The Congress has left town for the Easter/Passover break, not returning until Monday, April 17th. While the political world is focused on the unprecedented indictment of former President Trump, there remain serious policy issues that Congress needs to deal with including banking policy after the failure of SVB and others and the need to take action on the government debt ceiling that overhangs the economy.
In Washington the stalemate continues on how Congress and the Administration can find a way out of the financial crisis posed by a possible US Government default. Last week House Speaker Kevin McCarthy tried to take the initiative by writing a letter to President Biden suggesting a follow up meeting after their initial session at the White House on February 1. The President responded that before they could meet again the Republicans had to show some of their cards and release a budget proposal. While the Administration has released its budget for Fiscal Year 2024 that begins on October 1 the Republicans have yet to make a counter proposal.
No one knows when the debt ceiling will be hit, and it is likely months away, yet markets could become jittery as time goes by without serious talks happening in DC. The actual “drop dead” date is determined by the Treasury that issues US debt; currently the only comments coming from the Department is that authority to issue new debt may hit the limit sometime in June. Others who follow government cash flows believe it may be as late as July or maybe even September. It is impossible to accurately calculate the government cash flows–both expenditures and inflows—a better estimate is likely after the April tax season.
Speaker McCarthy’s letter outlined several ideas that he and the President might discuss that ranged from reducing government spending levels to energy policy and controlling the Southern border.
During my career both as a Congressional aide and public policy at major banks, little has changed in the area of the US budget politics. The fact is that budget cuts are very tough. The Republicans start the budget discussions having taken Social Security, Medicare and most defense spending off the table. There simply is not room in what remains of government spending to reach the Republican goal of restoring spending to FY 2022 levels. While the White House continues to hold to the position that they will not negotiate until Congress passes a so-called clear debt ceiling increase, political reality is that there will need to be some compromise from both sides in order to avoid a financial calamity.
The Speaker’s letter did outline some ideas that could become the focus of bipartisan talks, including energy rules that accelerate permitting for new exploration and more money and new policy with respect to the Southern border. These are proposals that Democratic moderates may be able to support.
The fundamental problem that McCarthy and House Republicans have is that they only have a five seat majority with 18 Republicans sitting in seats Biden won in 2020. Several of these Republican members in Democratic districts need to tread carefully if they want to get re-elected in 2024, and supporting the hardcore budget cuts of the most conservative Republicans is likely a prescription for defeat. These defeats could well cause House Republicans to lose their paper thin majority.
Democrats have a similar dilemma in the Senate where the debt ceiling bill will need 60 votes. Senate Republicans will need to find 9 of their members to join the 51 Democrats in order to pass the debt ceiling legislation. As I have written, Republicans are looking at a very favorable Senate map in 2024 that could well lead to them recapturing the majority, but being blamed for a financial crisis caused by failing to increase the debt ceiling is a strategy Republican Leader McConnell and his Republican colleagues know they need to avoid.
Banking hearings
Last week both the Senate Banking Committee and the House Financial Services Committee held hearings with representatives from the Fed, FDIC and Treasury testifying. At both hearings the Members focused on possible shortcomings by the regulators and their failure to act with more speed as troubles developed. A particular area of focus was the failure of the Federal Reserve’s San Francisco Regional Bank to push senior management at SVB to take more aggressive action when concerns arose with respect to their core businesses and balance sheet. Apparently regulators had warned months earlier about the mismatch between the bank’s funding sources and the long term government bonds on their balance sheet. Fed Vice Chair Barr made clear that the central bank was conducting a complete review of the failure of SVB.
Representatives and Senators also focused on the inability of the FDIC to find a buyer for the bank’s assets and liabilities. Having worked on bank acquisitions during my tenure at two large banks I have participated in bank merger discussions and there are many factors from bank branch locations, quality of deposits and loan asset concentrations that likely made the takeover a tough sell to many potential buyers.
Led by Senator Elizabeth Warren, progressive Democrats and the White House raised the issue as to what extent relaxation of regulation on small and midsize banks could have led to the banking crisis. Some blamed the bipartisan 2018 banking bill that loosened regulation of small and medium banks. Tightening regulation, stress testing and higher capital on banks between $100B and $250B has been proposed by the Biden Administration. Expect more reports coming from both the regulators and Congress in the coming months.