Something is cracking beneath the surface of global finance—and it's not just inflation or a dip in the Dow. In an extraordinary conversation between economist Paul Krugman and researcher Nathan Tankus, a picture emerges of a financial system not only stretched thin by erratic policy and regulation, but one that could be pushed over the edge by the whims of a single man.
At the center of this crisis is Donald Trump—not merely as a policymaker, but as a source of volatility in its purest form. The erratic policy swings, from tariffs to fiscal seizures, are not just unsettling markets—they’re breaking the machinery of modern finance. This is not hyperbole. When the U.S. Treasury system itself starts to malfunction, when, for example, cities like New York find their accounts unexpectedly debited by federal agencies, when markets seize up because no one knows if payments are final, we are entering truly uncharted territory.
The Threat Beneath the Surface
Tankus calls it the "Trump-Musk payments crisis," a slow-burning threat where the U.S. government undermines the very idea of payment finality—the notion that once money is transferred, the transaction is done. In a world of digital finance, if this basic trust collapses, so does everything that depends on it: salaries, taxes, government aid, bond markets, and more.
The underlying story is even more alarming. As Krugman and Tankus explain, after the 2008 financial crisis, global regulators (through frameworks like Basel III) created stricter capital requirements for banks. These regulations limited how easily financial institutions could adjust their balance sheets to absorb market shocks. Instead, hedge funds—less regulated, more fragile—stepped in to play the role of “residual buyer,” especially in the U.S. Treasury market.
But these hedge funds aren’t built for crisis response. They're fair-weather participants. When markets get too volatile—say, after a tweet or tariff threat from Trump—they withdraw. The result? Liquidity vanishes. Interest rates spike. And the whole financial system starts to wobble.
Volatility Has a Name
Tankus highlights a disturbing reality: in 2025, Donald Trump is volatility. Markets no longer react to macroeconomic fundamentals, but to his press conferences, his moods, his threats. This isn't just destabilizing; it’s dangerous. When policy becomes unpredictable on an hourly basis, business investment grinds to a halt. Financial firms can’t hedge. And the complex network of trades, swaps, and derivatives that hold the global economy together starts to come undone.
And yet, as Krugman notes, Wall Street’s "conventional wisdom processors" are still in denial. Traders don’t fully grasp—or don’t want to believe—how deep the dysfunction goes. They grasp at any signal of temporary calm and treat it as resolution. It’s a form of magical thinking, the kind that led to disasters like Long-Term Capital Management in the 1990s and the 2008 collapse.
This time, the stakes may be even higher.
Who Saves Us?
The Federal Reserve has stepped in before. In March 2020, amid COVID panic, it bought trillions in assets to stabilize markets. But this time, the instability is political, not economic. As Tankus puts it, the Fed can’t "make the volatility of Donald Trump go away." Worse, doing so would drag them into overt political conflict. So they wait, hoping things don’t fall apart too quickly.
But waiting may not be an option. The financial system now relies on entities—like hedge funds—that flee at the first sign of trouble. Tankus compares them to "shadow dealers," who aren’t required to stick around in bad times, unlike licensed market makers. This fragile setup means that a few bad days—just a few—could trigger a cascade of defaults and asset fire sales.
And when you look deeper, you see just how vast the exposure is: $113 trillion in foreign exchange swaps depend on dollar liquidity. Many rely on the U.S. acting as a global backstop. What happens when trust in the dollar—already shaken by arbitrary federal seizures and payment freezes—erodes?
A System Designed to Break
None of this is inevitable. But it is the product of a system that rewards short-term gain and punishes preparation. We’ve outsourced critical market stability to actors who aren’t built for it. We’ve allowed politics to infect the plumbing of our fiscal and monetary systems. And we’ve ignored the growing risk of treating money like code—reversible, manipulatable, fragile.
The conventional view is that “the market” will figure things out. But as Tankus warns, markets only wake up after the damage is done. We cannot afford another Lehman moment—especially not one caused by a leader who governs by tantrum.
What’s needed now is not just technical fixes. It’s a deep reconsideration of how we build financial systems in a world where volatility can have a Twitter handle.