Joe Biden’s ebbing economic tide
Hugo Gurdon
Just as a rising tide lifts all boats, so ebbing ones sink them closer to the rocks. Economies are the same. When they weaken and recede, everyone afloat on them — savers, wage earners, businesses, banks — gets closer to danger. A few boats, moored unwisely, are smashed to matchwood.
That is what we are watching now. Silicon Valley Bank, the first financial institution to capsize in the latest crisis, had moored itself to long-term Treasury bonds bought when interest rates were at record lows. These federal IOUs are considered safe assets, but they are not bulletproof.
When interest rates rise, fixed-rate paper offering low yields becomes deeply unattractive. Why buy or hold a bond paying only a fraction of what is available in the higher-interest-rate market?
SVB’s failure to notice that rates were going much higher and to hedge against the probable collapse of its bonds was boneheaded. I bet most people reading these words knew more than a year ago that interest rates would soon climb steeply to tame inflation, which was heading to 40-year highs.
But the micro-stupidity of SVB’s astonishing failure to manage its risk should not distract us from a macro-understanding that what ruined it and put everyone else in danger was (and still is) the ebbing economic tide. And that was caused substantially by President Joe Biden and his fellow Democrats.
The high interest rates that undid SVB were imposed by the Federal Reserve to stop inflation that hit 9% last summer. To acknowledge that tightening money is killing weaker banks and others is not to suggest that raising them was a mistake. Getting inflation under control is vital, and more broadly, it is important that real rates are high enough to impose a cost on borrowing — because cheap or free money encourages careless investing.
By the same token, accepting the merit of raising rates does not exonerate those who made them unavoidable by causing the inflationary spiral. Year-on-year price rises reached 7% before Russia invaded its neighbor in March 2022, so Biden’s mantra about “Putin’s price hike” is vacuous political spin and misdirection. The bottom line is that it was the pandering president and his profligate party, spending like intoxicated seafarers to bribe voters with their own and their grandchildren’s money, who brought us today’s crisis.
They believed or pretended to believe the crackpot nostrums of Modern Monetary Theory, which holds that the United States can print dollars ceaselessly without debauching the currency. The president, who campaigned in 2020 as a centrist alternative to his party’s kooky socialists, has governed as their glove puppet. He spent trillions of your dollars to give the cranks everything on their wish list, backing his actions with such solid arguments as “C’mon, man.”
Now we have arrived at the logical consequences of his and his party’s agenda. Don’t punish them if you’re not a wage earner, not an elderly saver, don’t have children who will pay for this for the rest of their lives, not a homeowner, don’t own a business, are invulnerable to recession, or are not simply a citizen who would like to see America run properly.
Everyone else knows where the blame lies and should act accordingly.