Biden faces major political risks from banking turmoil

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

Another major sector intervention to prop up a bank on Thursday — not by the government, but under the auspices of the administration — underscored the still grave political danger of the sudden crisis that erupted just over a week ago. It also pushed management further into a brittle limb that could snap if the bank’s collapse were to get worse.

Some of the country’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, banded together to prop up the floundering First Republic Bank with a $30 billion liquidity injection aimed at calming market anxiety, avoiding a ripple effect of more bank collapses and show that the sector remains on a solid footing.

This came days after the White House used the Deposit Insurance Fund, a $100 billion fund financed by premiums banks pay to the Federal Deposit Insurance Corporation, to guarantee Silicon Valley Bank’s deposits. , which went under last week, and Signature Bank, which was shut down by regulators.

The idea is for the banking industry to save itself, not for the government to bail out wealthy bankers whose recklessness endangered Americans’ savings, prosperity, and peace of mind.

It’s a narrative the president badly needs.

Still, the administration’s repeated assurances that there was no taxpayer money—necessary because of public fury over bailouts following the banking crisis of the 2008 Great Recession—creates some potential political vulnerability. While there are no signs yet that an isolated banking disruption could turn into a major systemic collapse, any future use of public funds could give Republicans, who are already inaccurately criticizing the government’s measures as a “bailout,” an opportunity to lash out. against Biden.

Events this week show that the government is on a knife edge when it comes to the banking crisis, of which it has no ability to control large aspects. This grim reality was highlighted on Wednesday when trouble spilled over to Credit Suisse, a huge global operator whose existing problems were catalyzed into a crisis by turmoil in the United States. The Berne authorities had to offer emergency loans to avoid a bankruptcy that would have had global repercussions.

The situation is so politically sensitive for Biden because the wisest 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 championing working and middle-class Americans, despite having long been a senator from Delaware, a haven for the US financial industry.

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

ominous historical echoes

The roller coaster ride that the banking sector has been on this week is taking place under the ominous shadow of the 2008 economic crisis, which is informing a strategy that rests, above all else, on the mantra of no bailouts.

The situation in 2008 and in 2023 is not the same. In the first case, the worst financial crisis since the Great Depression was triggered by mountains of subprime mortgages amassed by lax lending practices and easy credit that saddled banks with trillions of dollars in nearly worthless loans. Last week’s troubles at SVB, and the subsequent bank run, were caused by managers investing in government bonds whose prices fell as the Federal Reserve raised interest rates to combat high inflation. In most cases, the assets that supported the actual business of the bank were strong. There is a clear distinction here between the government bailing out bankers and banks in 2008 and what is now effectively a federal insurance fund protecting depositors.

However, these nuances are lost outside of the financial sector. Banking calamities are hard to explain to the public, at least by political leaders who lack the genius to distill an existential moment into a national rally the way President Franklin Roosevelt did during the 1933 banking crisis.

Politics — Biden’s side issue after avoiding a bank collapse — rarely rewards complexity. Presidential primary campaigns, for example, benefit from simplicity and big talk, often using fear to trigger momentum. So even the false perception that a president is doling out the money of struggling taxpayers can be political gold.

Treasury Secretary Janet Yellen tried once again to explain to a high-level audience 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 administration’s efforts without inviting comparisons to 2008.

“Shareholders and debt holders are not being protected by the government. More importantly, taxpayer money is not being used or put at risk with this measure,” Yellen told the Senate Finance Committee. .

His reassuring words, however, will not stop government critics from trying to portray the measures as tantamount to the dreaded “r” word: bailout.

Republican presidential candidate Nikki Haley, for example, claimed this week that “Joe Biden is pretending this isn’t a bailout,” misleadingly positing that if the Deposit Insurance Fund dried up, all bank customers would be on the line. . And she falsely claimed that healthy bank depositors were being forced to subsidize the SVB’s mismanagement. But unlike Biden, the former South Carolina governor is in the enviable position of being able to criticize without taking responsibility.

Another likely Republican candidate, Florida Gov. Ron DeSantis, misrepresented the situation to claim that banks’ “woke” concern over diversity, equity and inclusion initiatives had caused the industry to plummet. The fallacy furthered DeSantis’s strategy of waging a culture war to please conservative grassroots activists. And while he misdiagnosed current banking problems, his theory will take hold in the minds of many Republican voters thanks to the power of the conservative media.

Obama: Voters believe bailouts are ‘a scam’

Biden fully understands the political risks he faces. As vice president of the Obama administration, she was present at the grim meetings where fateful decisions about government bailouts were made after a new president inherited the worst financial crisis in more than 70 years.

The bank bailouts helped save the US economy, but they fueled a political backlash that fueled the Tea Party movement, which ousted Democrats from the House of Representatives in the 2010 midterm elections. It also sowed bitter resentment that it was a fertile incubator for the economic populism and reactionary politics of former President Donald Trump.

Barack Obama wrote in his autobiography, “A Promised Land,” that while early in his term Americans were frustrated with the glacial recovery from the 2008 crisis, “the bank bailout brought them to the brink.”

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

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