How bank failures could aid President Biden’s fiscal policy to curb inflation

Yahoo Finance senior columnist Rick Newman details how the recent bank failures and uncertainty in the financial system could contribute to deflationary conditions and the Biden administration's inflation-fighting policies.

Video Transcript

- President Biden's domestic headaches stubborn inflation. Well, it might have met its match this week in the chaos that followed the collapse of Silicon Valley Bank and Signature Bank. For more, we're joined by Yahoo Finance Senior Columnist Rick Newman. So Rick, help us make sense all this. You're making the case that the collapse of Silicon Valley Bank, maybe some of that turmoil in the banking sector could actually help the Fed's fight against inflation.

RICK NEWMAN: We have actually seen notable declines in inflation, indicators just starting the last few days and things like inflation expectations as predicted by the bond market. Now of course, we got the consumer price index data earlier this week. And that really was not reassuring about inflation. But that's measuring prices from several weeks ago, the basket of prices. And it is not capturing what is likely to happen as we get tightening financial conditions and perhaps rapidly tightening financial conditions.

So the whole reason the Fed has been raising interest rates is to tighten up on credit, to tighten financial conditions. Get people to spend a little bit less. But now out of nowhere we've got this exogenous shock, the banking crisis, these bank failures, which seems like it's going to do exactly that. It is going to lead banks to tighten underwriting standards. That means less credit. That means tighter financial conditions, which are exactly the things the Fed is trying to control.

And we just had Liz Ann Sonders talking about her belief that there will be a recession later this year. So it's very weird. I mean, we're all trying to guess. We're still trying to guess the first order effects of these banking failures. And we're talking here about possible second or third order effects. But in the short term, it is looking like this could be good for getting inflation down.

- Now Rick, how will this impact though President Biden's popularity when all of this is said and done?

RICK NEWMAN: Well, we have this question hanging out there. Are they bail outs? Are they not bail outs? Which I think is silly semantics. I mean, clearly these are bailouts.

I mean, when the government gets involved in the private sector and prevents losses from happening even when it's not obligated to do that, I think that is a bailout by definition. Voters really hate bailouts because they think that the little guy gets screwed and the rich guy gets saved. So it's now incumbent upon Biden to make this look like it is a good deal for taxpayers. And he's starting out obviously by saying, look, there's no taxpayer money involved. That could be true or not true based on whether any of the fees the bank pays to get through this, whether any of that filters down to consumers. If it ever does, you'll never know about it.

But it has a lot to do with framing. And I think that's one of the reasons we heard Biden come out today and say he wants Congress to do whatever it takes to hold accountable the executives at these banks. Whether that means clawing back previous pay or other things like that. Now Congress is not going to do that, but Biden is trying to make the case that this needs to happen. And that is all to make it look like it's not taxpayers who are on the hook here. So if this all settles down, I think the banking failures are a non-issue for Biden in terms of his popularity. If it continues to roil markets, he has some work to do to frame this to his advantage.

- Because taxpayers don't like bailouts. Rick Newman, thanks so much.

RICK NEWMAN: They hate them.

- That's right.

RICK NEWMAN: Bye, guys.