Trump, Finance, and Pandora’s Box

Will President Donald Trump go down in history – again – for opening Pandora’s box in finance? There are at least two reasons to think so: cryptocurrencies and structured finance.

Let’s start with so-called cryptocurrencies. Since Trump returned to the White House, crypto trading volumes have surged. Even back in August, when he was still a candidate, Trump had loudly declared he wanted to make the U.S. “the crypto capital of the world.” And he didn’t stop at words: since last October, Trump and his three sons – skirting basic conflict-of-interest norms – have lent their name to World Liberty Financial, a firm that invests in crypto assets.

Now that Trump is president again, Senator Bill Hagerty – a self-styled “MAGA warrior” and staunch Trump ally – has introduced legislation to give legal status to certain types of digital currencies.

These are stablecoins, a category of crypto assets issued by private firms who promise that their tokens can always be redeemed, one-for-one, for U.S. dollars. Supposedly, these promises are backed by reserves held in traditional financial instruments.

But can we take their word for it? It’s worth remembering what makes a currency a currency: universal acceptance, backed by the belief that it can always be exchanged for goods and services. Historically, money was anchored in physical commodities like gold or silver. Since August 1971, however, all currencies have become fiat – anchored not in tangible value, but in trust. Trust, specifically, in the issuing authority: the state.

Can the same trust be extended to a currency issued by a private entity? The answer is yes – if there’s a public guarantee. That’s what makes banks different: they’re supervised by the central bank.

But stablecoins? The answer is no. In the U.S., the biggest stablecoin issuers – Tether and USD Coin – aren’t recognized as financial institutions. Unlike banks, they fall outside the Fed’s regulatory perimeter. That absence of public backing affects their credibility – and their value.

Let’s look at the data. Stablecoins should be more valuable than other crypto assets like Bitcoin, thanks to their supposed redeemability. But as of February 6th, the market capitalization of Tether and USD Coin placed them only third and seventh among crypto assets. Other stablecoins fare even worse, languishing beyond the 25th place.

Nonetheless, Senator Hagerty is pushing legislation that would gift legal status to private stablecoin issuers – a sector that now includes the Trump family. His bill is (modestly) titled the Genius Act (Guiding Establishing National Innovation in US Stablecoins).

If passed, the bill would place major stablecoin platforms – those issuing over 10 billion coins – under Fed oversight. The Fed would conduct monthly checks on whether private issuers hold enough high-quality liquid assets to honor redemption promises. Smaller issuers, however, would avoid federal regulation altogether, remaining under state-level supervision instead.

And the cherry on top? A parallel Trump administration initiative to block the Fed from creating its own digital dollar. The crypto lobby would surely rejoice: granting monetary status to stablecoins is macroeconomically unjustifiable, especially since they don’t create credit like banks do.

What about financial stability risks? Tether has already faced scrutiny from the SEC over alleged false accounting. But not to worry: President Trump has already replaced the SEC leadership, who were seen as “too tough” on crypto. If things go south – if a platform fails or a full-blown financial crisis erupts – ordinary Americans will bear the cost. Just like in 2008, when a U.S. crisis infected the global economy.

A similar story is unfolding with structured finance – the world of asset-backed securities (ABSs), which Wall Street is once again eagerly embracing.

Consider this: in late February, over 10,000 participants flocked to the Structured Finance Association’s annual conference in Las Vegas – a record turnout. This sector is expected to move over $300 billion this year, echoing the heady days immortalized in "The Big Short", which came out exactly ten years ago.

That film told the story of a few sharp investors who, as early as 2005, predicted that the hyped-up marriage between real estate and securities markets would end in a catastrophic crash. They were right: they made fortunes, while the world was plunged into the deepest economic crisis since WWII.

So, what exactly is structured finance? In short, it’s a sector where bonds are issued and backed by pools of real or financial assets belonging to private actors – without any public guarantees. Before the 2008 crash, the U.S. financial system embraced structured finance under the long reign of Fed Chair Alan Greenspan (1987–2006), a Wall Street darling known as “The Wizard” or “The Maestro” – titles quickly forgotten after the collapse.

Greenspan’s approach combined aggressive deregulation and ultra-loose monetary policy. The logic was seductive: less regulation leads to more innovation, which makes the system more complex, more interconnected – and supposedly more resilient. As Greenspan put it in 2002, the complexity of modern finance was a strength, not a weakness. Translated: more debt for everyone.

For this debt-fueled strategy to work, interest rates had to stay low. Deregulation and cheap money formed a closed loop that turned Wall Street into a magnet for global capital. Structured finance exploded. ABS became a magic word. With safe government bonds yielding next to nothing, yield-hungry investors rushed into structured products. Combined with a stunning inability – or unwillingness – to price risk correctly, the stage was set. And when interest rates began to rise, the entire house of cards fell.

What did we learn from the first ABS wave?

Here’s the takeaway: when finance becomes a black canister, any match can ignite disaster. The more complex and interconnected the system, the harder it becomes to track where risks lie. Systemic opacity leads to systemic fragility.

The trauma of the Great Financial Crisis forced a rethink of both financial and monetary policy. Lesson one: prudential regulation needs structural support. Risk-taking can’t just be managed – sometimes it needs to be prohibited. Lesson two: overly loose monetary policy undercuts prudential goals.

Some now argue that a dovish monetary stance could complement Trump’s protectionist agenda. In fact, a recent paper by two Fed economists – though not endorsed by the institution – suggests that voters may underestimate the macroeconomic effects of trade tariffs. If those tariffs increase government revenues, and citizens fail to notice the indirect costs, the authors speculate that protectionism could boost national welfare. Their conclusion? Monetary easing should accompany tariff hikes.

In short, the return of ABSs isn’t necessarily bad news – if we remember the painful lessons of the past. But decades have passed. Memories fade. Financial and monetary laxity can be a siren’s song – sweet, seductive... and deadly.

To learn more:

• Bertaut C., Pounder DeMarco L., Kamin S., Tyron R., 2012, ABS Inflows to the United States and the Global Financial Crisis, Journal of International Economics, 88, 219-234.
• Bianchi J., Coulibaly L., 2025, The Optimal Monetary Policy Response to Tariffs, NBER Working Paper Series, n.33560.
• Eichengreen B. and Mitchener K.J. (2007), The Great Depression as a Credit Boom Gone Wrong, BIS Working Papers, Bank for International Settlement, n.137.
• Heilbroner, R. L., 1989, Behind the veil of economics: Essays in the worldly philosophy. WW Norton & Company.
• Miran S., 2024, A User’s Guide to Restructuring the Global Trading System, Hudson Bay Capital, November.
• James S., Quaglia, L., 2025, Banks and the Noisy Geopolitics of Big Tech Regulation in Europe, Competition and Change, forthcoming.
• Jordà O., Schularick M., Taylor A.M., 2010, Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons, NBER Working Paper Series, n. 16567.
• Reinhart C.M., Rogoff K.S., 2014, Recovery from Financial Crises: Evidence from 100 Episodes, American Economic Review, 104(5), 50-55.

Donato Masciandaro is a Professor of Political Economy at the Bocconi University, where he holds the Intesa Sanpaolo Chair in Economics of Financial Regulation. Since 1989 he has written for the newspaper il Sole 24 Ore. Since 2005, he has contributed to Economia & Management drawing on and developing his comments and analysis published in that economic-financial daily. The ideas expressed in this article are personal and do not reflect the position that the author holds, either permanently or temporarily, in academic or public institutions.

Photo iStock / Nastyaaroma