Trump, Game Theory and the Next U.S. Election

A lot hangs in the balance this week, from the fate of the U.S. financial system to the 2024 presidential race. Plus: Exploring crypto's role in the banking crisis.

Trump, Game Theory and the Next U.S. Election

One thing is clear: The fate of Donald J. Trump will impact the next U.S. presidential election — and its outcome.

It is easy to get lost in the partisan caterwauling surrounding the multiple investigations into former president Donald Trump, but as the number of state and federal cases against him begin to pile up, other questions are coming to the fore. Specifically, if his legal travails make it increasingly difficult for him to run for the nation’s highest office, how will it affect the next presidential election?

Trump has already made clear he has no intention of voluntarily stepping away from the race, even if criminal charges are brought. “Oh, absolutely, I won’t even think about leaving,” he stated before a speech over the weekend. And in response to questions from journalists about the possibility of an indictment, he predicted, “probably it’ll enhance my numbers, but it’s a very bad thing for America. It’s very bad for the country.”

He's not wrong. There’s not much of an upside to, or precedent for, criminally indicting a former president for failing to properly account for a $130,000 payment to a former stripper and pornographic film actress. Such a charge is expected to be brought as soon as this week by Manhattan district attorney Alvin Bragg. 

Earlier this year, a case Bragg brought against the Trump Organization resulted in $1.6 million in fines against the company after it was convicted on 17 counts for criminal tax fraud, conspiracy and the falsification of business records in a scheme that lasted 15 years. Trump was not pulled directly into that case, but his name came up during the proceedings many times. 

This next legal onslaught may be a bit different, as it would be the first time in history a former president could be indicted. Further complicating the situation is that Trump does not plan to go quietly, calling on his supporters (in all caps, naturally) on his online channel Truth Social to “PROTEST, TAKE OUR NATION BACK!”

In a searing piece this week, the editorial board of The Wall Street Journal also denounced Bragg’s move:

“It’s impossible to overstate Mr. Bragg’s bad judgment here. Perhaps the local Democratic DA has discovered some new proof of criminal behavior. But based on the public evidence so far, he would be resurrecting a seven-year-old case that even federal prosecutors refused to bring to court.”

It is believed that any charge brought by Bragg would primarily hinge on allegations related to the falsification of business records to pay for the silence of the pornographic actress, Stormy Daniels, ahead of Trump’s presidential election victory in 2016. That would ordinarily be a misdemeanor in New York state, the Journal noted, but “Mr. Bragg might bump it up to a felony by claiming the falsification was to cover up an illegal campaign-finance donation” to Trump’s campaign. For his part, Trump admitted he authorized the payment to Daniels (her real name is Stephanie Clifford), but denies the two had a sexual relationship. Little-known fact: Daniels sued Trump for defamation after he tweeted that her claims of being threatened to remain silent about their alleged affair were a “total con job” in a case she fought all the way to the Supreme Court. The court declined to hear the case.

The turmoil does not show any sign of slowing. Trump is also facing a potential indictment in Georgia over accusations he interfered with the certification of the 2020 presidential election, and he eventually may have to answer to a federal indictment in connection with the January 6 insurrection. Considering the raft of troubles Trump is confronting, even if he wanted to leave public life, it could be perilous to do so.

Why? Well, as a presidential hopeful in the 2024 race, he’s in a position to endlessly appeal for donations, raise funds for his legal battles and maintain the position that his legal problems amount to nothing more than a political witch hunt. “Some people say he’s not even interested in running anymore,” says Maria Gallego, a professor of economics at Wilfrid Laurier University in Waterloo, Ontario, who specializes in politics, elections and game theory. “But he doesn’t want to be out of the public eye, because he wants the protection of being a candidate. If he drops out, he cannot collect campaign money, he cannot raise funds to pay for his legal battles or support himself so, in a way, he cannot stop running for president.”

As long as Trump campaigns, every fight he undertakes can also effectively be a proxy for the presidential race he lost, with the onus on whether he will be allowed to run again – and win – or have his chances dashed, as many of his supporters believe happened in 2020.

It is clear Trump’s legal battles will certainly impact the election. But what about its outcome? There are some who believe Trump’s fate, whatever it may be, will not stop President Biden from winning a re-election if he runs again, as he is the incumbent and has already won against Trump. Indeed, Trump is the only incumbent to have lost a presidential election since 1992, failing to join the ranks of Bill Clinton, George W. Bush and Barack Obama. But Trump’s gambit has always been to be so lowly rated as to be underrated. And that allows him to surprise.

It is early days, but recent polls between President Biden and Trump show a very tight race. Trump’s lead over the field of Republican contenders, including Florida Gov. Ron DeSantis, also widened this month from last month, according to a survey out last week from Quinnipiac University, with Trump garnering 46 percent of the vote from Republican-leaning respondents versus DeSantis at 32 percent.

The poll showed other Republican hopefuls, such as former South Carolina Gov. Nikki Haley and former Vice President Mike Pence struggling in the single digits against Trump and DeSantis. When asked to pick between Trump and DeSantis in a head-to-head matchup, 51 percent chose Trump over DeSantis, who drew 40 percent of the vote.

It's more than 600 days until the election. What happens with these numbers over time is anyone’s guess. But those claiming that Democrats want Trump to run for president in 2024 because they think he will be the easiest to beat, might want to think again. “He looks like the Teflon man,” Gallego says.

Even if a non-Trump candidate does win the GOP nomination – which is far from assured, given Trump’s sticky support – they will have Trump gunning for them, tearing them down, chiseling at their vote, every day until election day. Remember Trump’s words last week at the Conservative Political Action Conference: “I am your warrior. I am your justice. And for those who have been wronged and betrayed, I am your retribution.”

The theme of vengeance is palpable on this particular Trump tour – and it is unlikely to spare his Republican opponents. It is also unlikely President Biden will be tangling with the same division in his own party, should he win the nomination. 

In short, the fate of Trump very well may affect the outcome of the next presidential election, but he may turn out to be a bigger problem for Republicans than Democrats. “He is hurting no group more than the GOP,” Gallego says. “You can make some projections. He will be attacking the other Republican candidates. If he keeps his base of support and starts getting rid of the other candidates, nullifying them like he did in 2016, it could be very damaging.” 

From this view, there’s no scenario where the GOP doesn’t have a ferociously contested, chaotic landscape ahead.

How to Know If the Fed Got It Right

The Fed faces a decision that is almost impossible – but it must still make a choice.

It’s not often the U.S. Federal Reserve faces a phalanx of wobbly banks as it weighs a decision to raise interest rates in order to cool inflation. 

Two weeks ago, Fed chief Jerome Powell appeared before Congress to testify that the central bank would need to move aggressively on raising interest rates, as the U.S. economy appeared to be revving back up. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he told the Senate Banking Committee. Powell also made the case for faster and bigger rate hikes, “if the totality of the data were to indicate that faster tightening is warranted.”

Well the data are in: Just a few days after Powell gave his semi-annual monetary policy report to the nation’s lawmakers, Silicon Valley Bank, which ended last year with assets of more than $200 billion, failed, marking the second-largest bank collapse in U.S. history. The contagion spread rapidly to Signature Bank, First Republic Bank and Switzerland’s Credit Suisse – all of which threatened countless other institutions within the global banking system, spurred bank runs and raised the possibility of a full-blown, long-lasting financial crisis. The Biden administration, the Fed and the U.S. Department of the Treasury took extraordinary measures to stem the fallout by backstopping U.S. bank deposits, but the financial system remains shaky.

The need for rate hike speed that Powell proposed to Congress is now in question. Are speedy rate hikes more important right now than ensuring the overall stability of the U.S. financial system? After all, one of the key planks of the Fed’s mandate is to maintain smooth financial regulation. Last month, even Powell acknowledged the “disinflationary process” was not going smoothly.

While many market prognosticators expect the Fed to continue its series of rate hikes in the near term – although some bold few have predicted cuts – there is less visibility on whether it will try to hit pause for now to allow the financial system to restabilize. Some have argued if it does, that may only increase the widespread alarm that’s already panicked both Wall Street and Main Street, as it could pull back the curtain on a spooked bunch of central bankers.

After all the big talk by Powell of greater and faster rate hikes, will the Fed be able to change its mind now that the facts have changed? “What they should do is the right thing,” says Campbell Harvey, a professor of finance at Duke University. “It’s ok to change your mind in the wake of new information and the new data are very serious – that might mean changing your mind.”

But the right thing may not be self-evident to the Fed. If continued high inflation, failing banks and an unsteady financial system is the wrong thing, then its moonshot opposite would be lower inflation, no toppled banks, no recession. But is that even possible? Tackling this thorny combination of problems is proving to be challenging, especially as the very steps the Fed must take to bring down inflation are creating fresh and menacing cracks in the financial system. Tougher still, it is only long after the Fed’s decisions have been made that it learns if it chose correctly, as central bank moves can take anywhere from months to years to show their full effects. 

As the Fed weighs its next decision, it will be very interesting to see who ended up in Powell’s appointment book this week. During the global financial crisis of 2007-2008, a Freedom of Information Act filing revealed former Fed chief Ben Bernanke received a bevy of phone calls from an ex-Treasury secretary (Robert Rubin) and a flurry of hedge funds (among them, Bridgewater Associates) just before the central bank decided to slash rates. No doubt, Powell is fielding many similar calls to the chairman’s office this week. 

How much the Fed is willing to sacrifice to break the back of the nation’s worst inflation streak in four decades may finally be made plain. Based on Powell’s recent remarks, we know the Fed is willing to risk or even create a recession to reduce U.S. inflation, but is it willing to risk the stability of the entire financial system? 

Perhaps more to the point, is it willing to risk shouldering a portion of the blame? 

“Why rush? You need more analysis,” Harvey says. “It’s hard to see the reason to do this in this manner. It’s dumbfounding. Things have changed since the last Fed meeting. You can make a direct connection between the Fed’s policy moves and the contagion.”

A Crypto-Bank Contagion Death Loop?

The latest banking crisis proves crypto does not exist in a universe of its own that never touches Wall Street.

With apologies to Rudyard Kipling, when it comes to central banks and crypto, the idea was that never the twain shall meet. The rise of cryptocurrencies and decentralized financial systems brought with them the sacred promise to operate outside the traditional financial system. 

Yet the bankruptcy of Sam Bankman-Fried’s $32 billion crypto empire FTX – which led to the loss of billions of dollars of customer funds, some of which appear to have influenced U.S. elections and ended up directly in Bankman-Fried’s pocket – blew those assurances to high heaven. Now the latest banking crisis is finishing the job.

The volatility of a crypto winter and rising interest rates, which combined to upend FTX late last year, certainly went uncontained, and the subsequent contagion ravaged crypto exchanges, then financial institutions, like Silicon Valley Bank, Silvergate Bank and Signature Bank, all of which served the crypto community. No matter how much central banks and crypto maximalists despise each other, their linkages can no longer be denied, or ignored.

Barney Frank, a former congressman who served on the board of New York-based Signature Bank, took the observation one step further, highlighting not just a correlation, but direct causation when it came to FTX’s role in the failures. “I think, if it hadn’t been for FTX and the extreme nervousness about crypto, that this wouldn’t have happened,” Frank said. “That wasn’t something that could have been anticipated by regulators.”

If that is true, then it also means last year’s steady stream of crypto calamities, not just FTX, likely contributed to the cumulative mess U.S. regulators are grappling with today. But that doesn’t mean U.S. regulators are happy to clean it up. In a sign they are not interested in saving crypto’s billions, the U.S. Federal Deposit Insurance Corp. arranged a deal for Signature’s cash deposits to be assumed by Flagstar Bank, a subsidiary of New York Community Bank, with the glaring exception of its $4 billion of crypto company deposits. Those crypto businesses were forced to bank elsewhere.

Frank, who helped lead major regulatory reforms of the U.S. banking system in 2008 following the global financial crisis, said he believes the move to exclude crypto companies was “to send a message to get people away from crypto.”

That strategy could backfire, driving the $1 trillion crypto industry even further offshore, making it all the harder for regulators to keep watch over it, prevent fraud, or investigate criminal activity and money laundering. Which, one might reasonably argue, is exactly the opposite of what regulators are supposed to do.