’ve got other Big Tech trying to control currency. We’ve got a lot of different issues going on. What do you see as the real systemic issues, things most likely to come up, if we are going to have a race to the bottom on bank deregulation? It certainly seems like it’s going to happen in the U.S., but unclear if we’re going to get that in Europe as well.
GRAHAM STEELE: I think there’s an important, yeah, I mean, this administration, the Secretary gave a speech in, I think it was March, where he said basically there are three pillars, three key pillars, to the President’s “America First” agenda: financial deregulation, tariffs, and dollar sanctions. Those second and third categories are very much part of this statecraft toolkit. But they view deregulation as a facilitator of these other policies. The way he has talked about it is we want to re-leverage the private sector and have them go out and be our national champions globally. And again, we’ll like win, win, win. They’ll profit. And we’ll get to throw our weight around. And that’ll be great.
But what we have seen when they’ve tried to use some of these other tools is that they create financial instability. When he imposed the tariffs, it created stress in the U.S. treasury markets. The response to that, from the administration, was, well, let’s just do more deregulation. That’ll let them blow out their balance sheets even more, and that will sort of solve the problem.
My argument in the paper is just the opposite of that. These institutions can’t be “Too Big to Fail.” They have to be well-regulated and resilient to be able to absorb those moments of stress. So, I think this idea of deregulation as the panacea for using these other sets of statecraft measures is actually going to be self-defeating over the long run. Because it’s not going to make them effective. These institutions and the financial system is going to be less resilient. So, they’re not going to serve as effective conduits for this regime.
But also, nothing will undermine the U.S. global financial leadership more than having financial instability, having “Too Big to Fail” banks, having crises and bailouts. That cedes U.S. global leadership. That financial instability creates political instability. It makes us look bad to the rest of the world that we don’t have our act together. And it further erodes the rest of the world’s confidence in our ability to be effective financial stewards of this global dollar system. So, it’s a self-defeating agenda, fundamentally, when you put the pieces together.
Now, is the EU actually trying to get into a race to the bottom with the U.S.? Or is it trying to turn this thing that the U.S. is trying to use as a competitive advantage into a source of vulnerability? They have done very interesting moves at various points in basically trying to target the U.S. financial sector and financial system when the U.S. has taken punitive measures. So, when the President imposed the “Liberation Day” tariffs, the European Commission’s response was to use something called the “anti-coercion instrument” to basically threaten to tax U.S. banks and tech firms and debar them all from contracts with European Union countries.
So, basically what they decided was tech and finance are two strategically important sectors for the United States. We’re going to target them specifically and try to turn them into a vulnerabilityand threaten to retaliate against those institutions in particular. And so, are they really trying to get into a race to the bottom? Or are they basically just trying to say to the U.S., “If you want to deregulate, we want our own deregulation or other things in return? And so, what are you going to give us as part of this system?”
Not clear to me what the game is that they are playing there. But over time, I think the issue is the U.S. is going to again cede its leadership position. One of the key lessons of the Global Financial Crisis was financial instability in any one of these globalized economies is everyone’s problem. It is not just the problem of that individual country. And that’s particularly true in the case of the United States. And so, that’s why there are a lot of multilateral reforms and these other bodies that were created, which the U.S. is stepping back from.
I think you can look back on, there was a story in Reuters, which is another good outlet, in May, that reported the European Central Bank was testing what its financial institutions would do if the President got control over the Federal Reserve and then tried to cut off European banks’ access to dollar funding. How would they respond to that?
And some of the deregulation is going to cede the U.S.’s central role here. But also, politicization of institutions like the Fed will also further diminish the U.S.’s role from a regulatory perspective, but also as the administrator of this global dollar system, too.
So, I think there are ways in which some of these other countries are looking at how the U.S. is mismanaging its role in the middle of this regime and thinking about how they can take strategic advantage of that, how they can sort of insulate themselves. And probably thinking about what alliances can they make with other countries to have some of these alternative systems.
I don’t think they need to fully displace the dollar in order to actually create a problem for the U.S. and create leverage over the U.S. There just have to be credible alternatives, other ways of electronic and other kinds of payments, to then get the U.S. to sort of think like, “Oh gosh. How do we back ourselves out of this? And how do we regain our centrality in this system?”
TEDDY DOWNEY: Okay, last question. We already talked about what a more positive vision for financial statecraft would be. So, we don’t need to get into that. But one thing that comes up a lot in trade conversations is when you have a concern about the rule of law and democracy in a place like the U.S., does that create an opportunity for other countries to fill that void? And I think we had a mini example of this. And you could disagree if you think otherwise. But when the U.S. said—when Trump said- hey, the E.U. needs to get their act together. And NATO countries need to spend more on their defense. They need to stop freeriding. And then Germany and other European countries are like, all right. We’ll borrow some money and we’ll pay for some weapons. And then all of a sudden, investors just flock into those stocks in those countries. It was also at the same time you were seeing some really radical positions by the Trump administration on rule of law. To what extent do you see financial statecraft?
Obviously, I think at some level, trade more broadly has implications with democracy and rule of law and where investors think that is contributing to political and financial stability. But when you think about financial statecraft, how much of a role do those things play into the strength of a country’s hand or opportunity? And just curious about your thoughts.
GRAHAM STEELE: Yeah, yeah. I mean, I think it is central to this entire system. I think, do the administrators of the system adhere to domestic laws and international norms? It’s a part of being a reliable source of global finance that investors and other countries can trust and feel they can be a reliable partner in this. Because fundamentally, it is a global partnership that others have to want to sign up for and be a part of. And I think if it just becomes an undependable system where the President’s friends get benefits and the President’s adversaries in a given moment get cut off and get penalized, then no one’s going to want to be a part of that system because it’s unpredictable. It is highly contingent and personality driven. But no one’s going to view that as a reliable safe haven.
And so, part of what undermines the system are the US’s ability to be a reliable international partner. So, when the ECB thinks that maybe the Fed’s not going to use its dollar swap lines anymore, that undermines the system and the U.S. centrality in it, on the one hand.
But also, some of these domestic moves of politicizing some of these agencies and having the President try to throw his weight around, not adhere to laws and norms and trying to confiscate people’s property and bring criminal charges against them, that upends the system too and suggests that some of these domestic laws that determine the way that this geopolitical system operates are up for grabs again and cannot actually be relied upon. And so, can people really be a part of that system?
So, I think it is all connected. And then the regulation piece of it is layered on top of that too. Which is, is this financial system going to be resilient over the longer term? Or is it just going to be boom, bust and crash? And then again, the President’s friends get bailouts and his enemies are sort of left to their own devices essentially.
And so, I think that’s an essential part of this. And I think markets don’t fully understand some of the moves and the nuances of this. And so, they’re not always reacting in the way that I would argue they should, given how much this system is actually being upended at the moment.
TEDDY DOWNEY: And last question, I promise, really quickly. Another thing that happens in the trade conversation is the U.S. just kind of continually falls back on us being the dominant consumer. China falls back on having monopoly power over specific chemicals, inputs, what have you, in the supply chain. Maybe also their engineering capacity. How do you think about financial statecraft and monopoly and issues like that? Does that come into how you think about it? I mean, obviously, we talked about too big to fail banks. But are there other monopoly issues that come up that you saw in your paper when you’re like, oh, this is an element of financial statecraft?
GRAHAM STEELE: Yeah, I think I refer to it in passing in one of the footnotes in particular, about the payment system. Where, from a government’s perspective, I think the conventionalthinking is things like economies of scale and, frankly, monopolistic dynamics in some of these markets, redound to the benefit of this regime. Because if you have one global payment messaging service, or you have a couple of dominant global payment providers, or you have a small handful of banks whose GDPs would be the third largest economy in the world, all of that helps you, at least in theory, throw your financial weight around. And so, some of the dynamics that drive monopolies and the creation of “Too Big to Fail” financial institutions, on the one hand, just at a very sort of simplified and intuitive levels, seem like they redound to the benefit of these statecraft policies. Because more finance and more U.S.-controlled finance is viewed as an unmitigated good.
And I’m trying to complicate that a bit and try to say that there are other factors that come into play that would preserve the U.S. finance as a central part of this system. And tipping too far into monopoly or into the “Too Big to Fail” problem are actually going to make the system worse.
Harder to administer, create a bunch of these unwanted and unintended consequences like financial instability and bailouts that are just going to undermine the system over the longer term. So, there’s a superficial intuitive appeal to the idea that you want a small group of monopolistic providers, but it’s going to actually create a more complex set of problems.
TEDDY DOWNEY: And to your point earlier, who’s really in charge is a question also.
GRAHAM: Yeah, for sure.
TEDDY DOWNEY: Graham, it’s great to see you. Thank you so much for doing this. This was an incredible conversation. I had such a good time catching up and talking about it all. And thanks to all of our listeners as well. Graham, It’s great to have you.
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