RUTH SUNDERLAND: Trump tactics rip away financial safety nets

Donald Trump is a one-man agent of havoc on markets. The US President’s reckless contempt, including for his own allies, makes him a danger to economies and financial stability.

We have seen the Trump effect when markets briefly tanked on tariff announcements last year. Conflict in Iran has sparked volatility in share and energy markets and fears are growing that the multi-trillion-dollar private credit sector will ignite a fresh crisis.

Wall Street coined the acronym Taco – Trump Always Chickens Out – to encapsulate the idea the President will back down if markets react badly, and that when he does, recovery will follow.

But the chaos created by the White House raises a deeper question.

In the financial crisis of 2008, the system was saved by international co-operation and US central bank, the Federal Reserve, acting as a global backstop. But with Trump in the Oval Office, it would be foolish to assume global leaders will co-operate on a rescue, or that the central bank will again ride to the rescue with lines of dollar swaps.

Perhaps the Fed’s role in a future meltdown may not be quite so crucial. China has been quietly expanding its own swap lines with emerging-market central banks. Beijing might act as a stabilising force – or it might fan the flames.

Another new element is private credit, much of which sits outside the regulated banking system, so Fed methods that applied in 2008 may not work.

These are real complications, but they do not fundamentally alter the fact the dominance of the dollar is unlikely to be overturned soon.

In a future crisis, the Fed would again be called to act as central banker to the world. The 2008 disaster would have been infinitely worse without its injection of trillions of dollars into the system through swap facilities.

This was not charity. If overseas banks crashed, it would have been a body blow to US financial stability. The Fed also came out with a profit.

Bailing out foreigners is unlikely to appeal to the America First brigade, and President Trump has been intent on eroding the Fed’s independence.

This is not as easy as he might like. His administration’s bid to launch a criminal investigation into the Fed’s chairman, Jerome Powell, was stymied by a federal judge who opined that the Fed chief had not ‘committed any crime other than displeasing the President’.

Even so, it is all too easy to imagine Trump leaning on the Fed to use dollar swap lines as an economic weapon against foes and friends, despite having no legal authority to do so.

The danger here is that Trump doesn’t actually need to achieve such aims to create damage – the perception he might is destabilising in itself.

These threats are being taken seriously. According to reports by Reuters, the Bank of England and the European Central Bank have asked lenders to assess their options if the Fed backstop was not to be forthcoming.

The G20 summit of 2009, hosted by Gordon Brown in London, where a vast $1.1 trillion stimulus package was agreed by world leaders, is seen as a triumph of international co-ordination, warding off another Great Depression.

There was plenty of dysfunction in 2009, but the quality of political leadership in the US and elsewhere has degraded since then. Perhaps a big enough crisis might induce a spirit of co-operation, as it did 16 years ago.

But this will be harder in the fragmented and hostile terrain of Trump-world.