Biden faces massive political risks from banking turmoil

(CNN) President Joe Biden could be damned if he saves the banks or damned if he doesn’t.

Another major intervention by industry to prop up a bank on Thursday – not by the government but under the auspices of the administration – underlined the still serious political danger of the sudden crisis that erupted just over a week ago. It also pushed the administration onto a fragile limb that could snap if the bank’s collapse worsened.

Some of the nation’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, combined to shore up the shaky First Republic Bank in a $30 billion cash infusion aimed at easing anxiety in markets and preventing a domino effect of more bank failures. and show that the industry still has a strong foundation.

That came 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 insure deposits at Silicon Valley Bank , which collapsed last week, and Signature Bank, which was shut down by regulators. .

The picture here is of the banking industry saving itself, not the government bailing out wealthy bankers, whose recklessness endangers the savings, prosperity, and peace of mind of Americans.

It’s a narrative the president badly needs to stick to.

Still, the administration’s repeated assurances that there was no taxpayer cash—necessitated by public fury over bailouts after the banking crisis of the Great Recession of 2008—created a potential political vulnerability. While there is still no suggestion that the isolated banking crisis could produce a major systemic collapse, any future use of public funds could give Republicans, who are already vaguely blasting the administration’s moves as a “savage” , an opening to take down Biden.

This week’s events show how close the administration is to dealing with the banking crisis, large aspects of which it has no ability to control. That disheartening reality was underscored on Wednesday when problems overwhelmed Credit Suisse, a major global player whose existing problems were catalyzed into a crisis by the turmoil in the US. It required emergency loan offers from the authorities in Bern to avoid a failure that would have had global repercussions.

The situation is politically complicated for Biden because the most prudent political move in some ways would be to allow small banks like SVB and Signature Bank to fail. Biden has based his entire political mythology on uplifting middle-class and working-class Americans, despite his long tenure as a senator from the American financial industry haven of Delaware.

But presidents face multiple and often competing demands on their attention and political capital. Any hesitation in supporting SVB last weekend could have set off a chain of consequences that plunged the entire sector into a crisis that would have required much greater government intervention, and possibly taxpayer-funded bailouts. This would have had disastrous consequences for Biden’s reputation for economic management and the likely re-election campaign, which, to succeed, must make a case for American recovery from the worst pandemic in a century. high inflation and political unrest.

Ominous historical echoes

This week’s banking sector rollercoaster takes place in the ominous shadow of the 2008 financial crisis, which is informing a strategy that is based, above all, on a mantra of no bailouts.

The situations of 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 piled up by lax lending practices and easy credit that saddled banks with trillions of dollars in nearly worthless loans. Last week’s problems at SVB, and a subsequent bank run, were caused by managers investing in government bonds whose prices fell as the Fed raised interest rates to combat high inflation In most cases, the assets supporting the bank’s actual business were solid. There is a clear distinction here between the government bailing out bankers and banks in 2008 and what is now a federal insurance fund that guarantees depositors.

This nuance, however, is lost outside the financial sector. Banking calamities are difficult to explain to the public, at least for political leaders who lack the genius to distill an existential moment into a national rally as President Franklin Roosevelt did during the 1933 banking crisis.

Politics: Biden’s side issue after averting a bank collapse rarely rewards complexity. Presidential primary campaigns, for example, capitalize on simplicity and soundbites and often use fear to activate momentum. So even a false perception that a president is handing out cash to taxpayers struggling to make ends meet can be political gold.

Treasury Secretary Janet Yellen tried again, in a high-level hearing on Thursday, to explain what is happening now and why it is not what happened in the past. His delicate task was to reassure Americans that the banking system is safe thanks to the administration’s efforts without inviting comparisons with 2008.

“Shareholders and debt holders are not being protected by the government. Importantly, taxpayer dollars are not being used or put at risk by this action,” Yellen told the Senate Finance Committee.

His assurances, however, won’t stop administration critics from trying to describe 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 is pretending this isn’t a bailout” and falsely suggested that if the Deposit Insurance Fund were to run out, all the bank’s customers they would be stuck. And he falsely claimed that depositors in healthy 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 accountability.

Another potential Republican candidate, Florida Gov. Ron DeSantis, twisted the situation to claim that banks’ “awakened” concern for diversity, equity and inclusion initiatives had led to the industry’s downfall. The conceit advanced DeSantis’ strategy of waging a culture war to please grassroots conservative activists. And even though he did not correctly diagnose today’s banking problems, his theory will be cemented in the minds of many Republican voters because of the power of the conservative media.

Obama: Voters Think Bailouts ‘Scam’

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

The bank bailouts helped save the U.S. economy, but they also fueled a political backlash that fueled the Tea Party movement, which wiped out House Democrats in the 2010 midterms. It also sowed a sense of resentment that was a fertile incubator for former President Donald Trump’s economic populism and reactionary politics.

Barack Obama wrote in his autobiography, “A Promised Land,” that while Americans early in 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 scam that had allowed the financial barons to emerge from the crisis relatively unscathed,” Obama wrote.

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

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