The Biden team is fighting to limit SVB’s economic and political contagion

(CNN) The Biden administration’s fight to prevent financial contagion from the Silicon Valley Bank crash is both an attempt to shield a resilient but still vulnerable economy, and to prevent serious 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 catastrophic meltdown of 2008 as they battled the opening of Asian markets with measures to stave off a run on small or regional US. banks.

They rolled out emergency measures on Sunday evening to guarantee deposits to SVB̵[ads1]7;s customers. Regulators also shut down Signature Bank, another institution that threatened to collapse, and ensured its customers would get a similar deal. American taxpayers will not fund any of these moves, officials said.

The swift action can alleviate immediate stress in the financial markets. But it is too early to say whether the government will be forced into more sweeping action amid growing concerns about the health of the financial sector. The sudden crisis exacerbates the anxiety since SVB failed, seemingly out of nowhere, in 48 hours. Assurances from 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 plans to address Americans on Monday morning about the administration’s emergency plan to contain the failure of the two banks.

“The American people and American businesses can have confidence that their bank deposits will be there when they need them,” the president said in a written statement Sunday night. “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen supervision and regulation of major banks so that we are not in this position again.”

The SVB drama invoked the ghosts of 2008 and voters’ anger over bailouts given to rich bankers who caused the crisis through greed and high-risk investments, but which bore little of the pain of the subsequent worst economic disaster since the 1930s, which was borne by the public.

Underscoring the extreme sensitivity of this story, an administration official told reporters late Sunday that extraordinary moves to guarantee SVB customer deposits by a federal insurance mechanism did not constitute a bailout. “These are not taxpayer funds,” the official said, adding that the bank’s equity would not be propped up and bondholders would be “wiped out.”

But a political blame game was already breaking out — a sign of how a dysfunctional and polarized Washington and a political system already stressed by the heated early exchanges of another presidential election may struggle to deal with a truly looming 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 criticized federal authorities for failing to prevent the collapse of the SVB in the first place, rekindling a long-running feud over the government’s role in the economy. Florida Gov. Ron DeSantis, who showed his willingness to exploit any issue to reinforce a culture-driven narrative for his potential presidential run, accused SVB leaders of being more interested in diversity and inclusion training than high finance.

A deepening crisis that increased the need for congressional action would also present an immediate case for incoming House Speaker Kevin McCarthy, who has a slim GOP majority and will face a major task of lining up votes from his most radical members for any government response.

But Republicans also got some blame. Sen. Bernie Sanders, an independent and two-time Democratic presidential candidate from Vermont, claimed the fate of the stricken bank was the “direct result” of ex-President Donald Trump’s “absurd” dismantling of financial regulations.

The danger facing Biden

Any new economic shocks would be a political disaster for an administration already defined by multiple crises, especially as the president prepares to launch his expected re-election campaign. It is crucial for Biden that he quickly gets the situation under control.

He would face a catastrophic political dilemma if worsening conditions forced a president — who has anchored his administration on uplifting working and middle-class Americans — to a choice between bailing out rich bankers or letting the contagion spread. 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 rapidly growing threat from China, a perceived southern border crisis and stubbornly high inflation, to try to convince voters of an aging president.

The growing political divisions over the SVB failure also give a bad sign of an upcoming settlement about the need to raise the state’s borrowing limit later this year. Republicans are demanding billions of dollars in spending cuts that would undermine the Biden agenda to do so. But the president warns that their intransigence could shatter America’s creditworthiness and plunge the US and global economies into a self-inflicted crisis.

The fight to avert a crisis

In retrospect, the timing of the SVB crisis was favorable as it gave Yellen a weekend to set up a stabilization plan with global markets closed. Officials worked frantically behind the scenes, briefing leaders and rank-and-file members of Congress.

The sweeping moves Sunday night by Yellen, Federal Reserve Chairman 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 wages and ensure their viability.

Throughout the weekend, Yellen sought to be a voice of calm while trying to prevent the situation from spiraling out of control – both in its economic and political dimensions.

“Let me be clear that during the financial crisis it was investors and owners of systemic large banks that got 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 mean that we won’t do it 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 [2008] financial crisis. That’s largely because of the reforms that are in place, Young said on CNN’s “State of the Union.”

But the risk from the SVB drama is still acute for Biden. There is growing debate, for example, over whether the Federal Reserve should ease its hard rate strategy – with markets expecting another 50 basis point hike soon – to avoid further exposing vulnerable banks.

Sheila Bair, a top bank regulator during the 2008 crisis, told CNN that the Fed should “take a break.” And California Democratic Rep. Adam Schiff echoed those concerns, saying on CNN’s “Newsroom” Sunday that Congress needed to find out whether the central bank was considering “the possibility that some institutions may not be able to handle such a rapid increase in interest rates ».

The debate emphasizes Biden’s grip on the economy. If the Fed halted its interest rate strategy, the inflation that is hammering voters and politically corrosive to the president could worsen after some recent signs of slowing. But if the Fed presses ahead, the risk that the actions will hurt the broader economy and raise unemployment could increase.

As the SVB crisis escalated, so did the political effort

In his initial comments on the crisis, McCarthy was tempered, apparently trying to limit the risk of a run on the banks in his home state of California, while talking up the quality of SVB’s customer funds, given that one option was a takeover by another. , major bank.

“The administration has tools to deal with this,” McCarthy said on Fox. “So I wouldn’t live off somebody posting something on Twitter. Let the actions of the administration get to work here before anybody goes to any positions in their own bank.”

But McCarthy also turned the knife on Biden, days after he dismissed the president’s new budget as a multibillion-dollar spending spree. And the speaker tried to use the SVB crisis to improve his position on the debt ceiling settlement. “High debt breeds inflation,” he warned. “And what happens with inflation? You see with this bank that interest rates are moving up, where they are stuck in bonds and others. We saw the pain that it inflicts on American citizens.”

South Carolina Republican Representative Nancy Mace emphasized the difficulty 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 continue to bail out private companies, because there are no consequences for their actions.”

The fierce bipartisan opposition to bailing out bankers is shared on both sides of the aisle, underscoring how the long-term consequences of unpopular attempts to avert the 2008 crisis still weigh heavily on national politics, potentially limiting the government’s power to respond to any new large-scale disaster in the banking system.

Before the administration’s announcement Sunday night, Democratic Rep. Ro Khanna, who represents the California district where SVB was headquartered, led calls for the administration to do more to make the institution’s customers whole, while firing bank executives.

“The coup in our country since FDR has always been that investors and shareholders lose. I have no sympathy for the executives, no sympathy for the 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 Governor 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 broader economy.