In September, Doug warned in these pages that the U.S. economy was on the brink of a crisis that would cause real pain for American households and businesses. Economists at the time posited that the Federal Reserve’s aggressive efforts to combat surging inflation, while necessary, portended an impending recession, or worse, a period of stagflation.
Six months later, the economic crisis that we – along with many others – feared is unfolding before our eyes, and has taken on a new dimension.
Last week, in the span of 72 hours, two banks – Silicon Valley Bank, the 16th largest bank in the country, and the New York-based Signature Bank – collapsed, forcing the federal government to intervene in order to avert a breakdown in the global financial system.
The consequences of these failures will take months to actualize, but in all likelihood, other banks will rein in lending, triggering a credit crunch and greater volatility in the stock market. Taken together with the continued fallout from the quickest pace of interest rate hikes since the 1980’s, the most likely result will be a recession.
To be sure, Fed Chair Jerome Powell had no choice but to raise interest rates to tame historically high inflation. However, doing so too rapidly – and arguably too late – always carried the risk of breaking something in the U.S. economy.
Ultimately, the political fallout from all of this for President Joe Biden – whose approval ratings on managing the economy and handling inflation are already deeply underwater – could be considerable, as the crisis is on track to peak just as he is gearing up to run for reelection.
Even before last week, Americans had little confidence in the stability of the economy. In February, 50% of Americans said they were worse off financially today compared to one year ago, per recent Gallup polling, the worst assessment since the Great Recession era in 2008 and 2009.
Economist/YouGov polling conducted just after the collapse of Silicon Valley Bank and during that of Signature Bank underscores the political troubles that lie ahead for Biden. By a 3-to-1 margin, Americans say the economy is getting worse (49%) rather than better (17%). Further, three-quarters of the public (73%) believes either that the U.S. economy is already in a recession, or that a recession is likely within the next year.
Americans’ fears are well grounded. Just 15 years ago during the Global Financial Crisis (GFC), seemingly-steady banks collapsed, the country plunged into a recession, and millions of Americans lost their jobs. It then took nearly six years for employment to reach pre-crisis levels.
This is not to say that we are doomed to relive the 2007-2009 crisis. In fact, the causes of the two recent bank failures are wholly different from those during the GFC. Back then, banks were crippled by bad loans and the housing bubble bursting. At the root of today’s problem is poor risk management by the banks and a Fed that is behaving aggressively to stem inflation.
That said, this distinction is irrelevant to a panic-stricken public worried that history could be repeating itself.
To his credit, Biden has taken action to reinforce to Americans that the U.S. banking system remains safe and secure. The FDIC took the extraordinary measure of backstopping all deposits at the two troubled banks, rather than adhering to the traditional policy of only insuring deposits up to $250,000.
There has been some backlash to this decision on both sides of the aisle – including from the far-right, which is averse to the idea of government bailouts, and from the far-left, which is invariably suspicious of collusion between big banks and the federal government. However, for every American with their money in a bank account, the only concern is the stability of the nation’s banking system.
Biden, who was clearly wary that this move would be interpreted as another “bank bailout” akin to 2008, has stressed a key point of clarification that “no losses will be borne by the taxpayers,” but rather “from the fees that banks pay into the Deposit Insurance Fund.”
While Biden may have conveyed to Americans that they won’t be saddled with the responsibility of bailing out billions in uninsured deposits, his political challenges are far from over.
Having presided over a period of historic inflation, and now over the 2nd and 3rd largest bank collapses in U.S. history, any effort Biden makes to campaign on strong economic indicators like historically low unemployment will be perceived as disingenuous – especially as the U.S. moves closer to a recession.
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On top of that, the president also has to worry about the looming debt ceiling deadline. House Republicans have dug in on the issue, demanding drastic spending cuts as a starting point for raising the country’s borrowing limit, which the administration has rejected.
It is worth nothing that raising the debt ceiling is a procedural way for the U.S. to pay its bills, including trillions in past spending that was authorized under former President Trump, and using the issue as a political bargaining chip is dangerous. Despite the devastation a default would cause to the world economy, far-right House Republicans are weaponizing the issue to capitalize on Biden’s poor job ratings.
Even so, a majority (53%) of Independents would blame both parties should the U.S. be unable to pay its debt. This underscores the political risks to President Biden if a deal is not reached, even if the other side is at fault.
Joe Biden was elected Vice President during the GFC, a time when the economy itself – and Americans’ confidence in it – had collapsed. 15 years later, President Biden finds himself in the White House during the most challenging time for the U.S. economy since the 2008 crisis, and his presidency will be defined by how he handles it.
Douglas Schoen is a longtime Democratic political consultant. Saul Mangel is a strategist at Schoen Cooperman Research.