Analysis: What Was Steve Mnuchin Thinking? Three Possibilities

Imagine having a runny nose, itchy eyes, congestion, and a sore throat, and your doctor telling you that you shouldn’t worry about cancer—she consulted her colleagues and they’re certain it is not cancer, and if it were, they could fight it.

This is roughly what happened on Sunday evening, when Treasury Secretary Steven Mnuchin put out a press release on calls he held with executives from the country’s largest banks. Mnuchin’s statement assured the public that they had not been having liquidity problems or “clearance or margin” issues—the sorts of things you would worry about if the country were on the brink of a financial crisis.

The markets have been suffering from something like a nasty cold of late, with a major correction in stock prices due to rising interest rates, trade tensions, the government shutdown, and slowing global growth. But the surprise holiday readout, which came with a heads-up that Mnuchin would be holding a call with some of the country’s top financial regulators as well, unnerved and puzzled investors, bank executives, politicians, and economists. What was the Treasury secretary thinking? Who thought we were tipping into a financial panic? None of the possible explanations are very reassuring, though it seems that Mnuchin was trying to be.

Option one: 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).

Option two: 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.”

Option three: 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.