Analysis: Biden faces massive political risk from bank instability

President Joe Biden can be damned if he saves the banks, but he can also be damned if he doesn’t.

Another major industry intervention to support a bank on Thursday (16th) – which was not undertaken by the government, but under its auspices – highlighted the still grave political danger from the sudden crisis that erupted just over a week ago.

Some of the nation’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, have teamed up to shore up the shaky First Republic Bank in a $30 billion cash infusion designed to ease anxiety in markets, avert a domino effect. of more bank failures and demonstrate that the industry still has a solid foundation.

This comes days after the White House used the Deposit Insurance Fund – a $100 billion facility funded by premiums banks pay to the Federal Deposit Insurance Corporation – to guarantee deposits at Silicon Valley Bank (SVB), which failed last week. , and Signature Bank, which regulators shut down.

The picture is of the banking industry rescuing itself — not the government rescuing wealthy bankers whose recklessness has endangered America’s economy, prosperity and peace of mind.

It’s a narrative the president needs to maintain.

Even so, the government’s repeated assurances that no taxpayer money was involved – necessitated by public fury after the Great Recession banking crisis of 2008 – demonstrate some potential political vulnerability.

While there is still no suggestion that an isolated bank revolt could turn into a major systemic meltdown, any future use of public funds could hand Republicans, who are already inaccurately criticizing the government’s moves as a “bailout”, a reason to criticize Biden.

This week’s events show how the government is on a razor’s edge in relation to the banking crisis – facing major aspects that it does not have the capacity to control.

This grim reality was underscored on Wednesday as trouble gripped Credit Suisse, a major global player whose crisis was accelerated by the turmoil in the US. The bank demanded emergency loan offers from the Berne authorities to avoid a failure that would have global repercussions.

The situation is so politically risky for Biden because the most prudent political move in some senses would be to allow small banks like SVB and Signature Bank to fail.

Biden has based his entire political platform on uplifting working- and middle-class Americans, despite having long served as a senator in America’s financial industry haven of Delaware.

But presidents face multiple and often conflicting demands on their attention and political capital. Any hesitation to support the SVB this past weekend could have set off a chain of consequences that would send the entire sector into a crisis that would require much greater government intervention – and potentially taxpayer-funded bailouts.

That would have disastrous consequences for the reputation of Biden’s economic administration and the likely re-election campaign that must, to succeed, outline a case for an American recovery after the worst pandemic in a century, high inflation and political turmoil.

past trauma

The banking roller coaster this week is taking place in the looming shadow of the 2008 economic crisis, which is spawning a strategy based, above all, on the mantra of no bailouts.

The situations in 2008 and 2023 are not the same. In the first case, the worst financial crisis since the Great Depression was triggered by mountains of mortgages accumulated by lax lending practices and easy credit that saddled banks with trillions of dollars in nearly worthless loans.

Last week’s problems at the SVB were caused by managers who invested in government bonds whose prices fell because of the Fed raising interest rates to combat high inflation. In most cases, the assets that supported the bank’s real business were solid.

There is a clear distinction here between the government’s bailout of bankers and banks in 2008 and the federal insurance fund protecting depositors now.

This nuance, however, is lost outside the financial sector. Banking calamities are difficult to explain to the public.

Politics — Biden’s secondary problem, right after avoiding a bank meltdown — rarely rewards complexity. Presidential primary campaigns, for example, profit from the simplicity of sound bites and often use fear to unleash momentum. So even a false perception that a president is doling out taxpayers’ money that is struggling to survive can be political gold.

Treasury Secretary Janet Yellen tried again on Thursday to explain what is happening now — and why it is not what has happened in the past. Her delicate task was to assure Americans that the banking system is safe thanks to the government’s efforts, without drawing comparisons with 2008.

“Shareholders and debt holders are not being protected by the government. It is important to emphasize that no taxpayer money is being used or put at risk by this action,” Yellen told the Senate Finance Committee.

His assurances, however, will not stop critics from trying to portray the government’s actions as amounting to a bailout.

Republican presidential candidate Nikki Haley, for example, argued this week that “Joe Biden is pretending this isn’t a bailout” and wrongly postulated that if the Deposit Insurance Fund were to run out, all of the bank’s customers would be on the hook. She even falsely claimed that depositors in healthy banks were being forced to subsidize the SVB’s mismanagement. But unlike Biden, the former governor of South Carolina is in the enviable position of being able to criticize without being held accountable.

Another potential Republican candidate, Florida Governor Ron DeSantis, twisted the situation to claim that banks’ “awakened” preoccupation with diversity, equity and inclusion initiatives has caused the industry to take a nosedive.

The concept advanced DeSantis’ strategy of waging a culture war to appease conservative activists. And while he didn’t correctly diagnose the current banking problems, his theory will solidify in the minds of many Republican voters because of the power of the conservative media.

Obama said voters consider the bailouts “a farce”

Biden intimately understands the political risks he faces here. As vice president in the Obama administration, he took part in the somber meetings that made fateful decisions about government economic bailouts after a new president inherited the worst financial crisis in more than 70 years.

The bank bailouts helped save the US economy, but even so fueled a political backlash that fueled the Tea Party movement, which eliminated House Democrats in the 2010 election. It also sowed a sense of resentment that was a fertile incubator for the economic populism and the political backlash of former President Donald Trump.

Barack Obama wrote in his autobiography, “A Promised Land”, that while Americans at the start of his term were frustrated with the glacial recovery from the 2008 crisis, “the bank bailout pushed them over the edge”.

“Across the political spectrum, voters viewed the bank bailouts as a farce that allowed the finance barons to emerge from the crisis relatively unscathed,” Obama wrote.

Biden’s political future may depend on avoiding such voter fury.