The Biden administration’s scramble to prevent financial contagion from the crash of Silicon Valley Bank is both an attempt to shield a resilient but still-vulnerable economy and to prevent grave political fallout.
The Treasury Department and federal regulators insisted there was no systemic risk to the banking system as a whole that could cause a repeat of the cataclysmic 2008 meltdown as they raced against the opening of Asian markets with measures to head off a run on small or regional US banks.
They unrolled emergency measures Sunday evening that will guarantee deposits of SVB’s customers. Regulators also closed down Signature Bank, another institution that was threatening to collapse, and ensured its customers would get a similar deal. US taxpayers will not finance either move, officials said.
The swift action may temper immediate stress in the financial markets. But it is too early to say whether the government will be forced into more sweeping action amid rising concerns about the health of the finance sector. The suddenness of the crisis is exacerbating anxiety since SVB failed, apparently out of nowhere, in 48 hours. Assurances by the White House and Treasury Secretary Janet Yellen that the broader banking system is sound set up a new test of economic credibility for an administration scarred by its handling of high inflation.
President Joe Biden sought to instill confidence in the US banking system when he addressed Americans Monday morning about his administration’s emergency plan to contain the failure of the two banks.
“Americans can rest assured that our banking system is safe. Your deposits are safe,” Biden said in remarks from the Roosevelt Room. “Let me also assure you we will not stop at this. We will do whatever is needed on top of all this.”
The SVB drama invoked the ghosts of 2008 and voter anger over bailouts granted to rich bankers who caused the crisis through greed and high-risk investments but bore little of the pain of the subsequent worst financial disaster since the 1930s, which was shouldered by the public.
Underscoring the extreme sensitivity of this history, an administration official told reporters late Sunday that extraordinary moves to guarantee SVB customer deposits by a federal insurance mechanism did not amount to a bailout. “This is not funds from the taxpayer,” the official said, adding that the bank’s equity would not be propped up and that bondholders will be “wiped out.”
But a political blame game was already erupting – a sign of how a dysfunctional and polarized Washington and a political system already stressed by the heated early exchanges of a new presidential election might struggle to deal with a truly threatening financial crisis.
Some Republicans accused Biden of unleashing a multi-trillion dollar spending spree that caused high inflation and forced the Federal Reserve into a high-interest rate strategy that made some banks more vulnerable. Others slammed federal authorities over the failure to prevent the collapse of SVB in the first place, reigniting a long-term feud over the government’s role in the economy. Florida Gov. Ron DeSantis, showing his determination to leverage every issue to reinforce a culture-driven narrative for his potential presidential bid, accused SVB executives of being more interested in diversity and inclusion training than high finance.
A deepening crisis that raised the need for congressional action would also prompt an immediate issue for new House Speaker Kevin McCarthy, who has a tiny GOP majority and would face a huge task in lining up votes from his most radical members for any government response.
But Republicans also got some blame. Sen. Bernie Sanders, a Vermont independent and two-time Democratic presidential candidate, argued the fate of the stricken bank was the “direct result” of ex-President Donald Trump’s “absurd” loosening of financial regulations.
The peril faced by Biden
Any new economic shocks would be a political disaster for an administration already defined by multiple crises, especially as the president gets ready to launch his expected reelection campaign. It is crucial for Biden that he bring the situation under control quickly.
He would face a disastrous political dilemma if worsening conditions forced a president – who has rooted his administration in lifting up working and middle class Americans – into a choice between bailing out rich bankers or letting contagion spill over. Populist Republicans, like his potential 2024 election rival Trump, would also pounce on any scenario in which Biden is seen as helping wealthy tech investors from liberal California.
A financial crisis would be an opening for Republicans who have seized on recent events, including a fast-rising threat from China, a perceived southern border crisis and stubbornly high inflation to try to convince voters an aging president is reeling.
The widening political splits over the SVB failure are also offering an ill omen for a coming showdown over the need to raise the government’s borrowing limit later this year. Republicans are demanding billions of dollars in spending cuts that would gut the Biden agenda to do so. But the president warns their intransigence could shatter US creditworthiness and pitch the US and global economies into a self-inflicted crisis.
The scramble to stave off a crisis
In retrospect, the timing of the SVB crisis was auspicious since it gave Yellen a weekend to line up a stabilization plan with global markets closed. Officials worked feverishly behind the scenes and briefed leaders and rank-and-file members of Congress.
The sweeping moves Sunday evening from Yellen, Federal Reserve Chair Jerome Powell and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg were designed to prevent panicked investors from withdrawing funds from other banks, thereby threatening their survival, and also to allow firms with large deposits to make payroll and ensure their viability.
All weekend, Yellen sought to be a voice of calm, simultaneously seeking to prevent the situation from racing out of control – in both its economic and political dimensions.
“Let me be clear that during the financial crisis, there were investors and owners of systemic large banks that were bailed out, and we’re certainly not looking (to do that),” Yellen told CBS News on Sunday.
“And the reforms that have been put in place means that we’re not going to do that again.”
Shalanda Young, the director of the White House Office of Management and Budget, also sought to ease public concerns, insisting that the US banking system at large was “more resilient” now.
“It has a better foundation than before the [2008] financial crisis. That’s largely due to the reforms put in place,” Young said on CNN’s “State of the Union.”
But the risks from the SVB drama are still acute for Biden. There is increasing debate, for instance, over whether the Federal Reserve should ease its harsh interest rate strategy – with markets expecting another 50 basis points hike soon – to avoid further exposing vulnerable banks.
Sheila Bair, a top banking regulator during the 2008 crisis, told CNN the Fed should “hit pause.” And California Democratic Rep. Adam Schiff echoed those concerns, saying on CNN’s “Newsroom” on Sunday that Congress needed to find out whether the central bank considered “the possibility that some institutions may not be able to handle such a rapid increase in rates.”
The debate underscores Biden’s jam on the economy. If the Fed paused its rates strategy, inflation that is hammering voters and is politically corrosive for the president could get worse after some recent signs it is abating. But if the Fed presses on, the risks that its actions damage the wider economy and spike unemployment could grow.
As the SVB crisis escalated, so did the political stakes
In his initial comments on the crisis, McCarthy was temperate, apparently seeking to contain the risk of a run on the banks in his home state of California, while talking up the quality of SVB’s customer assets, given that one option was a takeover from another, bigger bank.
“The administration has tools to deal with this,” McCarthy said on Fox. “So I wouldn’t live off somebody putting something on Twitter. Let the actions of the administration take work here before anybody goes to any positions in their own bank.”
But McCarthy also twisted the knife in Biden, days after he rejected the president’s new budget as a multi-trillion dollar spending spree. And the speaker tried to exploit the SVB crisis to improve his position on the debt-ceiling showdown. “High debt brings inflation,” he warned. “And what happens with inflation? You see with this bank, interest rates moving up, where they’re stuck in bonds and others. We watched the pain that it causes American citizens.”
South Carolina Republican Rep. Nancy Mace underscored the difficultly McCarthy would face in mobilizing any congressional action if the crisis spreads and the administration asks for help.
“I would not support a bailout,” Mace told CNN’s Kaitlan Collins on “State of the Union” Sunday morning. She added: “We cannot keep bailing out private companies, because there’s no consequences to their actions.”
The fierce bipartisan resistance to bailing out bankers is shared on both sides of the aisle, underscoring how the long-term consequences of unpopular efforts to stave off the 2008 crisis are still weighing heavily on national politics, potentially constraining the government’s power to respond to any new large-scale catastrophe in the banking system.
Before the administration’s Sunday evening announcement, Democratic Rep. Ro Khanna, who represents the California district where SVB was headquartered, led calls for the administration to do more to make customers of the institution whole, while dismissing bank executives.
“The bargain in our country from FDR has always been, investors and shareholders lose. I have no sympathy for the executives, no sympathy for people who have stock there. But the depositors are protected,” Khanna said on CBS News’ “Face the Nation.”
Republican presidential candidates also sought an opening.
Former South Carolina Gov. Nikki Haley warned: “It is not the responsibility of the American taxpayer to step in. The era of big government and corporate bailouts must end.”
Meanwhile DeSantis’ attempt to blame the bank’s Diversity, Equity and Inclusion programs was a reminder, that, unlike Biden, a potential candidate has no responsibility for the wider economy.