WASHINGTON — In 2016, Vice President Joe Biden warned against efforts to unravel banking regulations that Democrats had fought to implement following the nation's financial crisis, just as the emerging Trump administration was determined to loosen those strict banking rules.
Biden argued that without the far-reaching 2010 banking overhaul known as Dodd-Frank, financial institutions would continue to gamble with consumers' cash and ultimately hurt the middle class.
"We can't go back to the days when financial companies take massive risks with the knowledge that a taxpayer bailout is around the corner when they fail," Biden said in a speech at Georgetown University in the waning days of the Obama administration.
President Joe Biden speaks about the banking system Monday in the Roosevelt Room of the White House in Washington.
Now there's a banking crisis on his watch as president, and Biden is moving aggressively to assure the public that it is contained, bank executives will be fired, deposits are safe and taxpayers aren't on the hook — measures also designed to calm jittery financial markets.
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As he contemplates an announcement for a second term, Biden's ability to avert a contagion among financial institutions will test his contention that his administration represents competence and stability in contrast to the chaos of the Donald Trump years.
His call for additional regulation, though, is likely to run into stiff resistance in the Republican-controlled House and even among some moderate Democratic lawmakers who joined Republicans to loosen some rules in a 2018 law — not to mention criticism from the still-forming 2024 Republican field that has already labeled his actions a bailout by just another name.
President Joe Biden sought to reassure Americans over the country's banking system Monday, while insisting emergency measures would not be paid for by taxpayers as additional banks came under stress. SVB -- a key lender to startups across the United States since the 1980s -- collapsed after a sudden run on deposits, prompting regulators to seize control Friday.
Privately, Biden has been adamant that the government's intervention would not be like that of 2008, when Congress authorized billions in taxpayer cash to rescue financial institutions that were deemed too big to fail. That's according to a senior White House official, who was not authorized to describe private discussion by name.
But administration officials believe that this time they had to act substantively despite bad decision-making by bank executives, given the economic risks and the potential impact on customers who did nothing wrong.
Unlike in 2008, Biden was insistent that bank executives had to pay a price, said the official, granted anonymity to discuss internal White House deliberations.
"The management of these banks will be fired," Biden declared Monday. If an institution is taken over by the Federal Deposit Insurance Corp., "the people running the bank should not work there anymore."
On Monday, Biden also stressed that taxpayers will not bear the cost of his administration's penalties on the two failed banks, instead tapping into an insurance fund that is paid for by bank fees. And while customers and small businesses who stashed their money with the penalized banks would be protected, Biden emphasized that investors would not.
"They knowingly took a risk and when the risk didn't pay off, investors lose their money," Biden said. "That's how capitalism works."
California Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, said that Biden, like others, cannot ignore the lessons of the 2008 financial collapse and that having endured it firsthand, the president was well aware of the stakes. In conversations over the weekend, the White House assured her he was on top of it.
A sign is displayed Monday at a branch of Signature Bank in New York. Signature is one of two banks that collapsed.
A woman who was part of a line entering Silicon Valley Bank's headquarters pauses for a selfie Monday in Santa Clara, Calif. The federal government intervened Sunday to secure funds for depositors after the bank collapsed.
"I think that his main concern was how to, No. 1, take care of the depositors and avoid contagion so that we would not basically, seriously, disrupt the banking system in this country," Waters said.
Regulators put Silicon Valley Bank under FDIC control on Friday afternoon after panicked depositors rushed to withdraw all their funds within a matter of hours. That's a bank run. Top administration officials including Treasury Secretary Janet Yellen stressed that they were monitoring the situation, as reports of companies struggling to figure out how to manage their finances amid the two banks' shutdown rippled throughout the media and threatened regional banks around the country.
By Sunday night, Treasury, the Federal Reserve and the FDIC announced that all Silicon Valley Bank clients would be able to access their money, as would depositors from Signature Bank in New York, which similarly failed and would be taken over by state regulators. As administration officials were working behind the scenes, Biden was regularly briefed by his chief of staff, Jeff Zients, National Economic Council director Lael Brainard and Yellen throughout the weekend, according to the White House.
Biden also spoke with outside economists, although the White House declined to identify them.
Administration officials also worked to brief lawmakers over the weekend, although several Republicans were left off a call for senators with Treasury and FDIC officials on Sunday night. After Republicans protested publicly, and Senate Majority Leader Chuck Schumer, D-N.Y., pointed out to Treasury that GOP senators were excluded, the administration quickly convened a separate briefing for Senate Republicans on Monday afternoon.
There, several GOP senators conveyed their concerns to administration officials that Silicon Valley executives were being rescued in a way that could ultimately harm community banks in their home states, according to a person with knowledge of the call who was granted anonymity to discuss a private conversation. That would be because these banks would be assessed new fees to replenish the insurance fund that the administration tapped to aid the two failed banks' depositors.
White House and other administration officials are insisting their actions are not a bailout. But Harvard University economist Kenneth Rogoff said while he agrees that the government is rightly protecting the two banks' depositors, the money spent to make them whole is "certainly a bailout."
"The government swore after the financial crisis it was not going to bail out uninsured depositors and it was not going to bail out money funds," Rogoff said. "It basically, as I understand it, is guaranteeing everything. So that's certainly a bailout."
A look at the US economy's vital signs
INFLATION
Consumer inflation, not much of a problem, on average, since the early 1980s, started picking up in the spring of 2021 as the economy roared out of recession and Americans spent freely again. At first, Fed Chair Jerome Powell and some economists dismissed the resurgent price spikes as likely a temporary problem that would resolve itself once clogged supply chains had returned to normal.
But the supply bottlenecks lasted longer than expected, and so did high inflation. Worse, Russia's invasion of Ukraine a year ago sent energy and food prices rocketing. By June 2022, consumer prices were 9.1% higher than they'd been a year earlier — the hottest year-over-year inflation in more than four decades.
By then, the Fed had begun, belatedly, to respond. It has raised its benchmark rate eight times since March 2022 in its most aggressive credit tightening since the early 1980s.
In response, consumer inflation edged down from its mid-2022 peak. It posted milder year-over-year increases for seven straight months as supply chains unclogged and higher borrowing costs worked their way through the economy, putting a brake on overspending.
Financial markets appeared ready to declare the inflation dragon all but slain.
Then came January's unexpectedly hot consumer inflation data. Two days later, the government reported that wholesale prices had jumped 0.7% from December to January, nearly twice what forecasters had expected.
Next came bad news from the inflation gauge the Fed watches most closely: The government's personal consumption expenditures price index. It accelerated 0.6% from December to January, far above the 0.2% November-to-December uptick. On a year-over-year basis, prices rose 5.4%, up slightly from the annual increase in December and well above the Fed's 2% inflation target.
The PCE report "adds to the difficult if not impossible task facing the Fed in terms of getting inflation back to its 2% target without driving the economy into a ditch,'' said Joshua Shapiro, chief U.S. economist at the Maria Fiorini Ramirez Inc. consultancy.
One concern is that this time, inflation may prove harder to slow than it was initially. Households have increasingly shifted their spending away from physical goods like patio furniture and appliances to experiences like traveling, restaurant meals and entertainment events. Inflationary pressures, too, have shifted from goods toward services, where price acceleration can be harder to tame.
In part, that's because chronic labor shortages at stores, restaurants, hotels and other service-sector industries have led many employers in those industries to keep raising pay to attract or retain workers. Those employers, in turn, have generally raised their prices to make up for their higher labor costs, thereby fueling inflation.
Some economists expect the Fed to raise its benchmark rate by a substantial half-percentage point when it next meets March 21-22, after having announced only a quarter-point hike when it met Jan. 31-Feb. 1.
THE OVERALL ECONOMY
File - Traders on the floor at the New York Stock Exchange watch Federal Reserve Chair Jerome Powell's news conference after the Federal Reserve interest rate announcement in New York, Wednesday, Feb. 1, 2023.Â
The flipside of the disquieting inflation news is good news on the state of the economy — or what would be considered good news in normal times. Even burdened by rising borrowing rates, the economy has proved stronger and sturdier than most forecasters had imagined.
"This economy today looks very different from where we thought it was in mid-January,'' said Peter Hooper, an economist at Deutsche Bank. "Before, we thought that things were slowing down, the labor market was softening, wage and price inflation was coming down."
With inflation pressures still persistent, Hooper said, "there's this growing expectation that the Fed has clearly more work to do.''
The economy regained its footing last summer after enduring an anemic first half of 2022. The nation's gross domestic product — its total output of goods and services — contracted from January through March last year and again from April through June.
Though one informal definition of a recession is two straight quarters of negative growth, most economists set aside such concerns this time. They noted that the economy had shrunk in early 2022 because of factors unrelated to its underlying health: Leaner business inventories and a surge in imports, which widened the U.S. trade deficit.
GDP quickly regained momentum: It grew at a solid 3.2% annual rate from July through September and a 2.7% rate from October through December. Steady consumer spending contributed heavily to the growth.
Economists still foresee a recession sometime this year — they were always skeptical of a soft landing — but now see it coming later than they'd expected. A survey of 48 forecasters issued Monday by the National Association for Business Economics found that only a quarter of the respondents think a recession will have started by the end of March, down from half who had predicted so in December.
JOBS
The remarkable strength of the American job market has defied expectations throughout the economic tumult of the COVID years. 2021 and 2022 were the two best years for hiring in U.S. government records dating to 1940.
Job creation was expected to slow this year. Not so far. In January, employers added a blistering 517,000 jobs, far surpassing December's 260,000 gain. And the unemployment rate reached 3.4%, its lowest level since 1969.
What's more, American workers as a whole are enjoying nearly unheard-of job security despite some high-profile layoffs in technology and a few other sectors. The government's count of monthly dismissals and layoffs sank below 1.5 million for the first time in 2021 and has stayed there since. There are now about two job openings, on average, for each unemployed American.
But a robust job market also puts upward pressure on wages — and therefore on prices. Which means further inflation.
"The kind of wage gains we're seeing and the kind of tightness in the labor market is consistent with 3.5% to 4% inflation, not 2% or 3%,'' KPMG's Swonk said. "That's the hard reality of where we are.''
CONSUMERS
A shopper passes items inside the Walmart Supercenter in North Bergen, N.J., Thursday, Feb. 9, 2023. Americans have continued to shop this year, shrugging off higher interest rates and prices.
Their jobs secure, their bank accounts still bolstered by pandemic-era savings, Americans have continued to spend, shrugging off higher interest rates and prices.
In January, retail sales rose at their fastest pace in nearly two years, rebounding from a tepid holiday shopping season. Even after accounting for inflation, consumers spent their after-tax dollars at the fastest pace since March 2021. Consumer spending on services, ranging from health care to dinners out to airline tickets, last year accounted for 95% of the economy's growth.
Mark Zandi, chief economist at Moody's Analytics, estimates that consumers still have $1.5 trillion in "excess savings'' — above what they'd have socked away if the pandemic hadn't hit — from government aid and from cutting back while stuck at home at the peak of the pandemic.
Still, inflation continues to cause hardships for millions of households. Adjusted for inflation, average hourly earnings have fallen for 22 straight months, government data shows. Many low- and middle-income families are turning to credit cards to sustain their spending.
HOUSING
The Fed's rate hikes, which so far have had only a limited effect on the overall economy, have walloped one industry: Housing.
Residential real estate depends on the willingness of people to borrow for what's typically the costliest purchase of their lives. As the Fed continually jacked up interest rates last year, the average rate on a 30-year fixed mortgage topped 7% last fall — more than double where it began 2022 — before dropping back slightly.
The damage has been severe. Sales of existing homes have dropped for a record 12 straight months, according to the National Association of Realtors. And the government's GDP report showed that investment in housing plunged at an annual rate of nearly 26% from October through December after having tumbled 18% from April through June and 27% from July through September.
