Why the Erosion of Trust Could Shake America’s Economic Stability

The United States is in the midst of “a credibility recession,” says Amit Seru, a professor of finance at Stanford Graduate School of Business. The American public’s trust in governmental and financial institutions has eroded. And this, he argues, poses a significant threat to economic stability and growth.

In a series of recent commentaries and comments, Seru has detailed the risks of the growing trust deficit. In Barron’s, he has written about the importance of preserving the independence of the Federal Reserve and the cryptocurrency industry’s quest for trustworthiness. He has spoken with Fortune about the need for more transparency for hedge funds and other “shadow banking” institutions. His analysis of these disparate areas makes the case for why investments and innovation depend on credibility and clarity.

In an exchange with Stanford Business, Seru, a senior fellow at the Stanford Institute for Economic Policy Research and the Hoover Institution, detailed his perspective. “Restoring trust won’t be easy,” he says. “But it’s the only path to long-term resilience.”

In a recent piece in Barron’s, you emphasize that independent central banks are a cornerstone of modern macroeconomic management. Why is their independence so important?

Independent central banks are essential because they provide a buffer between economic policy and political cycles. Without that insulation, monetary policy becomes a tool of short-term electoral politics, not long-term economic health. The Fed’s ability to manage and anchor inflation expectations, stabilize employment, and promote sustainable growth hinges on its credibility. That credibility, in turn, rests on independence. Independence isn’t a luxury — it’s a prerequisite for trust in the institution’s signals.

You point out that the Fed’s credibility underpins the global standing of the U.S. dollar. How could threats to the Fed’s autonomy weaken this trust, and what would be the potential impact of a weakened dollar on the U.S. economy?

When markets suspect that political interference will steer interest rates or bank regulation, the Fed’s signals lose power. Investors start to price in future instability, not policy coherence. Since the U.S. dollar is the global reserve currency, any dent in confidence in the Fed can trigger capital flight, raise borrowing costs, and diminish U.S. leadership in global finance. This isn’t just about short-term volatility. If credibility erodes, the U.S. loses the exorbitant privilege of issuing the world’s safest asset — a structural advantage that underpins its global influence.

You acknowledge that the Fed is “far from perfect.” How would you recommend reforming the Fed while also ensuring its independence?

The Fed is not beyond critique. It was slow to react to inflation after COVID and still struggles with transparency around its dual roles as monetary policymaker and financial regulator. We should reform the Fed — but with surgical precision. That means strengthening internal accountability, improving data transparency, and possibly separating monetary and regulatory functions more cleanly. Undermining independence to correct past mistakes risks politicizing the very institution meant to safeguard long-term stability.

You note that President Donald Trump “may hurt the crypto industry more than help it.” How does his involvement in cryptocurrency potentially undermine its quest for legitimacy?

There’s real irony in the crypto industry’s embrace of Donald Trump as its savior. His track record shows a willingness to bend rules for political loyalty — and an unclear view on financial innovation. Crypto can’t claim to be decentralized while tethering itself to political personalities.

Crypto doesn’t need a hype man. It needs clarity. That means clear definitions of what counts as a security, predictable rules for token issuance and trading, and guidance for how stablecoins and decentralized finance will be supervised. What’s needed is institutional credibility, not populist endorsement. Regulatory clarity is not the enemy of innovation — it’s the foundation for scaling trust.

If clear rules for the crypto industry aren’t forthcoming, how will that affect cryptocurrency’s future as an investment and a financial tool?

Without regulatory clarity, crypto becomes a speculative sideshow — highly volatile, legally precarious, and unusable as a financial tool. The space will fragment, with institutional capital withdrawing and innovation moving offshore. Uncertainty is the enemy of adoption.

What benefits do shadow banking institutions and hedge funds provide by operating outside the traditional banking system?

Shadow banking institutions — like private credit funds and nonbank lenders — can provide flexibility and innovation where traditional banks can’t. They are often first movers where regulation or legacy systems slow banks down. They help allocate capital more efficiently, particularly in underserved segments or when banks are constrained. In that sense, they add a kind of resilience through diversification.

As highly leveraged hedge funds have grown and bought up more Treasuries, what risks does this present? What are the potential “ripple effects” if they get into trouble?

But the growth of highly leveraged hedge funds in Treasury markets and elsewhere brings fragility. These funds can unwind positions rapidly and in uncoordinated ways, causing liquidity shocks in core markets. In March 2020, the Treasury market — the most liquid market in the world — froze under stress. That shouldn’t happen. It exposed the fragility introduced by hidden leverage. If these actors face stress, the spillovers could hit banks, pension funds, and even Fed operations.

What is the tradeoff in regulating these types of shadow-banking institutions?

The regulatory tradeoff is simple: More oversight means less flexibility, but more stability. The challenge is finding that balance. One solution is transparency. Right now, hedge fund leverage and exposures are opaque to both regulators and markets. Requiring more frequent and standardized disclosures — especially around Treasury and derivatives positions — would allow preemptive responses to buildups of risk without necessarily stifling innovation.

A common idea here is the need for trust in the government and institutions as well as trust in the legitimacy and safety of investments. What does the importance of trust tell us about the current state of the economy?

Whether we’re talking about central banks, crypto, or shadow finance, the throughline is trust. Trust in the rule of law. Trust in institutions to be neutral and competent. Trust that the financial system won’t be weaponized for political gain.

The erosion of that trust is not just a macroeconomic risk — it’s a systemic one. It affects everything from how investors price assets to whether people believe their bank deposits or digital wallets are safe. We’re not just navigating an interest rate cycle — we’re managing a credibility recession. And unlike rates, trust is much harder to reset.