Biden faces enormous political risks from the banking turmoil

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

Another major industrial intervention to prop up the bank on Thursday – not under the government but under the administration – highlighted the still serious political danger of the sudden crisis that erupted just over a week ago. It also pushed the regime deeper into a fragile limb that could snap if the bank’s collapse worsened.

Some of the nation’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, combined to raise First Republic Bank’s steep $30 billion cash outflow aimed at easing market anxiety and stemming the domino effect of bank failures. and shows that the industry still has a solid foundation.

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

This picture shows the banking industry bailing itself out – and not the government bailing out rich bankers whose recklessness put Americans’ savings, wealth and peace of mind at risk.

It’s a narrative the president desperately needs to follow.

Even so, the administration’s repeated assurances that no taxpayer cash was involved — fueled by public outrage over bailouts following the 2008 Great Recession banking crisis — create a potential political vulnerability. While there are no signs yet that a single banking upheaval could escalate into a major systemic meltdown, any future use of public funds could lead to Republicans already inaccurately blasting the administration’s moves as a “bailout,” an opening for a disgraced Biden.

This week’s events show how the administration is on a knife’s edge in the banking crisis—large aspects of which it cannot control. That frightening reality was highlighted on Wednesday as trouble engulfed Credit Suisse, a huge global player whose current troubles were catalyzed into crisis by turbulence in the United States. It required emergency loan offers from Bern authorities to prevent a failure that would have had global repercussions.

The situation is politically so delicate for Biden because in some ways the most sensible political action would 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 his long tenure as a senator from the US financial gig in Delaware.

But presidents face multiple and often competing demands for their attention and political capital. Any hesitation to support SVB last weekend could have triggered a chain of consequences that plunged the entire industry into a crisis that would have required much greater government intervention – and possibly taxpayer-funded bailouts. That would have had devastating consequences for Biden’s reputation as a steward of the economy and a likely re-election campaign that, to succeed, must outline the case for America’s recovery from the worst pandemic in a century, high inflation and political turmoil.

Sad historical echoes

This week’s rollercoaster ride for the banking sector takes place in the ominous shadow of the 2008 financial crisis, a strategy based above all else on the bailout mantra.

The situations of 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 mortgages, piled up by lax lending practices and easy credit that led banks to take out trillions of dollars in near-worthless loans. Last week, SVB’s problems and subsequent bank run were attributed to managers investing in government bonds, whose prices fell as the Fed raised interest rates to combat high inflation. In most cases, the funds supporting the bank’s actual business were in order. There is a clear difference here between the government bailing out the bankers and banks in 2008 and what is effectively a federal insurance fund protecting depositors now.

However, such a nuance disappears outside the financial sector. Bank crashes are difficult to explain to the public, at least for political leaders who don’t have 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 bank failures – rarely rewards complexity. Presidential primary campaigns, for example, benefit from simplicity and votes and often use fear to fuel momentum. So even the false notion that the president is handing out taxpayer cash to those struggling to make ends meet can be political gold.

In a high-stakes hearing Thursday, Treasury Secretary Janet Yellen once again tried to explain what’s happening now — and why it’s not what happened before. His delicate task was to reassure the American people that the banking system is safe thanks to the administration’s efforts, without making comparisons to 2008.

“The government is not protecting shareholders and debt holders. What is important is that taxpayer money is not used or jeopardized by this action,” Yellen told the Senate Finance Committee.

However, his assurances do not prevent the administration’s critics from trying to describe the government’s actions as equivalent to the dreaded “b” word – the bailout.

For example, Republican presidential candidate Nikki Haley claimed this week that “Joe Biden is pretending this isn’t a bailout” and falsely assumed that if the Deposit Insurance Fund ran out, all bank customers would be on the hook. And he falsely 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 accountability.

Another potential Republican candidate, Florida Gov. Ron DeSantis, reversed course, claiming banks’ “awakened” concern about diversity, equity and inclusion initiatives had caused the industry to collapse. Complacency furthered DeSantis’ strategy of weaponizing the culture war to please conservative base activists. And while it didn’t properly diagnose the current banking problems, his theory is cemented in the minds of many Republican voters because of the power of the conservative media.

Obama: Voters See Bailouts as ‘Scam’

Biden is acutely aware of the political risks he faces here. As vice president in the Obama administration, he sat in on the grim meetings that made fateful decisions about the government’s bailout after the new president inherited the worst economic crisis in more than 70 years.

The bank bailout helped save the U.S. economy, but it caused a political backlash that fueled the Tea Party movement that swept out House Democrats in the 2010 midterms. It also sowed a restless resentment that was a fertile breeding ground for ex-President Donald Trump’s economic populism and reactionary politics.

Barack Obama wrote in his autobiography, “A Promised Land,” that while Americans were frustrated at the start of his term with an ice-age recovery from the 2008 crisis, “the bank bailout sent them over the edge.”

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

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

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