Your Risk Model Is Missing Its Biggest Variable: Politics

‍Political Cycles and Risk Management

Tamika Tyson, Founder & Managing Partner, SCALE
April 2026 | Part 4 of 7 in the Through the Cycle series

‍Last week I asked you to watch the plumbing. I walked you through the credit infrastructure, the concentration points, the places where a break in the pipes can cascade into a systemic event. But I left a question unanswered: who turns the valves?

The answer is political.

Most risk models treat political decisions as exogenous noise. A variable to be assumed away. A stubborn human behavior that refuses to cooperate with rational market frameworks. This is a fundamental analytical error. Political decisions are not background interference in the economic signal. They are the mechanism through which credit and investment cycles accelerate, pause, and reverse. They are the primary lever through which policy shapes the conditions that either amplify or dampen systemic risk.

I want to be clear about what I am not saying. This is not an argument that markets are merely political artifacts, or that economic fundamentals do not matter, or that we should predict elections to predict markets. Those are all intellectually lazy positions. What I am saying is this: if you want to understand why credit cycles happen when they do, why rate hikes arrive with particular velocity, why certain financial institutions fail while others thrive, or why the next crisis will likely originate from a different vulnerability than the last one, you have to understand the political cycle that created the conditions for that outcome.

The clearest evidence for this argument sits in plain view. We can trace a direct line from a political decision made in 2018 to a financial crisis in 2023. And that line passes directly through the Federal Reserve, through regulatory exemptions, and through the balance sheets of mid-sized banks. This was not mere coincidence; it was a meaningful contributing causal factor layered on top of other failures.

The Political Decision That Created the 2023 Banking Crisis

In 2018, Congress passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. The legislation had bipartisan support. It had a legitimate policy rationale. It was also, looking backward from 2023, a consequential decision that helped create the conditions for the banking stress that emerged five years later.

The bill’s central feature was raising the threshold for enhanced regulatory supervision from $50 billion in assets to $250 billion. This sounds like a technical matter, the sort of thing that would generate debate among bank regulators and elicit a collective shrug from everyone else. In fact, it was a political choice about which financial institutions would be protected by intensive Fed oversight and which would not.

I have used Silicon Valley Bank twice already in this series, first as a grey swan that the market chose to ignore, then as a case study in how fast credit plumbing can break. I am returning to it a third time because SVB also illustrates something different: how a political decision made five years earlier created the conditions for failure. SVB had assets of approximately $209 billion when the banking crisis erupted in March 2023. Under the 2018 regulatory threshold, SVB would have been exempt from the enhanced prudential standards that larger banks face. SVB would not have been subject to the same stress-testing requirements. SVB would not have been required to maintain the capital buffers and liquidity coverage ratios that the Fed imposes on systemically important institutions. SVB’s interest rate risk, which eventually totaled roughly $15 billion in unrealized losses on its held-to-maturity portfolio, with an additional $2.5 billion in available-for-sale losses, would not have triggered the kind of intensive scrutiny that larger banks face.

The question is not whether SVB’s failure was the Fed’s fault, or the banks’ fault, or the fault of tech venture capitalists who concentrated deposits. The answer is that it was all of these things, layered on top of one another. The question is whether a different regulatory threshold would have changed the trajectory. Enhanced supervision would not have prevented every bank failure in 2023, but it could plausibly have prevented this failure, or at minimum would have likely reduced its probability or severity.

This is what I mean by political decisions actively shaping the risk landscape. A vote in 2018, justified on grounds of reducing regulatory burden and promoting bank competition, directly reduced the probability of detecting the risk accumulation that would eventually threaten financial stability. The political calculation was that the costs of tighter regulation outweighed the benefits. The market consequences of that calculation arrived five years later.

The Four-Year Political Rhythm and Economic Policy

Understanding when political decisions are made requires understanding the rhythm of the political cycle. Elections in the United States happen every four years. That rhythm creates a predictable pattern in how policy gets designed and implemented.

In Year 1, a new administration typically pursues an aggressive policy agenda. The political capital is fresh. The party has momentum. The time horizon to the next election is distant enough that controversial or unpopular policies can be absorbed by economic growth or shifting circumstances before the next campaign begins. This is the window for transformative policy.

In Year 2, the focus shifts to implementation. The policies announced in Year 1 begin to move through the legislative and regulatory process. The economic consequences of those policies begin to emerge. Congress faces midterm elections. The administration begins to recalibrate messaging and priorities based on early outcomes.

In Year 3, positioning for re-election accelerates. The administration wants to be able to point to accomplishments and positive economic conditions heading into the final campaign year. There is pressure to emphasize benefits and downplay costs. Policy initiatives that require time to pay off have likely already been announced. New initiatives that might generate negative consequences are less attractive.

In Year 4, electoral calculus dominates the policy conversation. The administration is in campaign mode. Congress faces general elections. The incentive is to emphasize continuity, take credit for positive developments, and manage any negative developments that threaten the political narrative.

As of this writing, we are in Year 2 of the current administration. The aggressive policy moves of Year 1, on trade, energy, and regulatory posture, are now moving through the system. Midterm elections are seven months away. If the pattern holds, the policy conversation is about to shift from implementation to positioning. That transition matters for risk, because Year 2 is where the consequences of Year 1 decisions begin to surface in earnings, in credit conditions, and in market pricing.

This rhythm is not deterministic. External shocks, wars, pandemics, and market crashes create their own logic that cuts across the political calendar. But in the absence of those shocks, policy generally follows this pattern. And crucially, the risks that emerge from policy decisions follow this pattern as well.

Fiscal Stimulus as Political Choice, Not Economic Necessity

The pandemic accelerated the political cycle and compressed the timeline, but it did not change the fundamental logic. The federal government chose to deploy approximately $5 trillion in fiscal stimulus across three major bills: the CARES Act ($2.2 trillion), the Consolidated Appropriations Act ($900 billion), and the American Rescue Plan ($1.9 trillion). These were political decisions, made by elected officials, debated in Congress, and shaped by the political environment of each moment.

Some of this stimulus was necessary. The CARES Act in particular was a reasonable response to an unprecedented disruption. But the full magnitude was not economically determined. Other countries faced similar disruptions and deployed smaller packages. The size of the American response reflected political choices about the role of government, the desired speed of recovery, and the acceptable inflation risks.

The consequence was a V-shaped recovery that was faster and more aggressive than most forecasts predicted. The unemployment rate fell from 14.7 percent in April 2020 back to pre-pandemic levels by early 2022. Economic growth rebounded sharply. Corporate profits surged. Asset prices rose across most categories. From a purely economic perspective, the recovery looked successful.

But the stimulus also created the conditions for the inflation that would dominate 2022 and 2023. There is significant debate among economists about how much of the inflation was due to excessive fiscal stimulus versus supply chain disruptions, energy price shocks, or accommodative monetary policy. That debate will not be resolved here. The relevant point is that the size of the fiscal stimulus was a political choice. And that political choice had economic consequences that policy makers would subsequently have to address.

The Federal Reserve and the Cost of Credibility

The Federal Reserve’s response to post-pandemic inflation illustrates how political pressure shapes monetary policy decisions in ways that ultimately affect financial stability. Throughout 2021 and much of 2022, inflation accelerated beyond the Fed’s target while the Fed maintained a historically accommodative policy stance. This was unusual and eventually controversial. The Fed faced significant criticism for responding too slowly to the inflation problem, for holding rates at zero while price growth accelerated, and for not raising rates more aggressively earlier.

The criticism mattered. Central bank credibility is essential for price stability. If the public believes that the Fed will tolerate high inflation rather than take difficult steps to reduce it, then inflation expectations become unanchored. That unanchoring makes inflation harder to control. It requires more severe rate hikes and a longer period of tight policy to bring inflation back down. The Fed wanted to avoid that outcome. It wanted to signal that it was serious about fighting inflation while minimizing the economic damage required to achieve that goal.

In practice, this meant that the Fed’s rate hiking cycle, once it began in March 2022, was the fastest rate-hiking cycle in more than 40 years. The Fed raised rates 525 basis points in roughly 16 months. The speed was justified on economic grounds, but it was also a response to political pressure. The Fed was attempting to restore credibility that had been damaged by the perception that it had moved too slowly in 2021.

The consequences were immediate. The campaign triggered the fastest repricing of long-duration assets in decades. Bonds and stocks fell simultaneously. It exposed the interest rate risk that many financial institutions had accumulated during the period of near-zero rates. Banks that had funded long-term assets with short-term deposits suddenly faced negative net interest margins. The banking sector entered a fragile condition where a seemingly minor shock could trigger sudden deposit flight and cascading failures.

This does not mean the Fed should have continued to accommodate inflation. That would have been worse. It means that political decisions upstream created the inflation problem, political pressure downstream compressed the Fed’s response window, and financial institutions caught in the middle experienced rapid repricing that they had not prepared for.

Energy Policy and the Regulatory Pendulum

Another clear example of how political decisions reshape the risk landscape can be seen in energy policy over the past five years. The administration that took office in January 2021 moved quickly to signal a shift toward climate-focused energy policy. Executive orders suspended new oil and gas lease sales on federal lands. Regulations were tightened on emissions from power plants. The Inflation Reduction Act directed hundreds of billions of dollars toward renewable energy and electric vehicle adoption. The narrative was clear: the United States was moving toward a decarbonized energy future.

This created a distinct policy regime. Investors made capital allocation decisions on that basis. Energy companies restructured their capital expenditure plans. Renewable energy became a favored sector for institutional capital. The regulatory environment was perceived as moving in a consistent direction.

In January 2025, a new administration took office with a sharply different energy policy perspective. Executive orders reversed the suspension on federal oil and gas leases. The language around environmental regulations shifted from acceleration to rollback. The Inflation Reduction Act has not been repealed, and major tax credits remain on the books, but implementation has shifted sharply. Multiple clean-energy grants and loan guarantees have been paused, rescoped, or cancelled, while regulatory emphasis has moved toward fossil fuel and nuclear projects.

This is a dramatic policy shift. It creates uncertainty about the trajectory of energy policy going forward. It creates winners and losers among energy companies and renewable energy investors. It raises questions about the durability of capital investments made under the previous regime. An investor who deployed capital to renewable energy projects in 2023 and 2024 on the assumption of continued climate-focused policy now faces a materially different regulatory environment.

This is not a criticism of either policy direction. Reasonable people disagree about the appropriate role of government in energy markets. The point is that the political cycle creates a pendulum effect where policy swings sharply between regimes depending on which party controls the executive branch. This pendulum has real consequences for capital allocation, for the durability of business models, and for the risk calculations of investors and lenders.

Trade Policy and the Current Risk Landscape

As of April 2026, the political cycle’s effects on risk are particularly visible in trade policy. The current administration has positioned tariffs as a central economic policy tool. Negotiations over trade terms with various countries dominate headlines. The threat of tariff escalation is material to capital allocation decisions. Companies are assessing the risk that their input costs will increase, their supply chains will be disrupted, or their export markets will face retaliatory tariffs.

Tariff policy is inherently political. Economists across the political spectrum are skeptical of protectionist tariffs on efficiency grounds. But tariffs are popular in certain constituencies and geographies. Tariffs are a form of industrial policy that governments can implement without Congressional approval if they invoke emergency or national security authorities. The political logic of tariffs is straightforward: they are visible to constituents, they can be framed as protecting American workers and businesses, and they create concentrated benefits for protected industries even if they create diffuse costs across the broader economy. Tariff policy is inherently uncertain and will shift with ongoing negotiations and political pressure, but the mechanism is consistent: political decisions compress time horizons and force rapid repricing in credit and equity markets.

From a risk perspective, trade policy uncertainty creates two distinct problems. First, it creates optionality uncertainty. Companies are uncertain about what tariff regime they should prepare for. Should they invest in production facilities in the United States to avoid tariff exposure on imports? Should they move supply chains to tariff-exempt countries? Should they accept tariff costs as a business expense? This uncertainty raises required returns and suppresses capital investment. Second, tariff escalation creates an asymmetric risk scenario where downside shocks to earnings are possible if trade disputes escalate faster than company managements expect.

As of April 2026, the tariff regime is markedly more aggressive than in late 2025, with reciprocal baseline tariffs, expanded Section 232 coverage, and targeted sector measures. This reflects political decisions about the desired role of trade policy in economic strategy. For many companies, tariffs are no longer a background assumption; they are now a central input into capital allocation and supply-chain design.

The Geopolitical Dimension

Political cycles operate not only domestically but also in the international arena. The current geopolitical environment illustrates how political decisions in different countries can create correlated risks across global markets. The escalation of conflict between Israel and Iran reflects political choices by both governments about acceptable military risk. The implications for oil markets, for insurance costs, for shipping in the Persian Gulf, and for the global risk premium are material.

These are not economic phenomena that emerge from market fundamentals alone. They are political outcomes shaped by leadership decisions, by the domestic political pressures that leaders face, and by the interaction between political cycles in different countries. An investor trying to forecast oil prices or shipping costs cannot ignore the political variable. The political decision to escalate or de-escalate conflict is a primary driver of those outcomes.

The Analytical Imperative

Look at the evidence. The 2018 regulatory threshold change helped create the conditions for SVB’s failure. The magnitude of pandemic fiscal stimulus was politically determined, not economically necessary. The speed of Fed rate hikes was accelerated by political pressure about credibility. Energy policy has swung sharply based on which party controls the executive branch. Trade policy is now a central driver of capital allocation and supply-chain design. Geopolitical risk reflects political decisions about acceptable military risk.

This is not a partisan argument. Both major political parties have made consequential decisions that shaped risk landscapes. The point is that risk management frameworks treating these decisions as exogenous are missing the primary mechanism through which policy shapes outcomes. The political variable operates on a four-year rhythm. Understanding that rhythm is essential to anticipating when and how new risks will emerge.

In the next post, I am going to put the credit cycle, the political cycle, and the investment cycle on the same timeline and show you what happens when all three move together. Come back next week to understand why we are in the middle of the sixth. The pattern has repeated five times since 1971. We are in the middle of the sixth.

The question is not whether politics shapes markets. The question is what you are going to do about it. Reach me at tamika@tamikatyson.com to discuss how the current political cycle is reshaping your specific risk landscape.

Sources

Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155): Congress.gov, Public Law 115-174, signed May 24, 2018.

SVB asset size ($209 billion) and unrealized losses (~$15 billion HTM + $2.5 billion AFS): Federal Reserve, “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank,” April 2023.

Enhanced prudential standards threshold change ($50B to $250B): Board of Governors of the Federal Reserve System, “Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements,” October 2019.

CARES Act ($2.2 trillion, March 2020): U.S. Department of the Treasury; Congressional Research Service, “CARES Act Overview,” 2020.

Consolidated Appropriations Act ($900 billion, December 2020): Congressional Research Service, “COVID-19 Relief Assistance to Individuals, Families, and Businesses,” 2021.

American Rescue Plan ($1.9 trillion, March 2021): U.S. Government Accountability Office, “American Rescue Plan Act: Status of Programs, Obligations, and Expenditures,” 2022.

Total pandemic fiscal stimulus (~$5 trillion): U.S. Government Accountability Office, “COVID-19: Significant Improvements Are Needed for Overseeing Relief Funds and Leading Pandemic Response,” January 2022.

Unemployment rate (14.7% April 2020, recovery timeline): U.S. Bureau of Labor Statistics, Current Employment Statistics, 2020-2022.

Federal Reserve rate hiking cycle (525 basis points in ~16 months, beginning March 2022): Board of Governors of the Federal Reserve System, Federal Funds Rate historical data.

SVB failure and deposit flight ($42 billion in one day, March 2023): Federal Reserve, “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank,” April 2023; FDIC, “Recent Bank Failures and the Federal Regulatory Response,” March 2023.

Inflation Reduction Act (climate and energy provisions): Congress.gov, Public Law 117-169, signed August 16, 2022.

IRA funding freeze and implementation status: Executive Order on federal funding pause; H.R. 191, 119th Congress (repeal bill introduced 2025); BlueGreen Alliance, “An Update on Inflation Reduction Act Programs: What Survived?” August 2025.