The Biden administration’s scramble to avert financial contagion from Silicon Valley Bank’s failure is an attempt to protect a resilient but still vulnerable economy while also avoiding serious political damage.
Once Asian markets opened, the Treasury Department and federal authorities said there was no systemic risk to the banking sector as a whole that might lead to a replay of the disastrous 2008 catastrophe.
They implemented emergency procedures Sunday evening that will guarantee SVB customers’ deposits. Authorities also closed down Signature Bank, another institution on the verge of failing, and promised its customers a similar settlement. Officials have stated that neither relocation will be financed by American taxpayers.
The quick response may help to alleviate acute market stress. But, it is too early to tell whether the government would be obliged to take more drastic measures due to growing concerns about the health of the financial industry. The crisis’s suddenness is heightening anxiety, as SVB failed seemingly out of nowhere in 48 hours. The White House and Treasury Secretary Janet Yellen’s assurances that the banking system as a whole is sound set up a new test of economic credibility for an administration tainted by its management of high inflation.
As President Joe Biden spoke to Americans Monday morning about his administration’s emergency strategy to contain the failure of the two banks, he sought to instill confidence in the US banking system.
“Americans may be confident that our banking system is secure. “Your deposits are secure,” Biden stated from the Roosevelt Room. “Let me also promise you that we will not stop here. On top of that, we will do whatever is required.”
The SVB drama evoked the ghosts of 2008 and voter outrage over bailouts handed to wealthy bankers who precipitated the crisis through greed and high-risk investments but endured little of the agony of the ensuing biggest financial calamity since the 1930s, which was borne by the public.
An administration official told reporters late Sunday that exceptional steps to safeguard SVB customer deposits by a federal insurance mechanism did not amount to a bailout, emphasising the tremendous sensitivity of this history. “This is not taxpayer money,” the official said, adding that the bank’s equity would not be bolstered and bondholders would be “wiped out.”
Yet, a political blame game was already emerging, indicating how a fragmented and polarised Washington, as well as a political system already stretched by the heated early exchanges of a new presidential election, may struggle to deal with a truly threatening financial catastrophe.
Several Republicans accused Biden of launching a multi-trillion-dollar spending spree that resulted in high inflation and forced the Federal Reserve into a high-interest-rate approach that put some institutions at risk. Others chastised federal officials for failing to prevent SVB’s collapse in the first place, reigniting a long-running debate over the government’s role in the economy. Florida Gov. Ron DeSantis accused SVB executives of being more interested in diversity and inclusion training than high finance, demonstrating his eagerness to utilise every problem to promote a culture-driven narrative for his prospective presidential candidature.
A worsening situation that necessitates congressional action would be an immediate challenge for new House Speaker Kevin McCarthy, who has a sliver of a Republican majority and would face a massive task in lining up votes from his more radical members for any government response.
Republicans were also blamed. Sen. Bernie Sanders, a Vermont independent and two-time Democratic presidential candidate, claimed the bank’s demise was a “direct outcome” of ex-President Donald Trump’s “absurd” relaxation of financial laws.
The danger that Biden faces
Any additional economic shocks would be a political disaster for a government already defined by multiple crises, especially as the president prepares to run for reelection. It is critical for Biden to rapidly get the situation under control.
He would confront a severe political quandary if worsening conditions compelled a president whose administration has been founded in lifting up working and middle-class Americans to choose between bailing out rich bankers and allowing contagion to spread. Populist Conservatives, like his probable 2024 opponent Trump, would seize on any scenario in which Biden is viewed as assisting wealthy liberal California tech capitalists.
A financial catastrophe would provide an opportunity for Republicans, who have used recent events such as China’s rising threat, a perceived southern border problem, and stubbornly high inflation to try to persuade voters that an old president is in trouble.
The deepening political schisms over the SVB debacle are also portending a clash later this year over the need to lift the government’s borrowing limit. Republicans are demanding billions of dollars in budget cuts, which would devastate Biden’s plan. But, the president cautions that their obstinacy risks shattering US creditworthiness and plunging the US and global economies into a self-inflicted crisis.
The mad dash to avert a crisis
In retrospect, the timing of the SVB crisis was fortunate since it provided Yellen with a weekend to devise a stabilisation strategy when global markets were closed. Behind the scenes, officials worked tirelessly to brief leaders and rank-and-file members of Congress.
The bold moves made by Yellen, Federal Reserve Chair Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg on Sunday evening were intended to keep panicked investors from withdrawing funds from other banks, endangering their survival, while also allowing firms with large deposits to make payroll and ensure their viability.
Yellen endeavoured to be a voice of calm throughout the weekend, attempting to keep the situation from spiralling out of control in both its economic and political dimensions.
“Let me be clear: during the financial crisis, there were investors and owners of major large banks who were bailed out, and we are not looking to do that,” Yellen told CBS News on Sunday.
“And the reforms that have been implemented mean that we will not do that again.”
Shalanda Young, head of the White House Office of Management and Budget, also attempted to assuage public fears, claiming that the US banking industry as a whole was “more resilient” now.
“It has a stronger base than before the [2008] financial crisis. “This is largely due to the reforms that have been implemented,” Young stated on AWN’s “State of the Union.”
But, the hazards associated with the SVB drama remain high for Biden. For example, there is growing debate about whether the Federal Reserve should modify its harsh interest rate policy – with markets expecting another 50 basis point boost soon – to avoid further exposing fragile banks.
During the 2008 financial crisis, Sheila Bair, a key banking regulator, told AWN that the Fed should “stop.” California Democratic Rep. Adam Schiff reiterated such concerns, stating on AWN’s “Newsroom” on Sunday that House wanted to know if the Fed was concerned about “the risk that some institutions may not be able to withstand such a quick increase in rates.”
The argument highlights Biden’s economic impasse. If the Fed delayed its rate approach, inflation, which is weighing on voters and is politically damaging to the president, might worsen despite recent evidence that it is slowing. Yet, if the Fed continues, the risks that its actions may harm the economy and cause unemployment to rise will increase.