America’s biggest problem is its politics, not its banks | CNN Politics

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The dramatic meltdown of Silicon Valley Bank is proving one thing for sure – the biggest systemic risk to the United States lies not in its banking system but in its polarized politics.

So far, the Biden administration’s frantic effort to contain the California bank’s woes seems to have worked. There was no Monday morning run on the banks after the federal government agreed to guarantee deposits at SVB and another shuttered bank, although future failures can’t be ruled out.

But the hyper-politicized reaction to the drama in Washington and on the Republican 2024 campaign trail, as key figures twisted the situation to further predetermined political ends, suggested that if a real financial crisis does erupt, it may be beyond the government’s capacity to fix it.

Several prominent Republicans – led by Florida Gov. Ron DeSantis, a potential White House hopeful – quickly blamed the bank’s collapse not on its questionable financial strategy but on a supposed obsession with “woke” socially progressive investments. Other Republicans – like former South Carolina Gov. Nikki Haley, a declared 2024 contender – preferred to open a new front in the perennial debate between conservatives and liberals about the role of government in the economy.

“Joe Biden is pretending this isn’t a bailout. It is,” Haley said on Monday. The charge is not specifically accurate. But in presidential campaigns, perception has long been just as important as the truth – even before Donald Trump wove his alternative factual reality. On the left, two former Democratic presidential candidates – Sens. Elizabeth Warren of Massachusetts and Bernie Sanders of Vermont – re-upped their calls for more regulation of the banking industry. And some Democrats, including President Joe Biden, resorted to an increasingly familiar gambit when trouble hits – blaming it on Trump and his regulatory purges.

As a new presidential campaign stirs and with relations between the two parties fractured perhaps as never before in the wake of an unprecedented insurrection at the US Capitol two years ago, it’s clear that gaping partisan mistrust is a national threat that could hamper efforts to tackle grave financial and other crises.

The SVB mess is not the first time in recent weeks that such a disaster has been followed within hours by a bitter and polarized blame game.

The derailing of a freight train in Ohio last month quickly triggered an organized GOP attempt to destroy the credibility of Transportation Secretary Pete Buttigieg – a past and possibly future Democratic presidential candidate. Democrats, meanwhile, pinned the blame on regulatory rollbacks by Trump. While generally, the ex-president’s relaxing of rules might make accidents more likely, the regulations in question do not appear to have applied to the train that ran off the rails in East Palestine, Ohio. But such distinctions would be lost in campaign rhetoric.

The pattern was the same in February when a suspected Chinese spy balloon floated across the continental US. The crisis exposed gaping divisions between American leaders and sparked another blame game, which raised questions over whether Washington will be able to come together on a coherent policy on the most critical foreign policy issue of this century – a brewing Cold War with Beijing.

This political fracturing is now routine. But if the SVB situation gets worse or in the event of a future financial crisis, the administration will not have the capacity to quell the possibility of contagion on its own. It will require a partnership with Congress. This was the case in 2008. At a time when Democrats controlled both the Senate and the House of Representatives, Republican President George W. Bush sent his top economic officials to Capitol Hill to warn of an impending financial cataclysm at the start of the Great Recession.

Senior congressional leaders emerged from a harrowing briefing in then-House Speaker Nancy Pelosi’s office staggered by the possibility of an economic disaster with the potential to wipe out the banking system and the savings of millions of Americans. “When you listened to (them) describe it, you gulped,” New York Sen. Chuck Schumer was quoted as saying in The New York Times. Then-Sen. Chris Dodd, a Connecticut Democrat, later added that it was “one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

The Bush administration was a time of deep political discord in Washington. Even so, when the survival of the US economy was at stake, feuding leaders agreed, eventually, on a package of finance industry rescues. But 15 years later, given the inflamed political atmosphere of a post-truth era, it’s hard to image the parties even perceiving the same level of threat from a briefing by a senior administration official, let alone uniting on common action.

This disconnect is an ill omen with Biden and House Republicans already dug into entrenched positions on the need to raise the government’s borrowing limit. The president is calling on Congress to do so to pay for already appropriated programs and incurred debt, some of it racked up under Trump. But radical GOP lawmakers are demanding massive spending cuts that would effectively smash Biden’s agenda. If the debt ceiling is not raised by late summer, America’s credit rating could be splintered and the economy could be thrown into chaos. Social Security checks might be stopped and the military might not be paid. Market-linked retirement savings could tumble if the markets go into free fall.

And at this point, there is little clear sign that a broken political system in Washington will be able to stave off the danger in time.

While warring political leaders chose their own causes of the SVB crisis, poor management and a confluence of difficult economic conditions appear to be the biggest culprits for the bank’s sudden collapse. Seeking higher returns on investment, the bank loaded up on federal financial instruments, effectively betting on a prolonged period of low interest rates. But when the Federal Reserve kept hiking rates to temper high inflation, the value of those bonds fell, leaving the bank in a deep hole, which eventually led to customers seeking to pull their money out.

“It had committed one of the most elementary errors in banking – of borrowing money in a very short-term way and then investing it in a long-term way and then when interest rates went up, those assets lost their value,” former Treasury Secretary Larry Summers told CNN’s Wolf Blitzer on Monday.

Republicans have long argued that Biden’s spending policies are to blame for high inflation, but the situation is more nuanced in a confusing period coming out of the Covid-19 pandemic, when supply chain crunches caused demand to skyrocket. Still, claims that the administration helped to put banks in tough positions because of the high cost of living make more sense than many of the arguments rolled out by Republicans about SVB.

DeSantis, for instance, claimed that the bank was obsessed with diversity, equity and inclusion policies and therefore took its eye off the financial ball.

“This bank, they’re so concerned with DEI and politics and all kinds of stuff, I think that really diverted from them focusing on their core mission,” the Florida governor said on Fox on Sunday.

Other Republicans tried to put the bank’s troubles down to its pursuit of ESG investing – an approach in which investment mangers consider environmental, social and governance factors when placing their financial bets.

“So these SVB guys spend all their time funding woke garbage (‘climate change solutions’) rather than actual banking and now want a handout from taxpayers to save them,” Missouri GOP Sen. Josh Hawley tweeted on Monday.

Biden recently threatened to veto a Republican-written resolution that seeks to rescind a Labor Department rule that allows fund administrators to consider such questions, although it does not force them to do so. The Republican preoccupation with the measure fits into the party’s climate skepticism. But given the lucrative possibilities of next-generation energy industries, it may have been a sound investment for a bank in the Silicon Valley forefront of innovation to finance environmental projects.

Haley first weighed in on the fate of SVB over the weekend, slamming Biden’s “bailout” even though the administration is using the Deposit Insurance Fund, a $100 billion facility funded by premiums banks pay to the Federal Deposit Insurance Corporation, to make whole the customers of the California-based bank and New York-based Signature Bank, which it also shut down. In this case, the government action is intended to rescue depositors in SVB, not the banks that made loans, as was the case in the 2008 financial crisis.

At a rally in her home state of South Carolina on Monday evening, Haley blurred the reality of the SVB situation even more.

“Now, they want to bail out a bank? No. If one of our small businesses got bailed out – or went into bankruptcy, do you think they’d bail us out? They wouldn’t,” Haley said, adding cryptically: “There’s no value for a dollar. We’ve got to bring that value back.”

Some Democrats, meanwhile, argued that rollbacks of post-2008 crisis banking legislation by Trump were to blame for the crash of SVB. It remains unclear whether such regulations would have made a difference here. Some analysts did suggest that if the bank had been subject to stress tests like larger institutions it might have been saved before it reached the brink. But the bank’s own misjudgments and high inflation seem to have played a greater role in its fate.

Still, that didn’t stop Biden from placing the blame.

“During the Obama-Biden administration, we put in place tough requirements on banks like Silicon Valley Bank and Signature Bank, including the Dodd-Frank law, to make sure the crisis we saw in 2008 would not happen again,” Biden said Monday.

“Unfortunately, the last administration rolled back some of these requirements. I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely this kind of bank failure would happen again.”

But any hopes of getting even minor changes to banking regulations through Congress seem about as ill-judged as some of SVB’s investments.