Biden Administration Considers Replacing Janet Yellen Amid Banking Crisis

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U.S. Treasury Secretary Janet Yellen testifies before a Senate Appropriations Financial Services and General Government Subcommittee hearing on President Biden’s proposed budget request for the Department of the Treasury for fiscal year 2024, on Capitol Hill in Washington, U.S., March 22, 2023. REUTERS/Evelyn Hockstein

According to sources familiar with the matter, Treasury Secretary Janet Yellen is once again under scrutiny by the Biden administration for her handling of the current banking crisis, which has been causing turbulence in markets. The question remains as to when the administration will take action, and appoint someone who can adequately deal with the real possibility of banks failing on a scale not seen since the 2008 financial crisis, and a possible deep recession.

White House advisers have been increasingly wary of Yellen’s ability to perform her job, despite her extensive resume and years of experience running the Fed, due to her bungled response to inflation. The administration floated possible replacements last year, including Commerce Secretary Gina Raimondo and Bank of America CEO Brian Moynihan. Both are seen as policy heavyweights with real-world business experience, unlike Yellen, who has spent her career in academia and government.

Despite criticism, Yellen managed to survive the attempt to remove her from her position because the President did not want to fire a woman from such a high-profile post. However, given the growing severity of the banking crisis, sources suggest that Biden may not have much choice but to replace her. The collapse of large regional banks like Silicon Valley and Signature banks is imminent, with First Republic on the precipice of collapse. Credit Suisse nearly imploded and had to merge with UBS, and Deutsche Bank is at risk of failing.

Yellen’s response to the crisis has been criticized for its messaging. She has been flip-flopping on whether the government will cover all deposits in a failed bank, even those exceeding the FDIC insurance threshold of $250,000. While she does not want people to withdraw their money at the slightest hint of weakness in a bank, her statements lack credibility. It is unlikely that the federal government or the underfunded FDIC insurance fund will cover deposits exceeding a million dollars.

Critics have also accused Yellen of slow-walking the potential severity of weakness in the plumbing of banks as failures begin to pile up. Despite her assurances that the system is safe and secure, it is obvious that it is not. Years of historical and super-low interest rates distort asset values and risk-taking, and banks cannot be immune to the consequences.

Sources reveal that the administration is stuck with Yellen, given that it would be bad to remove a Treasury Secretary during a banking crisis. However, they also acknowledge that they do not have anyone who can respond to the crisis in a competent manner.

Yellen called an emergency meeting of top bank regulators on Friday to discuss the expanding crisis. The agenda will likely include past bank collapses, as well as the impasse over First Republic’s fate. Bankers are trying to save the institution from being the latest domino to fall in the regional bank mess.

There is also a feared implosion of Deutsche Bank, which, given its size, carries a significant systemic risk to the entire financial system. This includes big banks like JPMorgan and Bank of America, which trade with the German behemoth.

While it is better late than never, Yellen’s sudden urgency is coming in week three of a fast-moving banking contagion. The crisis could cause a significant recession if banks collapse en masse, and lending dries up. Whatever action Yellen takes to resolve the crisis must be taken swiftly and competently, as the nation’s economic future is at stake.

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  1. Staff T com. What Was the Financial Crisis of 2007-2008? Causes, Outcomes & Lessons Learned. TheStreet. Published October 8, 2022. Accessed March 25, 2023. https://www.thestreet.com/dictionary/f/financial-crisis-2007-2008
  2. Schroeder P, Shalal A. US officials talked about raising deposit insurance without Congress -sources. Reuters. https://www.reuters.com/markets/us/us-officials-talked-about-raising-deposit-insurance-without-congress-sources-2023-03-21/. Published March 21, 2023. Accessed March 25, 2023.
  3. Banking fears spread to German giant Deusche Bank. www.cbsnews.com. Published March 24, 2023. Accessed March 25, 2023. https://www.cbsnews.com/news/deutsche-bank-shares-down/