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August 9, 2023
Presented by AARP
You need voters 50 and over on your side.
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PRESENTED BY
THE TOP
Happy Wednesday morning.
It’s been a cheery few months for the U.S. economy. Growth is solid, inflation is down — there will be more to say on this issue later in the week — and unemployment is holding steady at low rates not seen since the 1960s. The stock market and manufacturing investment are both way up.
“Bidenomics” may not be “It’s morning again in America,” but it ain’t bad.
Yet the past week has also made clear the financial system propping up that economy is facing some serious stress.
Moody’s Investors Service kicked things off with a series of high-profile bank downgrades on Monday. Ten regional banks saw their credit ratings downgraded, meaning those institutions will face higher borrowing costs to reflect a worsening financial outlook.
More pressing, Moody’s also announced that some larger institutions will face a formal review of their credit ratings. Those banks include the Bank of New York Mellon, U.S. Bancorp, Truist Financial, State Street Corp. and Northern Trust Corp. These are large banks with hundreds of billions of dollars in assets.
The private rating agency didn’t need to look far to see the risks facing the U.S. banking system writ large. Analysts pointed to “interest rate and asset-liability management (ALM) risks with implications for liquidity and capital” and “particular risks in some banks’ commercial real estate (CRE) portfolios.”
Profound uncertainty in the commercial real estate sector has hung over the U.S. economy since the pandemic’s early months. With workers only slowly returning to the office, the Federal Reserve’s rapid push to raise interest rates has squeezed the margins of certain banks, raising concerns about the stability of the sector since the spring.
This isn’t a crisis yet. But it is a multi-trillion dollar challenge that will take years to wind its way through the financial sector as business tenants rethink, downsize or totally abandon office spaces in metropolitan areas around the country. That’ll have long-term implications for America’s cities too, but that’s another issue.
And it’s not just commercial real estate, either. This story from the Wall Street Journal’s Konrad Putzier and Will Parker makes the case that apartment buildings are emerging as “the next major trouble spot” in real estate:
Not to mention last week’s downgrade of U.S. sovereign debt via Fitch Ratings, which markets have largely shrugged off in the days since.
The federal government fiscal picture is dismal, with revenue down 10% from last year. The budget deficit was $1.6 trillion in the first 10 months of FY2023 alone. The failure of America’s political leaders to get the debt and deficit under control, or appear ready to do anything about entitlement spending, were among the reasons cited in Fitch’s downgrade.
There’s a real tension between these signs of financial stress and an economic outlook that has spent the better part of two years improving markedly. It also underscores the risks for any political party or politician trying to run on the economy more than a year out from a general election.
We asked a lot of lawmakers before recess how they thought the economy would play into the 2024 election. Most were circumspect.
“Who knows?” Sen. Kevin Cramer (R-N.D.) responded. “Even that’s over a year from now — before we really get into the next campaign. It will depend on what happens over the next year.”
Fans of Bidenomics — meaning the president and fellow Democrats — have spent much of the summer taking a victory lap. Inflation continues to slow, the labor market has been resilient and wage gains for low-to-middle-income workers are finally outpacing rising prices. Widespread predictions of a U.S. recession happening some time in the past two years have been off the mark.
But even sturdy economies can find themselves kneecapped quickly by a financial crisis when an asset class implodes. Banks’ lending and stability is a cornerstone of the U.S. economy, and value of property plays a critical role in many of their balance sheets.
Federal regulators say they’re keeping a close eye on things. One encouraging note: Nearly all current bank agency principals cut their teeth or otherwise played a key role in the 2007-2008 crisis, when the U.S. housing market was centerstage in the near-collapse of the global economy.
However, there’s only so much the U.S. government can do to eliminate any dangers lurking the multi-trillion real estate sector before things start to break. If and when that happens, it may fall to a divided Congress to decide what to do about it.
Note: The White House is planning to unveil its request for additional Ukraine and disaster relief funding on Thursday, according to multiple sources familiar with the announcement. The amount the White House will ask for is still under discussion, we’re told.
— Brendan Pedersen and John Bresnahan
THE CAMPAIGN
Ohio voters reject GOP effort to change constitutional amendment threshold
Ohio voters resoundingly rejected a Republican-backed effort to raise the threshold to change the state’s constitution.
This is a major defeat for the state’s GOP elected officials, including Rep. Jim Jordan, who cut an ad pushing Issue 1, and Frank LaRose, the secretary of state who campaigned for the initiative. LaRose is seeking the GOP nomination in Ohio’s 2024 Senate race.
Passage of Issue 1 would’ve raised the threshold to amend the state’s constitution to 60% from a simple majority. The result increases the odds that an initiative codifying abortion rights in Ohio will pass in November.
Top Ohio Republicans had rallied to increase the threshold to amend the state constitution. The GOP had argued the move would prevent special interests and out-of-state-liberals from trying to influence Ohio’s laws.
But voters in the state sided with the Democratic position, setting the stage for yet another consequential election centered around abortion rights in the post-Roe era.
The victory for the “No” side on Issue 1 will also reverberate in the Ohio Senate Republican primary. LaRose is running in a crowded GOP field that includes Bernie Moreno and state Sen. Matt Dolan. In many ways, LaRose was the public face of the campaign and had explicitly tied the vote to abortion.
The November abortion vote will be fascinating to watch. Notably, Kansas rejected an abortion ballot initiative that would have curtailed abortion rights in 2022 — which some saw as a harbinger that the GOP red wave wouldn’t materialize in the midterms.
Ohio has trended to the right in recent elections and is no longer a presidential swing state. Former President Donald Trump won the state by eight points in 2016 and 2020.
“By rejecting State Issue 1, Ohioans rejected special interests and demanded that democracy remain where it belongs – in the hands of voters, not the rich and powerful,” Sen. Sherrod Brown (D-Ohio) said in a statement. Brown still faces a very difficult path to reelection in 2024, but this was a good sign for him.
President Joe Biden also hailed the Democratic win: “This measure was a blatant attempt to weaken voters’ voices and further erode the freedom of women to make their own health care decisions. Ohioans spoke loud and clear, and tonight democracy won.”
— Jake Sherman and Max Cohen
The Fed strides into stablecoin regulation
The Federal Reserve isn’t waiting for Congress to tell it how to supervise stablecoins issued by banks.
The U.S. central bank issued new guidance on Tuesday afternoon via two letters that cover a wide swath of crypto activity in the banking system.
It’s a small but significant move that comes just days after Republicans, along with a handful of Democrats on the House Financial Services Committee, advanced legislation that would limit the Fed’s role in the future of state-issued stablecoins among nonbanks.
The first letter announces a new program the Fed will use to supervise “novel activities.” That would include anything “related to crypto-assets, distributed ledger technology (DLT), and complex, technology-driven partnerships with nonbanks to deliver financial services to customers,” per the letter.
The second piece of guidance has the Fed zeroing in on “dollar tokens,” which is more or less another term for stablecoins. This type of crypto asset is essentially a form of private money that tries to mimic the value and function of the U.S. dollar.
The Federal Reserve’s message here is pretty simple and builds off earlier guidance from the Office of the Comptroller of the Currency. Banks that want to experiment with stablecoins “should receive a written notification of supervisory nonobjection from the Federal Reserve before engaging in the proposed activities,” the letter says.
This is one of the most concrete steps taken by the Fed to date on crypto regulation. Officials such as Chair Jay Powell and Vice Chair for Supervision Michael Barr have publicly spoken about the need for oversight. But more formal guidance like this goes a long way toward shaping banks’ approach to business.
We should note these letters don’t apply directly to nonbank stablecoin-issuers. Disagreements around the Fed’s oversight of that type of institution were at the center of the breakdown in negotiations between Rep. Maxine Waters (D-Calif.), the White House and Rep. Patrick McHenry (R-N.C.) in July.
McHenry’s bill would allow nonbanks chartered by state governments to see only limited oversight from the Fed. But the Fed is very much in the business of money supply, and it would rather not lose control of that process to state-level nonbanks.
— Brendan Pedersen
PRESENTED BY FUEL CELL & HYDROGEN ENERGY ASSOCIATION
America needs clean, domestic hydrogen to reach our goals.
Additionality would put an unnecessary and inequitable burden on producers.
2024
David Hogg, Frost adviser launch young candidate outreach effort
Gun control activist David Hogg and Kevin Lata, a top adviser to Rep. Maxwell Frost (D-Fla.), are teaming up to launch a PAC dedicated to electing young Democrats nationwide.
The group — Leaders We Deserve — will focus on supporting candidates under 30 running for statehouse positions in Republican-controlled states like Florida, Georgia and Texas. And Hogg told us the PAC will also back a small number of House candidates who are under 35.
Leaders We Deserve will seek to play the long game to help the left build a bench that can oppose right-wing efforts playing out in state capitols across the country.
“The worst of the worst laws are being passed by state legislatures,” Hogg told us. “These abortion bans, the ‘Don’t say gay’ laws, the anti-trans laws, they’re not coming from D.C. They’re coming from Tallahassee. They’re coming from Austin.”
It’s the latest effort from Democrats to combat what they perceive as a GOP advantage in statehouses nationwide. The PAC also boasts substantial institutional support, with a number of House Democrats — such as Reps. Jamie Raskin (D-Md.), Lauren Underwood (D-Ill.), Eric Swalwell (D-Calif.) and Frost — on its advisory board.
“My generation has the greatest advantage in politics, which is time on your side. We’re going to outlive the Supreme Court,” Hogg said. “But what are we going to do about the legacy they leave behind? What we’re trying to do is build up a pipeline from the state legislatures to give these young candidates a chance to prove themselves.”
The PAC will target “open, blue-seat primaries in state legislatures and Congress,” Hogg said. He described Frost’s 2022 victory — the first House victory by a member of Generation Z — as a model for Leaders We Deserve. Frost won a crowded Orlando-area House primary triggered by Rep. Val Demings’ (D-Fla.) Senate run, besting former Reps. Alan Grayson (D-Fla.) and Corrine Brown (D-Fla.) in the process.
Hogg, a national figure who helped found the March For Our Lives movement, said he will travel to rally with the PAC’s candidates in person to help the low-profile races get more attention.
The PAC’s tailored local focus is important to Hogg, who said a targeted approach aimed at teaching candidates how to staff up and run campaigns will be the most effective.
The power of state legislatures on the national conversation was on full display this year when three members of the Tennessee statehouse faced disciplinary action for protesting the state’s gun laws. The “Tennessee Three” became national figures overnight and highlighted the plight of Democrats in red states. Fittingly, state Rep. Justin Jones — one of those members — is on the PAC’s advisory board. Jones won reelection last week to his old seat.
— Max Cohen
AD WATCH
Win it Back PAC has another ad up in Iowa. This ad features a voter who says he was an independent and supported former President Donald Trump in 2016 but does not think he can win in 2024.
“I think for 2024, Trump is not the most electable candidate,” the ad says.
— Jake Sherman
PRESENTED BY FUEL CELL & HYDROGEN ENERGY ASSOCIATION
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