Biden faces huge political risks from turmoil in the banking sector

(CNN) President Joe Biden can be damned if he saves 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 on a vulnerable component that could snap if the bank’s collapse got worse.

Some of the country’s most powerful banks, including JPMorgan Chase, Wells Fargo, Citigroup and Truist, joined together to prop up the floundering First Republic Bank in a $30 billion cash injection designed to ease market turmoil, prevent the domino effect of more bank failures and show that the industry is still on solid footing.

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 in Silicon Valley Bank, which collapsed last week, and Signature Bank, that regulators have closed.

The picture here is of the banking industry bailing itself out — not the government bailing out wealthy bankers whose recklessness is jeopardizing Americans’ savings, prosperity, and peace of mind.

It is a story that the president urgently needs to hold on to.

Yet the government’s repeated assurances that no taxpayer money was involved — necessitated by public anger over bailouts following the 2008 Great Recession banking crisis — do create some potential political vulnerability. While there is as yet no suggestion that an isolated upheaval in the banking system could culminate in a major systemic collapse, any future use of public funds could give Republicans, who are already inaccurately quashing government moves as a “bailout”, an opening to Biden defeat.

This week’s events show how the government is on the cutting edge over the banking crisis – big aspects it can’t control. This frightening reality was highlighted on Wednesday as trouble overwhelmed Credit Suisse, a huge global player whose existing problems were catalyzed into crisis by the turbulence in the US. It required emergency loans from authorities in Bern to avert a failure that would have had global reverberations.

The situation is so politically unpredictable for Biden because in some ways the most prudent political move would be to topple small banks like SVB and Signature Bank. Biden has based his entire political mythology on elevating working- and middle-class Americans, despite long serving as a senator for the US financial haven of Delaware.

But presidents face multiple and often competing demands on their attention and political capital. Any hesitation to support SVB over the weekend could have unleashed a series of repercussions that plunged the entire industry into a crisis that would have required much greater government intervention – and possibly taxpayer-funded bailouts. This would have had disastrous consequences for Biden’s reputation for economic stewardship and the likely re-election campaign that, to succeed, must outline a case for a US recovery from the worst pandemic in a century, high inflation and political turmoil.

Ominous historical echoes

This week’s rollercoaster ride in the banking sector is all taking place in the ominous shadow of the 2008 economic crisis, which is the foundation of a strategy based above all on the mantra of no bailouts.

The situations in 2008 and 2023 are not the same. In the former, the worst financial crisis since the Great Depression was caused by mountains of subprime mortgages piled up by lax lending practices and easy lending that saddled banks with trillions of dollars in nearly worthless loans. Last week’s problems 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 that supported the bank’s core business were sound. There is a clear distinction here between the government bailing out bankers and banks in 2008 and what is now effectively a federal insurance fund protecting depositors.

However, such nuance is lost outside the financial sector. Banking disasters are hard to explain to the public, at least by political leaders who lack the genius to turn an existential moment into a national gathering, as President Franklin Roosevelt did during the banking crisis of 1933.

Politics — Biden’s secondary problem in preventing a banking collapse — rarely rewards complexity. For example, presidential primary campaigns benefit from simplicity and sound bites and often use fear to create momentum. So even a mistaken perception that a president is handing out the money of taxpayers struggling to make ends meet can be political gold.

Treasury Secretary Janet Yellen tried again on Thursday at a high-stakes hearing to explain what’s happening now — and why it’s not what happened in the past. Her delicate job was to reassure Americans that the banking system is safe thanks to government efforts, without inviting comparisons to 2008.

“Shareholders and debt holders are not being protected by the government. Importantly, no taxpayers’ money is being used or endangered by this action,” Yellen told the Senate Finance Committee.

However, her reassurances won’t stop the government’s critics from trying to paint the government’s actions as the dreaded “b” word: bailout.

For example, Republican presidential nominee Nikki Haley this week argued that “Joe Biden is acting like this isn’t a bailout,” misleadingly argued that if the Deposit Insurance Fund dried up, all bank customers would be hooked. And she falsely claimed that depositors in sound banks were forced to subsidize mismanagement by the SVB. But unlike Biden, the former governor of South Carolina is in the enviable position of being able to criticize without taking responsibility.

Another Republican candidate, Florida Governor Ron DeSantis, distorted the situation by claiming that the banks’ “awakened” preoccupation with diversity, equality, and inclusion initiatives had caused the industry to collapse. The conceit furthered the DeSantis strategy of weaponizing a culture war to please conservative grassroots activists. And while it failed to correctly diagnose current banking problems, its theory will be solidified in the minds of many Republican voters through the power of conservative media.

Obama: Voters Think Bailouts ‘Scam’

Biden understands very well the political risks he faces here. As vice president in the Obama administration, he was present at the dismal assemblies that made fateful decisions about government 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 sparked a political backlash that fueled the Tea Party movement, which wiped out Democrats in the House of Representatives in the midterms of 2010. It also sowed a festering sense of resentment that was a fertile breeding ground for former President Donald Trump’s economic populism and defiance.

Barack Obama wrote in his autobiography “A Promised Land” that while Americans were frustrated with the glacial recovery from the 2008 crisis early in his term, “the bank bailout pushed them over the brink.”

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

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

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