(CNN) President Joe Biden could be damned if he saves the banks or damned if he doesn’t.
Another major industry intervention in support of a bank on Thursday – not by the government but under the auspices of the administration – underscored the still grave political peril of the sudden crisis that erupted just over 100 years ago. one week. It also pushed the administration further on a shaky limb that could break if the banks’ collapse were to worsen.
Some of the country’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, have teamed up to shore up the ailing First Republic Bank with a $30 billion cash injection meant to ease anxiety in the markets. and avoid the domino effect of more bank failures. and demonstrate that the industry still has a solid foundation.
It came days after the White House used the Deposit Insurance Fund, a $100 billion facility funded by the premiums banks pay to the Federal Deposit Insurance Corporation, to insure the deposits of the Silicon Valley Bank, which collapsed last week, and Signature Bank, which regulators closed. .
The picture here is of the banking industry saving itself – not of the government bailing out wealthy bankers whose recklessness endangers Americans’ savings, prosperity and peace of mind.
It’s a narrative the president really needs to stick to.
Even so, the administration’s repeated assurances that no taxpayer money was involved — necessitated by public fury over bailouts after the 2008 Great Recession banking crisis — creates potential political vulnerability. While there’s no suggestion yet that an isolated banking shake-up could turn into a major systemic meltdown, any future use of public funds could put Republicans, who are already mislabeling the administration’s moves as “bailout”, an opening to castigate Biden.
The events of this week show how the administration is on a knife edge in the face of the banking crisis, of which it does not have the capacity to control large aspects. This daunting reality was underscored on Wednesday when problems overwhelmed Credit Suisse, a huge global player whose existing problems were catalyzed into crisis by turmoil in the United States. It took emergency loan offers from authorities in Bern to avert a failure that would have had global repercussions.
The situation is politically risky for Biden, as the most prudent policy move in some respects would be to allow smaller banks like SVB and Signature Bank to fail. Biden has based his entire political mythology on uplifting working-class and middle-class Americans, despite having long served as a senator from Delaware, America’s financial industry haven.
But presidents face multiple and often competing demands for attention and political capital. Any hesitation in backing SVB last weekend could have set off a chain of consequences that tipped the whole sector into a crisis that would have required far greater government intervention – and potentially taxpayer-funded bailouts . It would have had dire consequences for Biden’s reputation for economic stewardship and the likely reelection campaign that must, to succeed, sketch a case for an American rebound from the worst pandemic in a century, high inflation and unrest. policies.
Disturbing historical echoes
The rollercoaster ride of the banking sector this week is unfolding in the ominous shadow of the 2008 economic crisis, which informs a strategy based, above all, on a no-bailout mantra.
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 subprime mortgages accumulated by lax lending practices and easy credit that burdened banks with trillions of dollars in nearly worthless loans. Last week’s problems at SVB, and an ensuing bank run, were caused by managers investing in government bonds whose prices fell due to the Fed’s interest rate hike to fight high inflation. In most cases, the assets supporting the real business of the bank were sound. There is a clear distinction here between the government bailing out bankers and banks in 2008 and what is effectively a federal insurance fund securing depositors today.
Such nuance, however, is lost outside the financial sector. Banking calamities are difficult to explain to the public, at least by political leaders who lack the genius to distill an existential moment into a national gathering as President Franklin Roosevelt did during the banking crisis of 1933.
Politics — Biden’s side issue after preventing a banking meltdown — rarely rewards complexity. Presidential primary campaigns, for example, take advantage of simplicity and sound bites and often use fear to trigger momentum. So even a false perception that a president is handing out tax dollars to struggling taxpayers can be political gold.
Treasury Secretary Janet Yellen tried again in a high-stakes hearing on Thursday to explain what is happening now – and why it hasn’t happened in the past. His delicate task was to reassure Americans about the safety of the banking system thanks to the administration’s efforts without inviting comparisons with 2008.
“Shareholders and creditors are not protected by the government. It is important to note that no taxpayer dollars are being used or put at risk with this action,” Yellen told the Senate Finance Committee.
His assurances, however, will not stop the administration’s critics from seeking to paint the government’s actions as tantamount to the dreaded “b” word – bailout.
Republican presidential candidate Nikki Haley, for example, argued this week that “Joe Biden claims this is not a bailout” and misleadingly postulated that if the Deposit Insurance Fund were to run out, all bank customers would be on the hook. And she falsely claimed that depositors in sound banks were forced to subsidize SVB’s mismanagement. But unlike Biden, the former South Carolina governor is in the enviable position of being able to criticize without being held accountable.
Another potential Republican nominee, Florida Governor Ron DeSantis, twisted the situation to claim that banks’ “woke” preoccupation with diversity, equity and inclusion initiatives had dragged the industry down. Vanity furthered DeSantis’ strategy of weaponizing a culture war to please conservative grassroots activists. And while he misdiagnosed the current banking problems, his theory will be solidified in the minds of many Republican voters because of the power of the conservative media.
Obama: Voters think bailouts are ‘a scam’
Biden intimately understands the political risks he faces here. As vice president of the Obama administration, he was inside the grim meetings that made fateful decisions on government bailouts after a new president inherited the worst financial crisis in more than 70 years. .
Bailouts to banks helped save the US economy, but nonetheless fueled a political backlash that fueled the Tea Party movement, which wiped out House Democrats midterm in 2010. It also sowed a sense of festering resentment that has been a fertile incubator for former President Donald Trump’s economic populism and backlash policy.
Barack Obama wrote in his autobiography, “A Promised Land,” that while Americans early in his term were frustrated with the frosty recovery from the 2008 crisis, “the bank bailouts tipped them off.”
“Across the political spectrum, voters viewed the bank bailouts as a scam that had allowed the finance barons to emerge from the crisis relatively unscathed,” Obama wrote.
Biden’s political future may hinge on avoiding such voter fury.