How the SVB collapse explains the economy

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Mar 10, 2023 View in browser   By Ben White With additional reporting from Ari Hawkins President Joe Biden delivers remarks on the February jobs report in the Roosevelt Room at the White House | Alex Wong/Getty Images INTERCONNECTED — Two stories dominated economic headlines today: the spectacular collapse of Silicon Valley Bank (SVB) and a February jobs report that displayed a still-hot jobs market. These stories may seem largely unrelated. They are not.  Taken together, they offer a nifty microcosm of what exactly is going on in our highly complex, virtually impossible to predict, post-pandemic economy. And both events have potentially significant implications for what the Federal Reserve decides to do on interest rate policy at its meeting later this month. Let’s start in Silicon Valley with the biggest bank failure since the 2009 financial crisis. SVB was among the go-to banks for start-ups and biotech companies. That sector, which gorged on cheap money for years, is currently one of the few now shedding workers (though not that many) as the Fed hikes rates to fight persistent inflation. While Fed officials are generally happy to see some froth come out of the tech industry, they certainly weren’t hoping to help tip a bank with over $200 billion in assets into insolvency. And it certainly was not all the result of the Fed. SVB was (yes, it’s now officially dead) a strange bank. Nearly all of its depositors held over the insured FDIC limit of $250,000 in their accounts. That insurance was created to end the parade of bank runs that dominated the Depression era. But it did little to help SVB once its well-to-do depositors realized they could actually lose their money and raced to take it out. It all happened so fast — with a failed capital raise on Thursday — that the feds had to shut the place down Friday in the middle of the day, an extremely rare and highly dramatic move. The question now is whether the Fed looks at SVB and wonders if all of its tightening could destabilize any other industries and the financial institutions that serve them. One large bank failure may not induce the Fed to choose a quarter-point hike this month, instead of half-a-point. But at the margins, it could nudge them toward a quarter-point. That brings us to the February employment report — which showed that outside of technology, the jobs market remains hot and the economy looks pretty good. The 311,000 jobs figure beat expectations. And the tick up to 3.6 percent unemployment (from 3.4 percent) happened for the very welcome reason that nearly half a million people rejoined the labor force. The pace of wage gains also slowed a bit, though overall pay increases are proving fairly sticky, which the Fed believes (though not everyone agrees) is driving overall consumer price inflation. January’s giant 517,000 jobs gain, which seemed wildly off the mark at the time, only got revised down to 504,000. Even industries expected to suffer under the weight of higher interest rates mostly fared well. Construction employment grew by 24,000 even as higher rates are hammering home prices and the fear of recession is trimming back corporate investment plans. And both wage and employment gains continue to center on lower-paying retail and hospitality jobs. So putting the picture together, some very wealthy Silicon Valley-types are taking tough hits. And the fact that SVB could drop dead so fast raises some regulatory questions. But on its own, the bank collapse is no reason to panic. Economic equality going down since the pandemic is a feature, not a bug. The bigger question is whether the Fed’s actions wind up having similar but more delayed impacts on other industries. The Fed would accept this if it determines it is the only way to push annualized inflation from around 6 percent back to its target of roughly 2 percent. But this would be a crash landing, not a soft one. We get one more giant piece of data next week ahead of the Fed meeting, with the latest reading on the Consumer Price Index coming on Tuesday. Expectations are for some very modest declines. If those don’t materialize — or if prices surprisingly tick up again — the Fed will blow off any SVB concerns and drop another half-point hike on the economy. If the numbers are more Fed-friendly, the central bank will have a bit more room to consider whether to ease up on the economic brakes. Because no one wants to see more SVBs. Or to see millions of Americans who are not Tesla-driving tech folks take a big hit. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight’s author at bwhite@politico.com or on Twitter at @morningmoneyben.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     What'd I Miss? — Judge okays use of Access Hollywood tape in Trump defamation trial: The longtime magazine columnist who accused former President Donald Trump of raping her in the 1990s can use the ‘Access Hollywood’ tape as evidence at trial in her defamation case, a federal judge ruled this afternoon. The Manhattan judge also rejected Trump’s effort to block the columnist, E. Jean Carroll, from using the testimony of two other women who previously accused him of sexual assault. —  George Santos denies involvement in 2017 credit card scam: Rep. George Santos (R-N.Y.) said he is “innocent” in response to questions about his alleged involvement in a 2017 credit card skimming operation this afternoon. Santos’ comments come after POLITICO reported that his former roommate claimed Santos oversaw the credit card operation. Gustavo Ribeiro Trelha, who was convicted of the 2017 crime and was deported to Brazil, sent a sworn declaration to federal authorities on Wednesday detailing Santos’ alleged role. — Liberal groups raise ‘grave concerns’ about Biden judicial pick: Several liberal advocacy organizations are expressing serious doubts about President Joe Biden’s nominee to the First Circuit Court of Appeals, Michael Delaney, highlighting his handling of a school sexual assault case. In a memo sent to Democrats on the Judiciary Committee, the National Women’s Law Center, the Leadership Conference on Civil and Human Rights, and People for the American Way said Delaney’s legal career is defined by an “egregious lack of respect for the privacy, safety, and rights of survivors.” Nightly Road to 2024 DESANTIS RISING — Republican grassroots leaders are increasingly losing interest in former President Donald Trump — and eyeing Florida Gov. Ron DeSantis for the 2024 presidential nomination, according to a wide-ranging survey conducted by Seth Masket, director of the Center on American Politics at the University of Denver. The survey, which was sent to nearly 3,000 Republican Party chairs, asked which candidate the participants would consider supporting, and who they would not want to win the nomination. The results suggest that in the fight to be the Trump alternative, DeSantis is emerging as an indisputable frontrunner. TAKING AIM — The Stop Trump campaign among Republican elites is already off to a quick start. But as DeSantis heads to Iowa Friday for what’s effectively the start of his presidential bid, his initial strength with Republican contributors and voters alike is prompting the other would-be candidates to divide or at least pair their attacks to dislodge DeSantis from his early perch as the strongest alternative to Trump, POLITICO’s Jonathan Martin reports. THREE QUESTIONS WITH… Nightly spoke with Margie Omero, a veteran Democratic pollster and strategist at GBAO Strategies, a progressive firm specializing in public opinion research and strategic consulting. What is the single most important factor, or issue, or force that will determine the fate of Biden’s 2024 reelection campaign? Women voters — across educational lines or race/ethnic lines — are going to be essential to Democratic success. A lot of women voters are going to be looking to how the parties differ on a range of issues — abortion, Social Security and Medicare, and child care or college affordability. But beyond issues, women tell me in focus groups they're looking for the party trying to bring us together as opposed to just offering angry "own the libs" rants. Do you expect issues of crime and police funding will play a central role in the 2024 presidential campaign? What other issues will be the most important? Voters are going to be no less outraged over Republicans' proposed cuts to Social Security/Medicare, or over total bans on abortion than they were in 2022. It's possible we might be talking about crime, since Republicans voted to cut funding for local policing & one of their frontrunners is facing multiple criminal investigations. Which Republican candidate would be easiest — and most difficult — for Biden to run against in the 2024 race? We have such a highly polarized environment — there is no "easy" matchup. That said, not one of the announced or likely GOP candidates seem like they've learned any lessons from how their party underperformed in 2022. AROUND THE WORLD Protest against President Kais Saied's policies, in Tunis, Tunisia, Saturday, March 4, 2023. | Hassene Dridi/AP Photo TUNISIA’S CRACKDOWN — The Tunisian president’s crackdown against political opponents and sub-Saharan migrants is complicating the country’s ability to secure economic support from abroad, even as the country’s financial crisis continues to worsen, Ari Hawkins reports for Nightly. The International Monetary Fund, which earlier delayed final sign-off with Tunisia over a $1.9 billion loan agreement, expressed unease over the country’s democratic decline this week. “The IMF is concerned about recent developments in Tunisia and notes the steps taken by the authorities to address the situation,” said an IMF spokesperson, responding to reports of rising violence against Black sub-Saharan migrants in Tunisia. President Kais Saied, who has ruled by decree since 2021, has escalated efforts to stifle opposition in recent weeks with arrests of politicians, activists and businessmen. The crackdown has led to protests in the capital of Tunis. The preliminary agreement with the IMF was reached in October, but has faced delays ever since, as Tunisia's government fails to make progress on key democratic reforms. Meanwhile, the country has plunged further into economic crisis. Soaring food and fuel prices kicked off more protests this week and has led to record emigration. Credit rating agencies have warned that foreign loan repayments due later this year mean that, without international assistance, Tunisia is at risk of defaulting. Comments from Saied last month encouraging police to crack down on migrants from sub-Saharan Africa, were followed by a wave of violent attacks from police and civilians, further alienating potential donors. “Migration is a plot to change Tunisian dynamics,” the president said during a National Security Council meeting last month, alleging an effort to replace the country’s Arab majority. He added that “hordes of irregular migrants from sub-Saharan Africa” had come to Tunisia, “with all the violence, crime, and unacceptable practices that entails.” The comments were condemned as racist by the African Union, which consists of 55 member states across the continent. On Sunday, the president of the World Bank told staff they would pause work with Tunisia because of the president’s role in fueling “racially motivated harassment and even violence.” Shortly after taking power following a democratic election in 2021, Saied suspended the nation’s parliament and the constitution drawn up after the 2011 uprising against the former dictatorship. The region has become increasingly economically isolated ever since.   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     5,000 The number of schoolchildren that the government of Iran announced have sought medical treatment for symptoms of poisonings. Scores of primarily all-girls schools in Iran have been hit by poisonings since late November, with pupils suffering from symptoms ranging from nausea, shortness of breath and vertigo. The government announced on Tuesday that the first suspects were under arrest. Parting Words Tibetans demonstrate in front of United Nations headquarters, on March 31, 1959 in New York. The 1959 Tibetan uprising, or Tibetan Rebellion, began when an anti-Chinese and anti-Communist revolt erupted in Lhasa, the capital of Tibet, which had been under the reign of the Communist Party of China since the invasion of Tibet in 1950. | Getty Images Did someone forward this email to you? Sign up here.   Follow us on Twitter Charlie Mahtesian @PoliticoCharlie Calder McHugh @calder_mchugh Katherine Long @katherinealong Ari Hawkins @_AriHawkins   Follow us

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