Update 694 – Economic Policy Week in Review
Debt Limit Stalemate, Failed Bank Execs Plead Case
The financial community and much of the American public remain on tenterhooks going into the weekend, with debt limit negotiations on hold and a wide range of outcomes still possible with a dozen days to go before Treasury’s X-date of June 1. Chief House negotiator Rep. Garret Graves (R-LA) said this morning that it’s time to “press pause” on talks. The Senate is expected to disband for its tentative 5-day recess, although Senate Majority Leader Schumer warned Senators to be ready to return on 24 hours’ notice.
Also this week, former executives of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank — and officials from the state and federal agencies that were charged with regulating them — were grilled by Democrats and Republicans on House and Senate Committees. Investigations into internal operations are still ongoing, but these hearings helped to at least shed light on what exactly happened in terms of executive compensation, and where we should go from here. More below.
Good weekends to all….
Debt Limit Updates
President Biden and Vice President Harris met with congressional leaders on Tuesday to continue negotiations on the debt limit. Daily negotiations have continued throughout the week without result, although the range of issues under discussion has narrowed.
Biden offered Republicans a list of roughly a dozen tax loopholes to close in order to raise revenue, including measures aimed at large real estate investors and crypto transactions, but Republican negotiators rejected all of them. Republicans have repeatedly rejected any attempt to raise revenues, focusing instead solely on spending cuts.
Work requirements remain a sticking point on both sides of the aisle, with McCarthy saying that work requirements were a “red line” for Republicans. Over the weekend, Biden had made comments that seemed to suggest that he was open to expanding work requirements for SNAP and TANF, a departure from his earlier commitments not to accept cuts that would push millions into poverty. But on Monday, Biden reaffirmed his commitment not to increase poverty and hunger. Discussions have spurred strong reactions from House Democrats this week, including Minority Leader Hakeem Jeffries (D-NY), who said “work requirements are a nonstarter”
The anxiety and uncertainty have moved to consider an unorthodox, break-the-glass solution to the debt deadlock. Congressional Democrats have been expressing mounting Senators Warren (D-MA) and Sanders (I-VT), joined by ten colleagues, have called on the president to invoke the 14th Amendment. The feasibility and pros and cons of such an approach are increasingly discussed.
Meanwhile, House Democrats moved forward with a discharge petition that would force a vote on a clean debt limit increase if they can secure 218 signatures. The petition currently has only 210 signatures, all Democrats. Democratic leaders expect all of their members to sign on barring real movement on negotiations, but there’s no indication that any Republicans will sign.
Former Bank Executives, Regulators Testify
This week former executives of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank — and officials from the state and federal agencies that were charged with regulating them — testified before the Senate Banking, Housing, and Urban Affairs Committee.
Greg Becker, the former CEO of SVB, spoke publicly for the first time since his bank collapsed and triggered contagion that almost spread across the broader banking sector. Becker, Scott Shay, the co-founder and former chairman of Signature Bank, and Eric Howell, the former president of Signature Bank, were the targets of bipartisan contempt as they testified before the committee.
Executives blamed interest rate hikes, social media, regulators, and “unprecedented” factors. They claimed to be responsive to regulators, despite failing to adequately address their warnings. Senator Warren (D-MA) highlighted bipartisan legislation she has introduced to claw back the millions in compensation the executives raked in over the months leading up to their banks’ failures. While Senators on both sides of the aisle laid into the executives, Democrats see a reason to push for stronger regulation.
On Thursday, the Committee continued its look into the bank failures with a hearing on oversight of federal regulators. Fed Vice Chair For Supervision Michael Barr, FDIC Chair Martin Gruenberg, OCC Acting Comptroller Michael Hsu, and National Credit Union Administration Chair Todd Harper testified before the committee alongside officials from the state regulators, who provided oversight of SVB and Signature ahead of their failures. Chair Brown (D-OH) highlighted the need to strengthen capital requirements and stress tests, address issues identified in regulators’ reports, including increasing staffing and resources, consider options for deposit insurance reform, improve merger policy and adjust the culture of supervision.
Accountability at the Federal Reserve
On Wednesday, the Senate Banking, Housing and Urban Affairs Committee Subcommittee on Economic Policy held a hearing titled, “Strengthening Accountability at the Federal Reserve: Lessons and Opportunities for Reform.”
Subcommittee chair Warren (D-MA) referred to former SVB CEO Greg Becker’s previous position on the board of the San Francisco Fed as part of a “culture of corruption.” Warren said that she and Senator Scott (R-FL) would introduce legislation to restrict big bankers’ presence on the boards of regional Federal Reserve banks.
Warren also highlighted a bill that she introduced with Senator Scott (R-FL) to require a presidentially-appointed and Senate-confirmed inspector general. Senators Warren and Scott also sent a separate letter to Bialek ahead of the hearing reiterating their position and addressing concerns that he raised about the legislation.
House Financial Services
The Execs and Regulators Before HFSC
Greg Becker, the former SVB CEO, and Scott Shay, the Signature co-founder and former chairman, returned to the Hill after being grilled by the Senate Banking Committee. They were joined by former CEO and president of First Republic Bank Michael Roffler, who spoke publicly for the first time since his bank’s collapse. They appeared at Wednesday’s joint hearing held by the Subcommittee on Financial Institutions and Monetary Policy and the Subcommittee on Oversight and Investigations. They were further grilled by both Democrats and Republicans and continued avoiding blame for their failed management and its broader consequences.
Barr, Gruenberg, Harper, and Hsu appeared before the full committee in a hearing on Tuesday. Committee Republicans continued to point to the finger at regulators for recent bank failures, while Democrats pushed for stronger regulation. The witnesses sought to reassure Congress, markets and the public that the banking sector and broader economy remain resilient. Congressman Foster (D-IL) highlighted that recommendations for stronger capital requirements that may come from Barr’s ongoing holistic review will involve a process of congressional input before they are implemented.
Stablecoin Standoff Signals Strife: A Battle of the Bills
The Subcommittee on Digital Assets convened on Thursday for their second stablecoin hearing of the year to address why legislation is needed to regulate stablecoins – or as the committee framed it, “to put the ‘stable’ in stablecoins.” The hearing largely focused on the two draft bills that were introduced before the committee – one from full committee Chair Patrick McHenry (R-NC) and the other from Ranking Member Maxine Waters (D-CA), which was released no more than 24 hours before the hearing commenced.
House Democrats argued that the GOP’s prized proposal to give states a major role in stablecoin regulation would almost certainly lead to a “race to the bottom” standard, in which industry would gravitate toward regions with lax standards. Instead, Democrats would like to preserve a role for a federal regulator that can offer a more uniform, consistent approach.
Waters used her floor time to explain how her bill addresses some outstanding concerns in a post-FTX world. Concerns that she argued, Republicans had failed to address in their own party proposal. Most notably, Waters’s bill attempts to:
- Strengthen protection for digital wallets and separate customer assets from crypto exchanges
- Strike direct access to the Fed for non-bank stablecoin issuers
- Allow the Fed the option to decline any registration of a state-approved stablecoin issuer
Even some fellow Democratic colleagues were quick to point out the inherent flaws in the ranking member’s bill, with Rep. Sean Casten (D-IL) going so far as to say that neither of the bills go far enough to address regulation in the digital asset space.
Neither bill, in its current form, is adequate to move forward, but we remain hopeful that Reps. Waters, McHenry, and members of the Digital Asset Subcommittee will be open to collaborative feedback from the concerned progressive community and work in a bipartisan manner to lift up consumer protections in what will hopefully result in a safe and sound stablecoin bill.
Senate Budget Talks Tax Cuts for the Rich
On Wednesday, the Senate Budget Committee examined the role of tax cuts for the wealthy in increasing debt and deficits. According to a recent report by the Center for American Progress, the Bush and Trump tax cuts are responsible for 57 percent of the increase in the debt-to-GDP ratio since 2001 and have added $10 trillion to the debt. Without these tax cuts, debt as a percentage of GDP would actually be on the decline.
Republicans and Democrats predictably clashed over the value of tax breaks for the wealthy and corporations, but all of the witnesses, including the two Republican witnesses on the panel, agreed that claims made by lawmakers that the 2017 Trump tax cuts would pay for themselves were overblown.
This comes as the two major parties continue to debate how to address the deficit, with Republican members and witnesses stressing the need for spending cuts and Democratic members and witnesses emphasizing the need to raise revenues and make the tax code more progressive.
The Senate will go into recess next week but the House will stay in session. Negotiators will continue to work towards a bipartisan agreement on the debt limit and we remain cautiously optimistic that a package can come together by week’s end.