The Biden team is trying to contain the SVB’s financial and political contagion

(CNN) The Biden administration’s fight to avoid financial contagion from the Silicon Valley Bank crash is both an effort to protect a resilient but still fragile economy and to avoid serious political fallout.

The Treasury Department and federal regulators insisted there was no systemic risk to the banking system as a whole that could trigger a repeat of the catastrophic crisis of 2008 as they raced against the opening of Asian markets with measures to put a run on small or regional US banks. banks.

They rolled out emergency measures on Sunday evening that guarantee deposits from SVB customers. Regulators also closed Signature Bank, another institution in danger of collapsing, and made sure its customers would get a similar deal. U.S. taxpayers will not fund either move, officials said.

The swift action may ease the immediate tension in the financial markets. But it is too early to say whether the government will be forced to take more drastic measures amid rising concerns about the health of the financial sector. The suddenness of the crisis exacerbates fears as SVB, seemingly out of the blue, failed in 48 hours. Assurances from the White House and Treasury Secretary Janet Yellen that the broader banking system is sound provided another test of economic credibility for a government marked by its handling of high inflation.

President Joe Biden plans to address Americans Monday morning about his administration’s contingency plan to contain the bankruptcy of the two banks.

“The American people and American businesses can be confident that their bank balances will be there when they need them,” the president said in a written statement Sunday evening. “I am determined to hold fully accountable those responsible for this mess and to continue our efforts to strengthen supervision and regulation of larger banks so that we are not in this position again.”

The SVB drama evoked the ghosts of 2008 and voter anger over bailouts granted to wealthy bankers who caused the crisis through greed and risky investments but suffered little from the pain of the ensuing worst financial disaster in years thirty, which was worn by the public .

Underscoring the extreme sensitivity of this history, a government official told reporters late on Sunday that extraordinary moves to guarantee SVB customer deposits through a federal insurance mechanism did not amount to a bailout. “This is not taxpayer money,” the official said, adding that the bank’s equity would not be backed and bondholders would 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 strained by the heated early exchanges of another presidential election could struggle to cope with a truly looming financial crisis. to offer.

Some Republicans accused Biden of unleashing a multi-trillion dollar spending spree that fueled high inflation and forced the Federal Reserve into a high interest rate strategy that left some banks more vulnerable. Others criticized federal authorities for failing to prevent the collapse of the SVB in the first place, reigniting a long-standing feud over the government’s role in the economy. Florida Gov. Ron DeSantis, who showed his determination to leverage any issue to bolster 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 increased the need for Congressional action would also pose an immediate problem for new House Speaker Kevin McCarthy, who has a slim GOP majority and would be given a huge task of getting his voters’ votes. to line up the most radical members for a government response.

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

The danger Biden faces

Any new economic shock would be a political disaster for a government already riddled with multiple crises, especially as the president prepares to launch his anticipated re-election campaign. It is crucial for Biden that he gets the situation under control quickly.

He would face a disastrous political dilemma if deteriorating conditions forced a president — who has rooted his administration in uplifting working Americans and the middle class — to choose between bailing out wealthy bankers or letting them overflowing with infection. Populist Republicans, like his potential election rival Trump in 2024, would also pounce on any scenario where Biden is seen helping wealthy technology investors from liberal California.

A financial crisis would be an opening for Republicans who have seized on recent events, including a surging threat from China, a perceived crisis on the southern border, and stubbornly high inflation, to try to convince voters that an aging president is reeling.

The growing political division over the bankruptcy of the SVB also bodes ill for an upcoming confrontation over the need to raise the government’s lending 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 erode US credit and plunge the US and global economies into a self-inflicted crisis.

The struggle to avert a crisis

In retrospect, the timing of the SVB crisis was favorable as it gave Yellen a weekend to develop a stabilization plan while world markets were closed. Officials worked feverishly behind the scenes, briefing leaders and rank-and-file members of Congress.

The drastic measures taken by Yellen, Federal Reserve Chairman Jerome Powell, and Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg were designed to prevent panicked investors from withdrawing money from other banks, jeopardizing their survival. would be jeopardized, and also to enable companies with large deposits to make payroll and ensure their viability.

Throughout the weekend, Yellen tried to keep a voice of calm, while at the same time trying to prevent the situation from spiraling out of control – both economically and politically.

“Let me be clear that investors and owners of systemic big banks were bailed out during the financial crisis, and we are certainly not looking (to do that),” Yellen told CBS News on Sunday.

“And the reforms that have been made mean we’re not going to do that again.”

Shalanda Young, the director of the White House Office of Management and Budget, also tried to allay public concerns by insisting that the US banking system as a whole is now “more resilient.”

“It has a better base than before [2008] financial crisis. That’s largely due to the reforms that have been put in place,” Young said on CNN’s State of the Union.

But the risks of the SVB drama are still acute for Biden. For example, there is growing debate over whether the Federal Reserve should relax its hard rate strategy — markets are expecting another 50 basis point hike soon — to avoid further exposure to vulnerable banks.

Sheila Bair, a top banking regulator during the 2008 crisis, told CNN that the Fed should “press pause.” And California Democratic Representative Adam Schiff echoed those concerns, saying on CNN’s “Newsroom” on Sunday that Congress should figure out whether the central bank was “considering the possibility that some institutions cannot handle such a rapid rise in rates.” .

The debate underlines Biden’s jam on the economy. If the Fed were to pause its interest rate strategy, inflation, which is plaguing voters and politically undermining the president, could get worse after some recent signs of abating. But if the Fed perseveres, the risks that its actions could harm the broader economy and increase unemployment may increase.

As the SVB crisis escalated, so did political interests

In his initial comments on the crisis, McCarthy was moderate. , larger sofa.

“The administration has tools to deal with this,” McCarthy said on Fox. “So I wouldn’t live on someone posting something on Twitter. Let the administration’s actions work here before someone goes to a position in their own bank.”

But McCarthy also turned the knife on Biden, days after he dismissed the president’s new budget as a multi-trillion dollar expense. And the speaker tried to exploit the SVB crisis to improve his position on the confrontation with the debt ceiling. “High debt leads to inflation,” he warned. “And what’s happening with inflation? You see interest rates rising at this bank, where they’re tied into bonds and others. We’ve looked at the pain it’s causing American citizens.”

South Carolina Republican Representative Nancy Mace underlined the difficulty McCarthy would face in mobilizing congressional action as the crisis deepens and the government asks for help.

“I wouldn’t support a bailout,” Mace told CNN’s Kaitlan Collins on “State of the Union” Sunday morning. She added: “We cannot continue bailing out private companies because their actions have no consequences.”

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

Ahead of the government’s announcement on Sunday night, Democratic Representative Ro Khanna, who represents the California district where the SVB’s headquarters were located, led the government to do more to help the institution’s clients get well while she fired bank executives. .

“The bargain in our country of FDR has always been, investors and shareholders lose. I have no sympathy for the executives, no sympathy for people who own shares there. But the savers 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 intervene. The era of bailouts by big governments and corporations 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.






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