Can Joe Biden escape the fallout from the US banking crisis?
N othing much to see here, so move along please. That has been the message from the White House to those who fear the collapse of three US banks in as many months spells serious trouble for the world’s biggest economy.
Joe Biden has a point, even though the line that the US financial system is fundamentally sound has become harder to maintain as it becomes clear that Silicon Valley Bank was not a one-off. The American economy has slowed down but continues to grow. Jobs are still being created. The unemployment rate is low at 3.4%. Manufacturing firms are heading to the US to take advantage of the green subsidies contained in Biden’s Inflation Reduction Act.
The spin is that none of what has happened thus far – least of all the collapse of a small number of regional US banks – should come as a surprise. Indeed, what’s surprising is how well the US economy is holding up. The US will emerge relatively unscathed as it invariably does. What is there to be worried about?
Plenty, as it happens. The US has just witnessed one of the biggest bubbles of the past 100 years. That has been followed by the most rapid increase in interest rates for four decades, which has taken official borrowing costs from near zero to more than 5% in little more than a year. If Biden is not worried about the implications of this for his re-election prospects in November 2024, then he should be. Things could turn nasty very quickly, for the economy and for the president personally.
In the circumstances, it will be little short of miraculous if the Federal Reserve – the US central bank – manages to finesse a soft landing for the economy. Wall Street is expecting interest rates to start coming down in July and to be just over 4% by the end of 2023 but the
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