BUSINESS TIMES
No bailouts? Echoes of 2008 in Washington
By Leon Hadar
IT WAS only a week ago that US President Joe Biden submitted his federal budget proposal that called for trillions of dollars in tax hikes on big corporations and the rich, while providing assistance to the struggling middle class and the poor. It was fair to say then that he seemed to place the interests of the investor class, or Wall Street, at the bottom of his economic agenda.
The Democratic president was trying to cast his administration and political party as allies of the people, as opposed to the elites. “For too long, working people have been breaking their necks,” he told an audience of labour union members in Philadelphia. “The economy’s left them behind – working people like you – while those at the top get away with everything.”
“I’m president because of you guys,” he stressed
It was a strategy aimed at countering the message of the Republican Party, which – under former president Donald Trump – transformed from the partner of Corporate America into a populist movement supposedly protecting the country’s “forgotten men and women”, while accusing the Democrats of promoting the interests of “globalist elites”.
In retrospect, the US banking crisis, ensuing financial meltdown, and Great Recession of 2007-2008 represented a watershed for populism in the US. At the centre of this was public opposition to then-president George W Bush’s use of more than US$700 billion in taxpayer money to inject capital into the struggling banks and other financial institutions.
The Bailout of 2008, as it became known, galvanised protests across the country. Outraged citizens continued to express their opposition online through blogs and websites.
This eventually led to the explosion of political sentiments – on the right, in the form of the Tea Party movement that served as a midwife to the rise of Trump and Trumpism; and on the left, with the Occupy Wall Street movement, as well as empowering the progressive wing of the Democratic Party headed by Senator Bernie Sanders of Vermont.
In the public’s mind, a bailout is seen as government intervention to save investors who lost money through reckless risk-taking – not very different from the behaviour of gamblers in Las Vegas.
So when the news of the collapse of Silicon Valley Bank (SVB) and Signature Bank reached Washington over the weekend, and as regulators shut down the two failed financial institutions, the immediate response in the White House and on Capitol Hill – among both Democrats and Republicans – could be summarised in a two-word exclamation: No bailouts!
Unsurprisingly, the economic story turned very quickly into a hot political one. Images from 2008 – of an angry public and protests in the streets – surely haunted Congress and Biden, who claimed on Monday (Mar 13) that “no losses” would be paid for by American taxpayers.
But then, the regulatory agency that closed the two banks promised to fully reimburse the depositors, and the Federal Reserve announced that it would offer banks loans against their Treasuries and many other asset holdings. It became clear that that was still an economic story.
To avoid financial contagion in the aftermath of the collapse of the two banks, and discourage people from pulling their money out of the banking system, the government had no choice but to bail out a lot of rich people who had made big and risky bets.
The goal was to prevent a broad and destabilising bank run that could hurt even more Americans and would then require massive government intervention.
That explains why, notwithstanding his “no-losses-will-be-borne-by-the-taxpayers” pledge, Biden recognised that only sweeping government intervention would protect all depositors.
Biden and his economic aides have insisted that they are not offering “a bailout”, but instead trying to protect small businesses, non-profits and thousands of workers who may lose their jobs as a result of the bank collapses.
“Small businesses across the country that had deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills,” Biden explained. “And their hard working employees can breathe easier as well.”
But there is no doubt that – bailout or not – the federal government would be providing taxpayer money to wealthy people and large business groups.
There thus remains a political narrative that could easily be advanced by Trumpist Republicans, that the Biden administration is beholden to powerful elites at the expense of working-class Americans – a narrative that, in the 2024 presidential elections, could affect the competition for the votes of blue-collar Americans.
Indeed, the Republicans have already launched attacks on the Biden administration that go beyond accusations of “bailouts.” They allege that the SVB collapsed because it was pushing “woke programmes”, while Senator Josh Hawley from Missouri argued that Biden cares more about “Silicon Valley elites” than he does about working-class Americans in Ohio.
“We all know that if a small community bank failed in a place like East Palestine, they would never get a bailout!” tweeted Donald Trump Jr. Senator Hawley has already introduced legislation to protect the interests of community banks.