Biden faces massive political risk from banking crisis

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

Another major industry intervention 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 further into a fragile limb that could break if the banking collapse were to worsen.

Some of the nation’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, combined to prop up struggling First Republic Bank in a $30 billion cash infusion intended to ease anxiety in markets, counter a domino effect of multiple bank failures and show that the industry still has a solid foundation.

This 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 guarantee deposits at Silicon Valley Bank, which collapsed last week, and Signature Bank, as regulators shut down. .

The picture here is of the banking industry saving itself – and not of the government saving rich bankers whose recklessness endangered the savings, prosperity and peace of mind of Americans.

It is a narrative that the president desperately needs to hold on to.

Still, the administration’s repeated assurances that no taxpayer cash was involved — necessitated by public outrage over bailouts following the 2008 banking crisis in the Great Recession — create a potential political vulnerability. While there is no sign yet that isolated bank failures could develop into a major systemic meltdown, any future use of public funds could give Republicans, who are already inaccurately blasting administration moves as a “bailout,” an opening to allow Biden to .

The events of this week show how the administration is on a knife’s edge over the banking crisis – large aspects of which it has no capacity to control. That chilling reality was underlined on Wednesday as problems overwhelmed Credit Suisse, a huge global player whose existing problems were catalysed into a crisis by the turbulence in the US. It required emergency loan offers from the authorities in Bern to avert a failure that would have had global repercussions.

The situation is so politically difficult for Biden because the most sensible political move would, in some sense, be to let small banks like SVB and Signature Bank fail. Biden has based his entire political mythology on uplifting working and middle-class Americans, despite serving as a longtime senator for the US financial industry haven of Delaware.

But presidents face multiple and often competing demands for their attention and political capital. Any hesitation in supporting SVB last weekend could have triggered a chain of consequences that tipped 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 the likely re-election campaign that, to succeed, must outline a case for an American return from the worst pandemic in a century, high inflation and political turmoil.

Ominous historical echoes

The rollercoaster ride in the banking sector this week takes place in the ominous shadow of the 2008 financial crisis, which informs a strategy based above all on a no-bailout mantra.

The situations in 2008 and 2023 are not the same. In the former case, the worst financial crisis since the Great Depression was triggered by mountains of subprime loans piled up by lax lending practices and easy credit that left banks with trillions of dollars in near-worthless loans. The problems last week 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 operations were sound. There is a clear distinction here between the government that bailed out bankers and banks in 2008, and what is effectively a federal insurance fund that insures depositors now.

However, such nuance is lost outside the financial industry. Banking disasters are difficult to explain to the public, at least by 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 secondary concern after preventing a banking collapse — rarely rewards complexity. Presidential primary campaigns, for example, profit from simplicity and soundbites and often use fear to spark 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 once again in a high-stakes hearing on Thursday to explain what is happening now – and why it is not what happened in the past. Her delicate task was to reassure 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. Importantly, no taxpayer money is being spent or put at risk with this action,” Yellen told the Senate Finance Committee.

However, her assurances will not prevent the administration’s critics from trying to portray the government’s actions as tantamount to the dreaded “b” word – bailout.

For example, Republican presidential candidate Nikki Haley argued this week that “Joe Biden is pretending this isn’t a bailout,” and misleadingly suggested that if the deposit insurance fund were to run dry, all bank customers would be on the hook. And she falsely claimed that depositors in healthy banks were forced to subsidize SVB mismanagement. But unlike Biden, the former governor of South Carolina is in the enviable position of being able to criticize without being held accountable.

Another potential Republican candidate, Florida Governor Ron DeSantis, twisted the situation to claim that the banks’ “woke” preoccupation with diversity, equity and inclusion initiatives had caused the industry to plummet. The conceit furthered the DeSantis strategy of weaponizing a culture war to please grassroots conservative activists. And even if it did not correctly diagnose the current banking problems, his theory will be cemented in the minds of many Republican voters because of the power of the conservative media.

Obama: Voters believe bailouts are “a scam”

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

Bank bailouts helped save the U.S. economy, but nonetheless created a political backlash that fueled the Tea Party movement, which wiped out House Democrats in the 2010 midterms. It also sowed a nagging sense of resentment that was a fertile incubator for ex- President Donald Trump’s economic populism and pushback policies.

Barack Obama wrote in his autobiography, “A Promised Land”, that while early in his term Americans were frustrated by the post-crisis glacier of 2008, the bank rescue “sent them over the edge”.

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

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