Monday saw fresh anxiety on Wall Street after Treasury Secretary Steven Mnuchin released an unusual statement on Sunday regarding the health of America’s financial system — an attempt seemingly meant to calm fears that produced the opposite effect.
Mr. Mnuchin said on Sunday that he had contacted the chief executives of six major banks to ensure that their operations were running smoothly, and that they had “ample liquidity available for lending.”
Mr. Mnuchin’s statement came amid a rough month for stocks in the United States, although analysts and economists have not cited a lack of cash for lending as a significant reason for the downturn.
Raising the specter of a liquidity crisis — even if in the service of reassuring there isn’t one — struck many economists and financial experts as odd, particularly as the economy overall appears to be humming along with no major difficulties.
The meltdown in the markets could hurt the broader economy if it begins to limit spending by companies and consumers or lending by banks. Borrowing in the corporate bond markets has already slowed as nervous investors demand higher interest rates on risky debt. The plunge in stocks could discourage investments, acquisitions or other types of corporate spending by executives unwilling to gamble on uncertainty.
But the United States economy remains healthy, and there has been no evidence so far that the financial system is not functioning properly.
What might have led Mnuchin to make such a move?
The Atlantic’s Annie Lowrey laid out three possibilities, none of which are comforting.
1) Mnuchin was speaking directly to the president:
The Treasury secretary was speaking to an audience of one. Mnuchin is under enormous pressure from President Donald Trump, who is upset about the market sell-off and mad at the current Federal Reserve chairman, Jay Powell. The press release was perhaps an attempt to show Trump that Mnuchin was doing something, anything, to talk the markets back into stability.
It makes some kind of squint-and-see-it sense. Mnuchin used Twitter earlier in the weekend to reassure the markets that Trump was not going to fire Powell, who has continued to tap up interest rates as the economy continues to grow at a decent pace. Mnuchin wrote that Trump told him he “totally” disagrees with Fed policy, calling it “an absolute terrible thing to do at this time.” But he said that Trump had informed him, “I never suggested firing Chairman Jay Powell, nor do I believe I have the right to do so.” The readout might be a further effort to keep Trump calm by showing him that everything is fine and his Treasury is taking action.
The problem with this explanation is that it means Mnuchin risked roiling financial markets to placate his boss (which of course would only further anger his boss).
2) Mnuchin is trying to quiet fears that a market correction could become a crisis:
The Treasury secretary believes that the market correction is due in part to animal spirits—animal spirits he could quiet by reminding everyone that the financial system is in fine shape. Perhaps he anticipated further declines in stock prices due to the government shutdown, and wanted to calm the markets.
And it is true that the sell-off remains nothing more than a sell-off, at least in most economists’ and corporate executives’ eyes—a correction, not a crisis; a cold, not a cancer. Even if the bear market were a precursor to an economy-wide slowdown, that would not necessarily result in bank runs and liquidity panics and cratering financial firms.
But, again, nobody was worried about a banking panic before Mnuchin brought it up. “Can someone who understands markets please explain what Secretary Mnuchin did and why?” Brian Schatz, a Hawaii senator who sits on the banking committee, wrote on Twitter. “Because it seems like a bad look at minimum, and maybe more concerning than that but I honestly don’t know.”
3) Mnuchin has information that has not yet become public:
Mnuchin has some troubling insider knowledge, and he wanted to broadcast to the markets that he is aware and in charge. Maybe some financial firms are teetering? Maybe rising interest rates and falling asset prices are straining some important market participants, and it just has not yet become evident in public reports?
Whatever Mnuchin was trying to do, he did not succeed in it, instead stoking market fears and sowing confusion. Perhaps the clearest takeaway is that Mnuchin and Trump’s Treasury lacks the expertise to communicate clearly and forcefully with the markets—no surprise, given how few experienced financial operatives Trump has hired and how many experienced non-political civil servants have fled Treasury during this administration.
If they’re communicating this poorly in the absence of a crisis, just imagine how disastrously they might perform in the presence of one.