Washington Weekly: Bank Hearings

The Senate confirmed various Biden administration judicial nominees. The House passed a bill that would increase parents’ rights in public education. It also voted but failed to pass a resolution to overturn President Biden’s veto of a resolution to overturn a Department of Labor rule to include environmental, social and governance factors in retirement plans.

The Senate will vote on a bill to rescind the authorizations of military force against Iraq in 1991 and 2002 (see below). The House will likely vote on a comprehensive energy policy package.

Bank Hearings.

Recent bank failures remain a dominant issue on Capitol Hill. Next week, House and Senate committees will hold hearings with key regulatory officials (from the Federal Reserve, FDIC and the Treasury) – and potentially former executives of Silicon Valley Bank and Signature Bank – to testify about the failures as well as the federal regulatory response to date. With the Fed not set to complete its internal review of the failures until May 1, regulators are likely to provide only provisional answers. Next week’s hearings may do more to underscore divisions among lawmakers about the causes of the failures and the appropriate responses. Republicans and some Democrats will highlight risk management and supervisory failures, while other Democrats will try to pin more of the blame on past regulatory relief efforts in Congress and at the Fed. There has been some bipartisan discussion about raising the current deposit insurance limit (something that generally would need Congressional approval), but there are divisions on this among lawmakers, with some Republicans concerned about moral hazard and with some Democrats interested in pairing any increase with a rollback of regulatory relief (a non-starter in the Republican House). Though Congress likely will be deadlocked on legislative changes, lawmakers will be influential in guiding the regulatory and supervisory changes regulators will consider following the Fed’s report in early May.

Deficit Reduction Blues.

As House Republicans continue their work on crafting a federal budget proposal for the 2024 fiscal year, we expect them to focus on the level of federal spending over the next year or two instead of over a longer term. They are likely to propose a cap on many areas of federal spending (based on 2022 spending levels) and reductions in others. These goals are seen as more manageable than an aspirational ten-year plan to balance the budget, which seems nearly impossible in a politically divided Washington. The emerging plan would propose a smaller rise in the annual budget deficit over the next two years. It then would count on sizeable reforms to Medicare (and possibly Social Security) to provide a more meaningful impact on the deficit. A key part of Medicare must be reformed by 2028 in order to ensure the continued payment of certain benefits. That imperative could be a spur to remedial (and possibly bipartisan) legislative action. Despite the budget’s expected focus on potential deficit reduction measures, some hardline House Republicans may view it as not tough enough. For their own part, House Democrats this week showcased the views of cabinet heads about how spending cuts would imperil their agencies. Cutting spending is a difficult exercise, and voters will have to demonstrate their support for such measures if Republicans are to be successful in enacting cuts to reduce the deficit.

Tangle Over Trade.

The Biden administration’s trade agenda was the subject of two hearings in the House this week. At both, lawmakers expressed disappointment in what they perceive to be an underwhelming trade agenda. The US business community and many Republican lawmakers are especially critical of the lack of new trade initiatives. They also are frustrated by the failure to resolve some thorny trade disputes left over from the previous administration, such as high tariff levels with trade with China and lethargy around negotiations on a new US-United Kingdom trade deal. The administration’s trade agenda has been limited not only because of the demands of Democratic priorities (labor union opposition to many trade deals and lack of receptivity from some other countries to US demands on labor rights and environmental standards), but also because national security issues have at times taken precedence over trade issues with countries like China.

Focus on Taiwan.

Although the US trade agenda seems to lack ambition, the Biden administration reportedly sent a letter to major US CEOs to urge them to further trade and investment in Taiwan. That is a tough ask for CEOs who have already made a significant investment in mainland China and don’t want to jeopardize their operations there. Separately, Taiwan President Tsai Ing-wen announced plans to visit the US, with a multi-day stop in New York later this month and later (early April) a stop in Los Angeles to visit with House Speaker Kevin McCarthy (R-CA). The Los Angeles meeting, which will replace a planned trip to Taiwan by the Speaker, was arranged in part to address concerns from China about another visit to the island by a House Speaker. While this pullback from a meeting in Taiwan will be noticed by China, we still expect China to respond to the visit with a range of military exercises in the Taiwan Strait as it did last year when Speaker Pelosi traveled to Taiwan.

Lawmaker Support for Ukraine.

The media has speculated that support from US lawmakers for further US assistance to Ukraine has waned and cannot be further ensured as the conflict begins its second year. We have always believed that speculation to be exaggerated. A few Republican lawmakers and former President Trump have articulated this line of thinking, and while these voices are often the loudest, it is the minority view among Republican lawmakers in the House and Senate. US support for Ukraine in Washington was certainly enhanced this week when Chinese President Xi visited Russia to reinforce his support for Russian President Putin. It’s hard to see US support for Ukraine further slipping in the near future if China continues to assist Russia and jockeys for a key role in brokering a potential peace deal. Russia will certainly benefit from increased commitments from China, but the consequences are a hardened US and western alliance to help Ukraine.

Repealing War Authorizations.

The Senate will vote next week on a bill that would repeal a pair of decades-old authorizations for use of military force in Iraq. The bill would repeal the 1991 Persian Gulf War authorization and the 2002 Iraq War authorization, the latter marking the 20th anniversary (almost to the day) of the US invasion into Iraq. While it may seem odd to repeal war authorizations from decades ago, there are concerns from some in Congress that since both war authorizations are active, they still can be used (or misused) by a sitting president. There have been attempts to repeal these authorizations over the past decade, but they have not gained traction. While the bill will likely pass the Senate, it will face challenges in the House where some defense hawks will chafe at the idea of repealing (rather than revising) the resolutions.

SALT Cap Marriage Penalty.

We were interested to see that freshman Congressman Mike Lawler (R-NY) introduced a bill that would double the $10,000 cap on the state and local tax (SALT) deduction to $20,000 for married couples. At this point, we don’t believe that this bill will advance. However, this is an important stake in the ground for future debate. The current SALT cap, along with many other provisions of the 2017 tax law, is set to expire at the end of 2025. With these sunsets looming, a tax bill could gain traction in 2025 and a SALT cap could be renewed as an important pay-for in such a bill. Congressman Lawler’s simple and straightforward proposal could serve as a compromise to placate both advocates and opponents of the current cap.

First Laws in the New Congress.

Earlier this week, President Biden signed two bills into law, one which nullified Washington, DC’s revised criminal code and the other to declassify certain information relating to the origins of Covid-19. These two laws, which are the first and second for the 118th Congress, come nearly three months after members were sworn in. While Congress is rarely (if ever) accused of being a swift lawmaking body, this year has witnessed a historically slow pace. A searchable database from Congress of when bills were signed into law only dates back to the 82nd Congress (1951 – 1953), but during the 36 sessions of Congress and 72 years since then, every Congress has passed a bill that was signed into law before March 21. In most instances, the first laws were signed in January. The slow start is mostly due to divided government and the fact that the House and Senate have very different priorities. This session of Congress will be short on bills enacted into law, but as long as the debt ceiling is extended and government funding is approved in some way and on time, this isn’t necessarily a bad thing.

The Trump Factor.

Whatever you think of former President Trump, it’s hard to argue that he is not highly skilled at generating free media coverage that reminds his core supporters almost daily of why they rally around him. And when you are a presidential candidate, this is a form of political gold. The media coverage this week – a rumored indictment from a New York District Attorney – isn’t favorable coverage for him from the perspective of many voters but it is to the dedicated Trump voting bloc. The ongoing Trump drama this week is frustrating to many Republican lawmakers in Washington. House Republicans held a retreat this week in an effort to show party unity behind a comprehensive energy bill, a parent-friendly education bill and a commitment to deficit reduction, but news of that was largely washed out by the Trump news. Most Republican lawmakers we talk to would like to see an alternative to Trump emerge in 2024, but this week’s dominance of the news by the former president shows how hard it is for the party to focus on anything other than him.