Haunted by the ghosts of 2008

When it comes to averting a financial catastrophe, there is rarely an attractive option. So picking the right one is not likely to win political points.

That was certainly the case during the 2008 crisis, in which then-speaker Nancy Pelosi had to push hard on her House Democratic troops to pass a $700 billion rescue of Wall Street, even as President George W. Bush’s own party was balking at using taxpayer money to buy Wall Street’s toxic mortgage-backed assets.

Two years later, Pelosi’s Democrats were back in the minority. “I think that’s why we lost the election in 2010, because it created the tea party on one side, Occupy Wall Street on the other — everybody unhappy we’ve bailed out Wall Street at the expense of Main Street,” Pelosi recalled as she prepared to leave the speakership in December. “It wasn’t true, but that’s how it was perceived.”

The populist fury that was ignited then has continued to burn on both the left and the right. Which is why, in the wake of the March 10 collapse of Silicon Valley Bank, it is critical for the Biden administration to show that it has taken to heart the political lessons, as well as the financial ones, of 2008.

While there are vast differences between then and now, starting with the scale of the crisis, there are also some disconcerting echoes. It is not unreasonable for Americans to note how quickly the government came to the rescue of wealthy Silicon Valley depositors whose funds exceeded the $250,000 that is guaranteed to be covered by the Federal Deposit Insurance Corporation, and to wonder whether the same would happen if, say, their own local bank failed.

Or whether, if the demise of mediumsized Silicon Valley Bank, followed quickly by that of crypto-heavy Signature Bank in New York, truly represented a “systemic risk” that merited Washington’s intervention. Might the message to the banking industry be that there is no consequence for engaging in imprudent management practices in pursuit of profit?

As Pelosi noted, what the public backlash in 2008 showed was how much perception — and clarity in messaging — matters. President Joe Biden has strenuously avoided using the word “bailout” and has insisted: “No losses will be borne by the taxpayer.” But while it’s true that uninsured depositors of Silicon Valley and Signature are being made whole through fees that banks pay to the FDIC, the cost of those fees presumably is passed along to the average citizens who are their customers.

Containing the current financial and political fallout might be only the beginning for the Biden administration. Many economists believe that the real failure in 2008 was that government did not go far enough.

It is also clearly with the memory of 2008 in mind that Biden is declaring that this time, the executives of these institutions won’t be allowed to get off the hook.

The president vowed Friday that the FDIC, the Securities and Exchange Commission and the Justice Department will investigate what happened at Silicon Valley and Signature and “take action against the management of these banks as appropriate.” He called upon Congress to pass legislation that would expand the FDIC’S limited ability to “claw back” compensation and money from stock sales by executives of mismanaged banks forced into receivership. (Silicon Valley CEO Greg Becker sold $3.6 million in company stock shortly before his bank collapsed.)

Just as important will be that the government look inward, both at whether its regulations are strict enough and whether its watchdogs are diligent enough. Questions are properly being raised about whether it was wise in 2018 for Congress, with bipartisan support, to roll back provisions of the Dodd-frank financial oversight law put in place after the 2008 crisis, lifting a provision that required enhanced supervision and annual stress tests of mid-sized banks such as Silicon Valley and Signature.

Even without that regulation, the San Francisco Federal Reserve might have seen this coming, given Silicon Valley Bank’s explosive growth, its reliance on uninsured deposits and the fact that it held an investment portfolio that was vulnerable to losing value as interest rates rose.

Now is not the time to paper over any lapses. So it was troubling that, according to The New York Times, Federal Reserve Chair Jerome H. Powell blocked mentioning possible regulatory failures in a joint statement released last weekend by the Fed, the Treasury Department and the FDIC.

Containing the current financial and political fallout might be only the beginning for the Biden administration. Many economists believe that the real failure in 2008 was that government did not go far enough and for long enough — that, for instance, it backed off fiscal stimulus too soon because of heavy criticism of the bank bailouts.

While the administration is not likely to win plaudits from middle America for doing what is necessary, giving people a clearer idea of why they are doing it is essential for the economic health of the country and the credibility of the people who are running it.