How did the 2007–8 global financial crisis affect U.S. global power? Does it signal the beginning of the end for the American empire, and if so, through what mechanisms? Eric Helleiner and Jonathan Kirshner answer these questions differently. Though both look at the reservoir of American financial power, and both see the glass as two-thirds full, Kirshner sees water seeping out at an alarming rate, while Helleiner sees no fundamental change in the water line and perhaps some increase.
Kirshner argues that the 2007–8 crisis fundamentally weakened American geopolitical power. He sketches out two eras of American global dominance, resting on two different ideological foundations. The era from 1945 to 1973 was profoundly Keynesian, involving control over international capital mobility, considerable use of fiscal stimulus, and highly regulated and segmented domestic capital markets. Conflict with the Soviet Union motivated U.S. concessions to its allies on trade that they reciprocated with forbearance regarding emerging U.S. current-account deficits, and thus an eventual overhang of dollars. The second period, starting roughly in the late 1980s, rejected central tenets of the Keynesian model in favor of what Kirshner and others have called a market fundamentalist worldview. This period lasted until the 2007–8 crisis, but arguably was already in decay by the mid-1990s with the Mexican and then Asian financial crises. These provided early warnings that market fundamentalism perhaps had a profoundly wrong understanding of reality.
Keynes argued that the impossibility of eliminating Knightian uncertainty interacted with actors’ tendency toward herd behavior to make financial crisis an endemic feature of capitalism. These crises could leave economies stuck in a permanent low-growth rut. The purpose of government intervention was to overcome tendencies toward inadequate aggregate demand and collectively irrational behavior. By contrast, market fundamentalism posited that markets were inherently efficient, that actors possessed all relevant information and shared a common economic model of the world, and thus that rational actors would naturally avoid crisis-inducing behaviors. Market fundamentalism thus not only justified deregulation of financial markets but in some sense demanded it as a way of producing stability.
Kirshner spends considerable time mapping out these arguments in American Power after the Financial Crisis because the central force eroding U.S. power is a collapse in the legitimacy of global governance structures currently favoring the United States. For Kirshner, cooperation around international monetary affairs is always difficult. Security concerns can lubricate cooperation, but ideological dominance that limits alternative visions, choices, and policies around international money is an even better source of power. He argues (p. 2) that the crisis has profoundly delegitimized market fundamentalism and introduced a “new heterogeneity of thinking” about the role of the U.S. dollar. Put simply, major actors like China no longer see the U.S. domestic or international model as being in their interest. Thus, they are looking for ways to increase their policy autonomy and decrease their reliance on the United States. This search for (monetary) policy autonomy will inevitably reduce U.S. policy autonomy, not only because power is a zero-sum game for Kirshner but also because reduced reliance on the U.S. dollar and U.S. demand inherently reduces the room for policy maneuver for the United States. Though Kirshner hedges his bets by noting the possibility of a Chinese growth slowdown and the reality of the Eurozone crisis, an end to exorbitant U.S. privilege in the international monetary system flows inevitably from increased ideological heterogeneity.
In contrast to Kirshner, Helleiner asks why the 2007 crisis did not produce more profound change, given all of the issues that Kirshner raises and the widely shared view that a U.S. dollar crisis was imminent well before the actual financial crisis. Helleiner admits to thinking in 2008 that there would be a complete change in global financial governance, with a G20 transformed from a finance ministers’ club into a leaders’ forum, and with more representation and power for rapidly growing non-G7 economies. The newly formed G20 pledged a major cooperative fiscal response to the crisis, and increased commitments to International Monetary Fund funding by $1.1 trillion. The G20 also sponsored what looked like a new international organization responsible for financial regulation that would be, in the words of then–U.S. Treasury Secretary Timothy Geithner, a fourth pillar of the international governance structure rivaling the World Bank, World Trade Organization and IMF. Third, like Kirshner, Helleiner saw the crisis as a major blow to the Washington-sponsored economic orthodoxy of free capital flows and minimal regulation. He thus expected a major ideological backlash that would translate into more substantive regulation of financial firms and flows, presumably through the new international Financial Stability Board (FSB). Finally, like Kirshner, Helleiner expected a substantial diminution of the U.S. dollar’s role as the global reserve currency.
Instead, in Helleiner’s view, the status quo prevailed. The G20 remains a talking shop. International power still emanates from Washington, and especially the Federal Reserve Bank and U.S. Treasury, to select central banks. The network of currency swaps the Fed initiated at the peak of the crisis in 2008 precisely maps that web. The FSB, far from being new, emerged from the G7’s earlier and understaffed Financial Stability Forum. Rather than being a fourth pillar, the FSB has limited resources and no ability to promulgate standards except via weak peer reviews of national systems of financial regulation, and among its members both the United States and China have refused to undergo that peer review process. As Kirshner argued, what made organizations like the G7 occasionally effective was that strong security and financial ties reinforced efforts to seek some kind of common interest. Nothing like this animates the G20 or FSB.
Consequently, the institutional landscape of and structural power in the global economy remain the same. Helleiner limns four scenarios at the end of The Status Quo Crisis that vary in their combination of interstate cooperation and centralized financial regulation. But as he notes (p. 3), what matters is “the enduring state centric foundations of global financial governance” rather than “international institutions or transnational elites and ideologies.” Unlike Kirshner, Helleiner sees continuing American power and centrality as driving continuity. American domestic and international interests around the dollar and financialization have not changed postcrisis, and so neither has the global financial architecture. Helleiner does not think this is sustainable over the long run, because it will do little to prevent the financial crises inherent to high levels of capital mobility and does not accommodate the growing importance of non-G7 actors in the global economy. In this respect, he is aligned with Kirshner.
Despite fruitful cooperation in a number of well-received edited volumes on the international role of the U.S. dollar and Chinese renminbi, Helleiner and Kirshner clearly disagree. Who is more nearly right? Can they both be right (or wrong)? One curious thing here is that both authors express considerable (and well-deserved) respect for Susan Strange, evidenced by numerous name checks in the theoretical setup (for Helleiner) or predictive chapter (for Kirshner). This does not induce analytic overlap or convergence, though. Why? Strange herself has a rather eclectic and heterogeneous approach that encompasses a number of theoretical strains that operate in international relations. The more curious and interesting thing is that each author moves in an important direction away from what one might presume are their theoretical priors.
Kirshner is a self-identified classical realist, and his emphasis on relative power is true to a realist perspective. Yet his book is primarily concerned with changes in ideas and ideology. Much of the book contrasts Keynes with market fundamentalism, stinting on the kinds of objective factors that nonclassical realists might adduce: shares of world GDP or profits, military power, control over critical resources, and so on. The closest Kirshner comes to these factors is a discussion of Albert Hirschman—like conditioning of third-party countries via their growing reliance on the Chinese market. But does big talk by non-U.S. actors amount to anything? Helleiner’s book suggests that this was largely cheap talk. But despite being loosely connected to what might be seen as a Canadian school of international relations that emphasizes international organizations and cooperation, he argues that U.S. structural power of the sort that realists cite explains continuity. In this sense, normal Kuhnian science is at work here. As both authors try to incorporate the crisis into their prior theoretical framework, they find themselves reaching for additional tools.
Putting aside how they answer the questions they raise, it is also important to note that in many ways it is still, as Chou En Lai allegedly said, “Too early to say” what the consequences of the 2007–8 crisis are. Practically, given the torpid pace of academic publishing, the 2014 imprint dates on each book suggests that they were written at the latest in 2013, only four years after the acute phase of the crisis peaked. In addition, Kirshner is correct in thinking that this crisis is game changing, just as Helleiner is correct in saying that not much has changed, at least so far. The crisis did fundamentally change the U.S. growth model of the 2000s, which was based on cheap oil, cheap Chinese wages, and creditworthy American consumers. Oil remains expensive relative to the 1990s and early 2000s, Chinese wages are inexorably trending upward, and while U.S. household balance sheets look healthier of late, U.S. consumers are wary of taking on much new debt.
At the same time, no new growth model is evident, producing the status quo that Helleiner notes. Yet the U.S. crisis has been steadily rippling through the world economy, albeit more slowly than the Great Depression did in the 1930s. The Eurozone was the first external victim of the U.S. crisis. China is the most recent one, given that its credit-fueled effort to shift its economy away from exports to the United States and toward a more balanced domestic growth model has produced a dangerous combination of slower growth and overleveraged firms. Slower growth everywhere will ultimately produce a search for a new model. But the United States retains enormous structural advantages in that search, not least the ability to set the agenda. Although both books are perceptive, they remain untested.
