If anyone is making a mistake, its Zelikow. He points out that the Federal Reserve strongly discouraged unsecured loans to the Entente shortly before Germany resumed USW. Then it did a 180. If Americans were not willing to finance the Entente, the Entente would go broke trying to pay for the war.
Wilson was perfectly willing to use this pressure to bring them to the table, until he wasn’t.
Edit: and again, I’m paraphrasing what Zelikow is arguing. I can’t really do justice to his argument, the best I can do is suggest you read some reviews or listen to some interviews with him on the book. His read of the events is very different from the popular history. For purposes of this discussion, we should assume he’s right.
Wilson did instruct the Reserve to discourage unsecured loans to foreign interests, which did close that avenue of finance to the entente, and damaged the confidence of borrowers in general in lending to entente interests. From what I can tell, this was indeed an attempt to force the European powers to the negotiating table. He was very convinced of the American destiny of bringing the squabbling European powers to civilized discourse in a similar fashion to getting children to play nicely with one another. However, the move said nothing specifically about
secured loans. This would depend on the ability of the Entente to come up with suitable collateral (American or neutral securities and gold mostly).
It is also true that the British Treasury's report on the financial situation at the time was somewhat bleak. However, we have gone over this issue a few times on this forum and a couple things do look different on closer inspection of the British situation. Specifically, the Treasury report shows the situation to be unsustainable
under the current rules. IOTL after the US entered the war, the British government more actively pursued, and eventually sequestered, American securities held by British citizens. They were able to find enough that they likely could have funded the war for some time if they could achieve anything close to the collateral-to- capital rate that they had received thus far. They also had a considerable amount of gold in the vaults of a section of the private banks that did not really need it for the discharge of their (now mostly domestic) business. France still had a very considerable amount of gold that they were loath to touch as they believed it was important to securing the Franc post-war (not an unreasonable belief but they did not end up needing all of it by far AIUI).
In short, the ability of the Entente to continue the war, even in the environment that Wilson's instructions to the Fed had created, was still significant. It would have required more disruption than was preferred to the financial institutions of Britain and France but not
necessarily more than they could handle. However, it is possible that even with this reserve there to be found, the
belief in the impossibility of continuing could have brought the combatants to the table. The success of the negotiations would then depend on the willingness of those involved to compromise and, to a smaller degree, the Entente not realizing that they have more in the tank then they thought.
On the whole, I think the idea of diplomatic talks occurring is at least plausible, but I am not so sure that even if they did, they would be successful.
I think the best chance for peace would be a scenario where everything in Europe runs more or less the same into 1916, but Teddy Roosevelt wins in 1912. He was better at diplomatic endeavors than Wilson, and had garnered plenty of prestige in already having brokered a peace conference between Russia and Japan. On top of that, even TR would be hesitant to run in 1916, so, as a lame duck, his hands would be freer than Wilson’s were prior to the election.
Plus, I hate the idea of Wilson’s legacy being improved.
I am not sure if TR would take the same path as Wilson when it came to trying to force the Entente to the table. If he was trying to reach a negotiated end of the war it seems like he would work more by personal and presidential appeal to the warring powers and offers to mediate. Its also possible he simply commits the US to making as much money off the conflict as it can while trying to stay out of it and improving their own forces as insurance should he fail.