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Crises of Uncertainty

National governments’ responses to the latest banking crisis confirm once again that some countries play by different rules than others. This double standard is bad for long-term planning within those countries and represents yet another threat to multilateralism.

PRINCETON – A relatively small-scale banking crisis has been sufficient to demonstrate the fragility of multilateralism today. Bank failures in the United States and Europe have upended expectations, because governments did not even pretend to be following any shared rulebook in handling the fallout. While the world’s banking system is in better shape than it was just before the 2008 financial crisis, the mechanisms established over the past 15 years to cope with financial strain have proved insufficient.

The latest crisis has broader implications for how the world can and should address collective problems. After all, multilateralism had already fallen on hard times. Though world leaders insisted repeatedly after the 2008 crisis that there must be no return to protectionism, the World Trade Organization has been rendered powerless, incapable of concluding new agreements or even arbitrating conflicts on the basis of the existing ones. All the major economies – the US, China, and the European Union – have adopted various forms of protectionism.

This trend can be understood as a combination of financial protectionism and arbitrary government action. A crucial lesson of the 2008 crisis was that fragmented regulatory systems are problematic, and that clear rules are needed in the event of a sudden shock or collapse. The failure of Silicon Valley Bank, however, was handled partly by the US Federal Reserve and partly by a California state regulator, which made the decision to close the bank in the middle of a trading day, precipitating a much wider run on smaller banks.

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