The last six months of U.S. economic policy are driving a drastic change in the international order of the past eight decades, with President Trump leading the retrenchment in the support of global trade, defense, and developmental aid.
This new approach has resulted in a combination of market volatility, heightened uncertainty, the erosion of the rule of law, and collectively diminished economic opportunities across the global arena.
This is according to Gary Gensler, the former chair of the Securities and Exchange Commission, who spoke to Institutional Investor on the eve of the launch of the new book, “The Economic Consequences of The Second Trump Administration: A Preliminary Assessment.” Gensler, Nobel laureate Simon Johnson, Ugo Panizza and Beatrice Weder di Mauro edited the book, which includes essays from more than 50 academics.
Referring to the normal push and pull of U.S. politics following a transition from one party to the other in the White House, Gensler said that the current situation is far from unprecedented. “It goes without saying that when there's a change of administration, the United States policy shifts, but this is a much more dramatic shift in more areas, from a President and his team that came in far more determined, with far more experience and more united on their mission,” he said.
During his time at the Commission, Gensler oversaw a radical overhaul of capital markets regulation, drawing widespread concern from lawmakers and industry on both sides of the divide about the speed and volume of new proposals and rulemaking. His tenure marked a rapid departure from previous regimes of slow-paced rulemaking. The crypto industry in particular railed against his approach and was jubilant to see his successor, Paul Atkins, assume the position earlier this year.
Last week the SEC withdrew 14 rulemaking proposals issued between March 2022 and November 2023, many relating to the division of investment management. This is not unusual, and similar actions were taken by the Biden and Obama administrations to withdraw proposals from the first Trump administration, and from George W. Bush, respectively.
But Gensler, who spent four years living and breathing SEC regulation, is more focused on the economic impact that the current administration is having both at home and abroad and says it’s “a broader story than any one regulatory agency.”
“What is happening around tariffs, immigration, pulling back from international alliances, challenges to the rule of law and really re-envisioning a whole international order are all so much bigger,” he said. “Although the stock market has shown quite a bit of resilience, and the bond market as well, these things have and will undermine economic growth in the U.S. We've already seen the OECD, the IMF and other independent forecasters lower their forecast for U.S. growth this year and next year, globally.”
In May, Moody’s was the third and final of the major rating agencies to downgrade the United States from Aaa to Aa1, with a stable outlook, citing that there was an inability to service the large and growing deficit.
One of the sections of the book, chapter 17, discusses the central role that the U.S. has long held in shaping the global economic and financial order. Throughout this period, the author writes, the country has delivered two essential international public goods: global military protection, which has helped to prevent conflicts between major powers, and financial stability, by supplying the world with dollar-denominated reserve assets and capital markets that facilitated international economic growth.
But the economics of the Trump administration is a stark retrenchment from this approach, and a catalyst for the slow erosion of U.S. hegemony.
Gensler stressed in the interview that rather than be a burden, this position of leadership has elevated the U.S. economically: and that rather than altruism it was borne from self-interest. Organizations like the United Nations, the World Bank and the World Health Organization are by no means perfect, he said, but the U.S.’s crucial role in their establishment and management as the leader of the global economy has benefited the country and its investors enormously and helped to strengthen the hegemony of the U.S. dollar.
Gensler said the attempt to undermine the role of the Federal Reserve, and the combination of all these factors undermining the dollar, has led to an increase in interest in Europe and pushed European investors to stay closer to home and consider euro instruments more closely as a viable option. China is also set to profit from the weakening of U.S. economic dominance.
“There's not a real competitor to the dollar, but undermining it can lead to greater financial stability risk or leverage in the system overall,” he said. “Consumer protection and investor protection, particularly with the effective dismantling of the CFPB [Consumer Financial Protection Bureau] and shrinking the SEC by about 20 percent leads to more vulnerable consumers and investors in our capital markets.”
Likewise, the promotion of stable coins – while they're still relatively small at a quarter of a trillion dollars, compared to the $45 trillion worldwide in the dollar-based banking system – has the potential to undermine sanctions, enforcement, and anti-money laundering measures, potentially destabilizing the economy. This would be worsened if there were runs on stablecoins.
Can the Deregulatory Agenda Paper Over Damage to the Markets?
President Trump ran his campaign on a promise of a deregulatory, light-touch agenda, and the financial sector welcomed this idea with open arms. For Gensler, this has started to materialize in some respects in the opening period of the administration – but he also suggested that the erosion of the very concept of U.S. economic leadership itself is likely to have a far bigger impact than the potential loosening of the rules that govern the financial system.
Indeed, the book starts with a comparison of the first 100-days of the current Trump administration to the first, drawing attention to how much more determined and prepared the approach is this time around. Observers have questioned whether there is a semblance of a plan in the approach, or if decisions are being made on an ad hoc basis.
“It's ten years ago Monday that he came down the escalator in Trump Tower. He's far more experienced, far more knowledgeable, far more determined, and has a stronger, more loyal team,” said Gensler. “This time around they came in broadly with a plan, and they're executing against it.”
Despite Trump's public admonishment of Gensler, the former SEC Commissioner remains circumspect.
“I think those plans are real,” he said. “And I say that respectfully. And they will achieve some portion of this, as every president comes into office their plans meet reality.”
An II opinion piece from April argued that the confirmation of Atkins to the SEC could provide the springboard towards deregulation that the administration needed to keep one of its broader economic promises made in the run-up to the election and potentially undo some of the initial damage to the equity markets following the tariff announcements.
Since then, the Commission has been active, although the flurry of activity has largely been in the crypto space so far.
Some changes have not been drastic, according to Gensler. The new approach to the regulatory oversight of artificial intelligence, for example, is the sort of ideological change you might expect from a Democrat – Republican regime shift. And the Department of Justice, too, has so far maintained its approach to big tech and not canceled pending antitrust lawsuits, which some have expected.
But there are monumental policy shifts, albeit not strictly financial regulatory ones, that have wider consequences, including the change in approach to Ukraine and to European defense support. The pullback on scientific funding and research and the attacks on academic institutions are pivots that will have long-term impact on U.S. prosperity and growth.
The geopolitical and economic environment in the U.S. and globally is quickly evolving, with the situations in both Ukraine and the Middle East particularly flammable. As such, the book is a preliminary assessment of a moving target and will be in time for the IMF/World Bank annual meetings this fall. When asked to predict what that near future might look like, and how asset managers can prepare, Gensler expressed uncertainty.
Like everyone else in the industry, all that managers can do is forecast and remain flexible to changing realities. “It's likely that we will continue to have a lot of policy uncertainty between now and the fall, though not as heightened as it was between February and April when everything was brand new,” said Gensler. “We are dealing with big consequential topics and policy headaches, but what we don't know is how each will settle.”
When it comes to tariffs, arguably the greatest concern of all for asset managers and the financial sector, it is unclear what will happen when the current extension comes to an end on July 8. The U.S. has so far managed to come to an early agreement with the U.K., but that is far from finalized and more of a framework for negotiations. How the administration can expect to successfully negotiate with a further 60 countries in the coming weeks is unclear, but “it's quite plausible that we will not see a final end game develop even by the fall,” said Gensler.
“Asset managers are thinking, ‘well what's the end game of the tariffs with China, what's the end game of this deportation situation, what's going to happen if this lawsuit goes this way or that way, how will the White House react?’,” he said. “The risk of a recession has gone up, this collection of policies, not just tariffs, diminish economic opportunity and means all businesses have to be a little more careful with their investments.”
During the interview with II, Gensler stressed that the leadership role of the U.S. in previous decades had been a net positive for the economy and has benefited everyday Americans and companies. The recent retrenchment has been more drastic than many envisioned and will likely have a ripple effect for many years. But it may not be forever.
Instead, there will be a greater ebb and flow than there has been in recent decades. The undermining of existing relationships, with Europe for example, will take some time to rebuild and the push on the continent to regroup in the wake of the U.S. withdrawal will shift the balance of power there. This will undermine the U.S.’ position in the world and erode some of its dynamism, Gensler concluded.
But this is only a preliminary assessment, and as we move forward away from globalization and into a new multipolar economic reality, it is unclear what will come next.
The book is available now and there will be an in-person launch in London on June 23.
