President Joseph Biden might be damned for saving the banks or damned for not doing so.
Another big industry intervention to prop up a bank on Thursday – not by the government but under the administration’s auspices – highlighted the still grave political risk of the abrupt crisis that erupted little over a week ago. It also pushed the administration further out on a limb that may shatter if the bank catastrophe worsened.
Some of the country’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup, and Truist, joined forces to bail out teetering First Republic Bank in a $30 billion cash infusion designed to calm markets, avert a domino effect of more bank failures, and demonstrate the industry still has a solid foundation.
This comes only days after the White House used the Deposit Insurance Fund, a $100 billion facility funded by premiums paid to the Federal Deposit Insurance Corporation by banks, to guarantee deposits at Silicon Valley Bank, which failed last week, and Signature Bank, which regulators closed down.
The picture presented is of the financial system saving itself, rather than the government bailing out rich bankers whose recklessness jeopardised Citizens’ savings, prosperity, and peace of mind.
The administration really needs this story to stick.
Yet, the administration’s repeated assurances that no taxpayer money was used – needed by public outrage over bailouts following the 2008 Great Recession banking crisis – provide some possible political vulnerability. While there is no indication that localised banking turmoil will lead to a massive systemic meltdown, any future use of public funds might provide Republicans, who are already incorrectly labelling administration efforts as a “bailout,” with an opportunity to attack Biden.
The events of this week demonstrate how the administration is teetering on the brink of a banking catastrophe over which it has no control. This foreboding reality was shown on Wednesday when problems overcame Credit Suisse, a massive global player whose pre-existing issues were exacerbated by the turmoil in the United States. It took emergency loan offers from Berne officials to prevent a failure with worldwide ramifications.
The position is so politically perilous for Biden because, in some ways, allowing small banks like SVB and Signature Bank to fail might be the most wise political decision. After long serving as a senator for the US banking industry sanctuary of Delaware, Biden has built his whole political mythos on lifting up working- and middle-class People.
Nonetheless, presidents must balance several, often conflicting demands for their attention and political capital. Any reluctance in bailing out SVB last weekend may have set off a chain of events that would have pushed the entire industry into a crisis that would have necessitated considerably more government intervention – and potentially taxpayer-funded bailouts. This would have been bad for Biden’s reputation for fiscal stewardship, as well as his anticipated reelection campaign, which must make the case for an American recovery after the worst pandemic in a century, rising inflation, and political unrest.
Historic echoes of doom
The financial sector’s roller-coaster ride this week is taking place in the foreboding shadow of the 2008 economic disaster, which is inspiring a policy that is predicated, above all, on a slogan of no bailouts.
The circumstances in 2008 and 2023 are not same. In the former example, mountains of subprime mortgages piled up by weak lending procedures and easy credit saddled banks with trillions of dollars in nearly worthless debts precipitated the biggest financial crisis since the Great Depression. Managers who bought in government bonds whose values fell when the Fed raised interest rates to battle excessive inflation caused the troubles at SVB last week, and a subsequent bank run. The assets backing up the bank’s real operations were generally sound. There is a distinct difference between the government bailing out bankers and banks in 2008 and what is now effectively a governmental insurance fund securing depositors.
Nevertheless, such detail is lost outside of the finance business. Banking disasters are difficult to explain to the public, at least for political leaders who lack the ability to turn an existential crisis into a national rallying cry in the way that President Franklin D. Roosevelt did during the 1933 banking crisis.
Politics, which is Biden’s secondary issue after averting a banking crisis, rarely rewards sophistication. Presidential primary campaigns, for example, benefit from simplicity and soundbites, and they frequently employ fear to generate momentum. As a result, even a false image that a president is handing out cash to poor citizens can be electoral gold.
Treasury Secretary Janet Yellen attempted to explain what is occurring today – and why it is different from what has happened in the past – at a high-stakes hearing on Thursday. Her difficult mission was to reassure Americans that the banking system is secure as a result of the administration’s actions while avoiding analogies to 2008.
“The government does not protect shareholders or debt holders. Importantly, no taxpayer funds are being spent or jeopardised as a result of this action,” Yellen told the Senate Finance Committee.
Her assurances, however, will not prevent the administration’s detractors from portraying the administration’s efforts as the dreaded “b” word – bailout.
Republican presidential candidate Nikki Haley, for example, claimed last week that “Joe Biden is pretending this isn’t a bailout,” implying that if the Deposit Insurance Fund ran empty, all bank customers would be on the hook. She also incorrectly stated that healthy bank depositors were being forced to finance SVB incompetence. Yet, unlike Biden, the former South Carolina governor has the advantage of being able to criticise without taking responsibility.
Another potential Republican candidate, Florida Gov. Ron DeSantis, twisted the scenario to suggest that the banks’ “woke” obsession with diversity, equality, and inclusion initiatives was to blame for the industry’s decline. The conceit strengthened DeSantis’ strategy of weaponizing cultural war in order to appease conservative base activists. While it did not accurately diagnose the present banking difficulties, his idea will be cemented in the minds of many Republican voters due to the dominance of conservative media.
Obama believes bailouts are a “scam.”
Biden is well aware of the political risks he confronts in this position. As vice president in Obama’s administration, he was present at the solemn discussions that determined critical decisions concerning government bailouts after a new president inherited the greatest financial crisis in more than 70 years.
Bank bailouts helped stabilise the US economy, but they also fueled a political backlash that fueled the Tea Party movement, which wiped out House Democrats in the 2010 midterm elections. It also generated a festering sense of bitterness, which served as a perfect breeding ground for ex-President Donald Trump’s economic populism and backlash politics.
In his autobiography, “A Promised Land,” Barack Obama said that while Americans were angry with the slow recovery from the 2008 financial crisis early in his presidency, “the bank rescue threw many over the edge.”
“Across the political spectrum, many saw the bank bailouts as a swindle that allowed the banking barons to emerge relatively unharmed from the crisis,” Obama wrote.
Avoiding such voter rage could be critical to Biden’s political future.