US President Joe Biden on Monday addressed the nation to assure Americans that, whatever the fallout from the collapse of Silicon Valley Bank, their deposits and the entire banking industry are both "safe."
US markets responded with mixed signals to Biden's speech. On the one hand, stocks initially tumbled over fears that other regional banks might soon crumble too (banks in general took a hit because high-interest rates are really hurting their bottom line). On the other, non-bank stocks closed in the black due to growing chatter that next week the Fed might hold off on further rate hikes to give the financial sector some breathing room.
The situation remains fluid, and it's still too early to say whether the so-called "backstop" measures taken by US authorities will be enough to stop the risk of SVB's insolvency infecting other regional banks.
For more on how we got here, read our explainer Q&A with Eurasia Group’s Celeste Tambaro here.
Meanwhile, the more uncertainty, the louder the calls will get for Biden to do something more. Perhaps even (gasp!) the B-word: bailout. That would be very bad news for the president, who knows that bailouts are politically toxic. So toxic, in fact, that opposition to them brings together odd bedfellows like Sen. Bernie Sanders (I-VT) on the democratic-socialist left and Rep. Thomas Massie (R-KY) on the libertarian right.
For Sanders, SVB's collapse is a direct result of the Trump administration's 2018 push to deregulate smaller banks, as if we had learned nothing from 2008 — not to mention the savings and loan crisis of the 1990s. For Massie, the culprit is the Fed for keeping interest rates too low for too long, which spurred the rise of piggy banks for venture capitalists like SVB, and then for raising rates to tame inflation.
Sanders and Massie agree that bailouts create a moral hazard by encouraging banks to gamble with people's money. In this case, though, what US regulators have done is bend the rules for SVB depositors, including many tech companies.
Yet, what if the Biden administration needs to consider a bailout to prevent a financial meltdown? It's pretty clear how Sanders and Massie will vote, but other lawmakers might need to make a tough choice. And if both parties are too scared of their flanks, political paralysis is all but assured.
What do you think? Let us know here and we might include your response in an upcoming edition.
