Biden faces enormous political risks from banking turmoil

(CNN) President Joe Biden He can be damned if he bails out the banks or damned if he doesn’t.

Another specialty Industry intervention The backing of a bank on Thursday — not by the government but sponsored by the administration — underlined the still-grave political danger of the sudden crisis that erupted just over a week ago. It also pushed the administration even further into a fragile limb that could explode if the banks’ collapse worsened.

Some of the nation’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, have joined forces to support a teetering First Republic Bank in a $30 billion cash infusion aimed at easing jitters in markets, averting the domino effect of more bank failures and proving that the industry is still there. It has a solid foundation.

It came days after the White House used the Deposit Insurance Fund, a $100 billion facility funded by premiums that banks pay to the Federal Deposit Insurance Corporation, to guarantee deposits in Silicon Valley Bankwhich collapsed last week, and Signature Bank, which regulators shut down.

The picture here is that the banking industry is saving itself — not about the government saving wealthy bankers whose recklessness is endangering Americans’ savings, prosperity and comfort.

It’s a story the president desperately needs to stick to.

However, the administration’s repeated assurances of no taxpayer money — necessitated by public outcry over bailouts after the Great Banking Recession of 2008 — has caused some potential policy vulnerabilities. While there is no indication yet that isolated banking turmoil could spill over into a major systemic meltdown, any future use of public funds could give Republicans, who are already inaccurately criticizing the administration’s moves as a “bailout,” what It opens the door for Biden to blame.

This week’s events show how the administration is on edge about the banking crisis – big aspects it has no control over. This grim reality was underlined on Wednesday when Troubles overwhelmed Credit Suisse, a huge global player whose current problems have been catalysed into crisis by unrest in the United States. It required emergency loan offers from the authorities in Berne to avert a failure that would have had global repercussions.

The situation is politically dicey for Biden because in some respects the wiser political move would be to allow small banks like SVB and Signature Bank to fail. Biden has based his political mythology entirely on uplifting working and middle-class Americans, despite having long served as the senator for the US financial industry haven of Delaware.

But presidents face multiple and often conflicting demands for their attention and political capital. Any hesitation about backing the SVB this past weekend could have unleashed a cascade of consequences that led the entire sector into a crisis that would have required much greater government intervention – and possibly taxpayer-funded bailouts. This could have dire consequences for Biden’s reputation for economic stewardship and a potential re-election campaign that must, to succeed, paint a case for the recovery of the United States after the worst pandemic in a century, soaring inflation and political turmoil.

Ominous historical echoes

The events in the banking sector this week take place in the ominous shadow of the economic crisis of 2008, which foreshadows a strategy based, above all, on the slogan of no bailout.

The situation in 2008 and 2023 is not the same. In the first case, the worst financial crisis since the Great Depression was caused by mountains of subprime mortgages built up by lax lending practices and easy credit that saddled banks with trillions of dollars in nearly worthless loans. The problems that occurred last week in the SVB, and the subsequent bank inflows, resulted from managers investing in government bonds that have fallen in price due to the Federal Reserve raising interest rates to combat high inflation. In most cases, the assets that support the actual business of the bank were intact. There is a clear distinction here between the government bailing out bankers and banks in 2008 and what is effectively a federal insurance fund that insures depositors now.

However, this nuance is lost outside the finance industry. Banking’s misfortunes are hard to explain to the public, least of all by political leaders who lack the genius to distill an existential moment into a national rally the way President Franklin D. Roosevelt did during the banking crisis of 1933.

Politics — Biden’s minor problem after preventing a banking meltdown — rarely rewards complexity. Presidential primary campaigns, for example, benefit from simplicity and soundbites and often use fear to spark momentum. So even the misconception that the president is handing out taxpayers struggling to make ends meet could be political gold.

Treasury Secretary Janet Yellen tried again in a high-stakes hearing Thursday to explain what is happening now — and why what happened in the past has not happened. Its delicate task has been to reassure Americans that the banking system is safe thanks to the administration’s efforts without drawing comparisons to 2008.

“The shareholders and debt holders are not protected by the government,” Yellen told the Senate Finance Committee. “More importantly, don’t use taxpayers’ money or put them at risk with this action.”

However, her reassurances will not stop administration critics from seeking to paint the government’s actions as amounting to a terrifying bailout.

For example, Republican presidential candidate Nikki Haley argued this week that “Joe Biden is pretending this isn’t a bailout,” misleadingly positing that if the Deposit Insurance Fund runs out, all bank customers will be on the hook. It wrongly claimed that depositors in healthy banks were forced to support 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 potential Republican candidate, Florida Gov. Ron DeSantis, twisted the situation claiming that the banks had “woke up.” Preoccupation with diversity, equity and inclusion initiatives caused the collapse of the industry. Vanity provided DeSantis’ strategy of weaponizing a culture war to appease conservative al-Qaeda activists. And although he did not properly diagnose the current banking problems, his theory would be cemented in the minds of many Republican voters on the power of the conservative media.

Obama: Voters think bailouts are a ‘fraud’

Biden knows firsthand the political risks he faces here. As vice president in the Obama administration, he was inside the dismal 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 American economy, but they nonetheless ignited a political backlash that fueled the Tea Party movement, which ousted House Democrats in the 2010 midterm elections. Former President Donald Trump Economic populism and political backlash.

In his autobiography, A Promised Land, Barack Obama writes that while Americans early in his term were frustrated by 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 fraud that allowed money barons to emerge from the crisis relatively unscathed,” Obama wrote.

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