‘Setting Biden Up For Disaster’: Steve Mnuchin Faces Allegations Of Sabotage

Steve Mnuchin came under what it’s fair to describe as intense scrutiny on Friday, after essentially demanding the Fed return funding that supports emergency facilities which have played a key role in stabilizing markets since the onset of the pandemic.

Mnuchin does have a plausible excuse. Credit spreads, for example, have compressed mightily thanks to the Fed’s backstop for the US corporate bond market. Indeed, corporate borrowers have tapped the primary market in record amounts over the course of the year, and inflows into investment grade and high yield credit funds reflect investor confidence in the Fed’s guarantee.

The letter to Powell cited numerous examples of the benign conditions engendered by the Fed’s facilities. “Today, bond issuance volumes equal or exceed pre-COVID levels, and spreads have fallen 80-95% of the way back to their pre-crisis values in all major sectors of the financial markets,” Mnuchin wrote.

The problem is that with the facilities still in place, it’s difficult to determine whether Mnuchin’s letter is an exercise in question-begging. If it is, the next issue that needs to be addressed is the Fed’s addiction liability.

If, for example, what you see in the visual above is attributable to the mere promise of the Fed’s backstop (remember, the Fed hasn’t actually “spent” all that much), one wonders what might happen in the event the US economy heads for a double-dip recession, prompting spreads to balloon wider and capital markets to become more prohibitive to corporate borrowers.

Seen in that light, Mnuchin’s letter is a bit self-referential. To be fair, if Mnuchin is engaged in a bit of circular reasoning (i.e., “These facilities have restored market functioning, so now let’s end them because markets are functioning”), then we need to be concerned, because markets need to be able to function without training wheels at some point.

But that point isn’t now. Because the US looks to be headed back into crisis. And that’s what had critics incredulous on Friday.

With lockdowns proliferating across the country, economists (including some at the Fed) are starting to assess the possibility that the economy could experience another downturn. I doubt anyone needs a refresher, but US COVID-19 hospitalizations hit record highs for nine consecutive days this month.

I won’t mince words. Some worry Mnuchin is deliberately setting the stage for the economy and markets to swoon just as Joe Biden takes office.

Carl Weinberg, chief economist at High Frequency Economics, told CNBC on Friday that he struggled to find an “economic rationale” for Mnuchin’s decision.

“I don’t think there is a good economic or public health or social reason to explain why they want to cut these programs at this particular time, so it has kind of got to be politics, doesn’t it?”, Weinberg wondered.

(Yes, it does.)

The US Chamber of Commerce isn’t amused. “A surprise termination of the Fed’s emergency liquidity programs, including the Main Street Lending Program, prematurely and unnecessarily ties the hands of the incoming administration, and closes the door on important liquidity options for businesses at a time when they need them most,” Chief Policy Officer Neil Bradley chided.

“For about three weeks in January, the markets will be operating without the backstop they’ve had since the spring,” JPMorgan’s Michael Feroli remarked.

Chicago Fed boss Charles Evans called the decision lamentable. “I think our 13(3) facilities have been very helpful. They perform a backstop role for when markets find themselves in a more challenged situation,” he said. “I think that backstop role might be important for quite some time, so it’s disappointing.”

“One of the great fears when the scope of the pandemic became apparent was that it would metastasize into a financial crisis too – and in fact it started to, with 2008-type surges in spreads,” Paul Krugman remarked. “Fed intervention, and even more important, the promise of more intervention if needed, calmed the markets,” he added, before musing that “it makes no sense to yank away the financial safety net, unless you’re trying to set up the next president for disaster.”

Mnuchin swears that isn’t the case. “This was a very simple thing. We’re following the intent of Congress,” he insisted Friday, while chatting with Jim Cramer who, I’d be remiss not to note, spent part of Thursday tweeting about the possibility that Trump might not leave office.

“This is not a political issue,” Mnuchin added. “This is very simple.”

(One of those two statements is true.)


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19 thoughts on “‘Setting Biden Up For Disaster’: Steve Mnuchin Faces Allegations Of Sabotage

  1. Aside from the two or three national security related cabinet positions, I’d put Treasury at the top of the list for needing a smooth transition from one administration to the next.

    Of course, we’re dealing with arsonists now and had to expect they’d get around to tearing down the market edifice. If I had to guess, I’d say every one gets their Santa Claus rally, then tax loss selling and rebalancing as usual, then watch out in January.

    Mnuchin did us all a “favor” by being so public about the administration’s intent; we were just telegraphed that equities are in play for a January burn down.

  2. It looks possible to have another covid shutdown (probably with protests and holiday visitation anyway?) combined with no stimulus and a government shutdown? That goes along with scorched earth. Then if Trump is still in charge of the republican party will we not get anything done for 4 more years despite covid? Hopefully the virus doesn’t mutate.

  3. H, I admire your ability to day after day talk about the underlying craziness of US politics and governance in a calm rational way. I can only read a little of the daily ranting of most news sources before my head is ready to explode. Your commentary helps me keep my sanity and is invaluable for managing my investments. Many thanks to you and also to your readers who generally post thoughtful intelligent comments.

  4. clearly this is a political calculation – i would bet emanating out of the white house. We have 61 more days of this nonsense- hopefully only 61 days….

  5. I fear this will go on beyond the 61 days…assuming the Biden Administration becomes a reality it must not sweep this lawlessness and hostility to humankind under the carpet. Trump and others in positions of responsibility must be held accountable for the death and suffering they are causing, the sooner the better.

    1. They should, but who is going to hold them responsible? Voters? The Senate?

      The people who care enough to see justice served are in the minority with this view.

      1. YEP!

        And the issue is it then emboldens the next batch of Rs politicians to go even further…

        IMHO, while an understable decision by Obama, not indicting GWB, Cheney and co over the Iraq War was the clearest sign that Rs will never be held accountable – as long as their base, 40 to 45% of the public, supports them. And, since then, they’ve done nothing but upping the ante.

      2. ideally the voters, so sad that the thought of voters holding corrupt leaders accountable is a pipe dream away in our current world (democracy), of course with so much of the press co opted we can see why this is so … I remember Jesse Helms going after CBS in the 1970’s …

        (excellent comment thread, everyone)

    2. No worries! The prosecutors in the NYC area alone will bleed him dry via lawyer’s fees.
      The only scenario in which I love attorneys.

  6. When will the third of the country that accepts this behavior wake up?


    All this “stuff” is off the charts, dangerous, ridiculous, etc. This kind of “stuff” is not acceptable to true Americans.

    1. Yes, I have been wondering myself when people will wake up. This incident of risking a deflationary depression has finally drawn outrage.

      …imagine if we open limit down on Monday.

  7. First step in getting rid of the roadblock to stimulus… Mitch won’t cave until the wealthy are feeling the heat as well as the masses.

  8. I’ll admit I was not enamored with some of the Fed facilities when initially implemented, but they have indeed worked and have given us constantly numb credit markets. To end the facilities now is madness and makes zero economic sense, the drug is working but the patient is far from healthy, Mnuchin knows this, we are witnessing another Trump power play because he would hate nothing more than a rising market under president Biden.

    1. Totally.

      The Fed is the only instrument of power in this country that kept us from a deflationary siphon. Who cares that some of the funds were misallocated, or that some was not even allocated. We need to make absolutely certain that the Fed is there and ready should there be any whiff at all of a collapse. Sentiment cannot be allowed to turn. We’ve seen in March what happens when sentiment turns.

      We have to make sure we avoid a deflationary depression. Full stop.

  9. “Risking financial crash,” etc. Now having had a couple of hours to scan through different media sources and read the pundits. I’m surprised at all the pushback in the media about this. Haven’t seen anything like it. Of course, there are at least a pair in the Red Senate who fully support “risking a financial crash.”

    Finally, some outrage.

  10. Here’s a post made today to a friend’s FB page. The Russian trolls have done a masterful job.

    “You should know by now that you have been highly MANIPULATED & totally BRAINWASHED during the last 3 decades by your ULTRA LIBERAL leftist/globalist party which do NOT REPRESENT real ‘DEMOCRACY’ anymore, but “GLOBALISM & TOTALITARISM” with the NEW WORLD ORDER & its POISONOUS VACCINE ! I simply pity you… but you should learn the truth!”

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