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The nation’s top two economic policy leaders offered contrasting visions about the economic outlook, with Treasury Secretary Steven Mnuchin favoring a wait-and-see approach to more federal aid and Federal Reserve Chairman Jerome Powell suggesting more would be needed.
Their positions expressed Tuesday reflected differing views on the prospects for a swift economic rebound from the coronavirus pandemic.
Mr. Mnuchin, appearing alongside Mr. Powell at an online congressional hearing, reflected the Trump administration’s belief that the biggest danger to the economy is waiting too long to restart activity after two months in which millions of Americans have sheltered in their homes to slow the spread of infections.
“There is the risk of permanent damage” to keeping commercial activity closed down too long, Mr. Mnuchin told the Senate Banking Committee.
Mr. Mnuchin echoed comments by President Trump and other administration officials who are predicting a V-shaped recovery—a sharp downturn followed by a strong bounceback.
“We’re going to have a really good third quarter. It’s already happening,” Mr. Trump told reporters at the Capitol later Tuesday after meeting with Senate Republicans. “You see what’s going on. We’re opening up.”
Mr. Powell, meanwhile, challenged the premise that there is a trade-off between economic growth and protecting the public’s health. Fear of coronavirus infection is the economy’s biggest hurdle, he said, and the recovery will be held back until Americans believe it’s safe to resume commercial activities involving person-to-person contact.
“The No. 1 thing, of course, is people believing that it’s safe to go back to work so they can go out,” said Mr. Powell. “That’s what it will take for people to regain confidence.”
For the third time in a week, Mr. Powell suggested additional spending by Washington could be needed to prevent long-term damage from high unemployment and waves of bankruptcies. “The scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II,” he said.
The Fed and the Trump administration were frequently at odds last year over interest rate policy, with the president faulting Mr. Powell for not providing more stimulus during a period of steady economic growth.
Now, the tables are turning, with the Fed now calling for more stimulus and the administration more hesitant.
Mr. Powell and other senior central bank officials have indicated they don’t think a V-shaped recovery is likely. This has fueled their concern that the government’s initial relief measures may prove insufficient to nurse the economy through a shock with no modern parallel and with interest rates already near zero.
In a speech Tuesday, Boston Fed President Eric Rosengren said he expected the unemployment rate to peak near 20% this year and to stay above 10% through the end of the year. “This outlook is both sobering and a call to action,” he said. “Now is the time for both monetary and fiscal policy to act boldly to minimize the economic pain from the pandemic.”
Mr. Rosengren warned that simply allowing businesses to reopen without slowing the spread of the virus risked making the economy worse.
“If consumers are afraid to eat out, shop or travel, a relaxation in laws requiring business closures may do little to bring back customers and thus jobs,” said Mr. Rosengren. “It is vital that the design and timing of reductions in business restrictions not result in worse outcomes and higher unemployment over a longer period of time.”
The nonpartisan Congressional Budget Office, which released its updated economic forecast Tuesday, said it anticipates a “gradual and incomplete pattern of recovery” over the next year and a half. CBO expects the economy will grow faster in 2021 than it projected last month, but will still be 1.6% smaller than it was at the end of 2019, while the jobless rate remains above 9% through the end of next year.
“Despite the initial rebound in employment, health risks are expected to linger and some degree of social distancing is projected to remain in place into next year,” CBO said.
The Fed has slashed rates to near zero and bought more than $2 trillion in Treasury and mortgage securities to stabilize financial markets. It has promised to lend trillions of dollars more, backed by more than $200 billion in funds from the Treasury. Congress has appropriated nearly $2.9 trillion so far to support households, businesses, health-care providers and state and local governments, or around 14% of national economic output.
“I do think we need to take a step back and ask over time is it enough, and we need to be prepared to act further,” Mr. Powell said Tuesday.
Mr. Trump’s top advisers have laid out a more optimistic scenario they say justifies waiting to see how the economy fares before providing more aid to businesses, households and state and local governments. President Trump has said he wants to suspend the payroll tax and eliminate capital-gains taxes to spur more hiring and investment.
House Democrats narrowly approved a $3 trillion relief package last week with only one Republican voting in favor. The bill is unlikely to become law on its own, but individual pieces of it may survive. The measure included $1 trillion in funding for state and local governments and a second, larger round of payments from the IRS to households.
“We are not going to spend our way out of this,” White House economic adviser Lawrence Kudlow said in an interview last week. Animating the administration’s approach is the expectation of a V-shaped recovery, he indicated. “We believe it’s the best bet,” Mr. Kudlow said.
Another White House economic adviser, Kevin Hassett, told reporters Monday a fourth round of economic stimulus might be unnecessary. “I think it’s possible that we’ll see a strong enough economy that we don’t need a Phase Four,” he said.
Analysts say the approach carries risks. “They’re all assuming after Labor Day everything is fine. Hope is not a strategy,” said Stephen Myrow, a former Treasury official in the George W. Bush administration who is now managing partner of research firm Beacon Policy Advisers LLC.
Mr. Mnuchin signaled a shift Tuesday toward taking on more risk in federal lending programs designed to help businesses and governments bridge a loss in revenues. At issue is how the Treasury Department plans to invest $454 billion Congress provided in March to cover losses on emergency loan programs created by the Fed.
“Our intention is that we expect to take some losses on these facilities,” he said. “That is our base case scenario.”
This marked a shift from last month, when he told reporters the Treasury was looking at “a base case scenario that we recover our money.”
Some lawmakers and economists worried his comments last month reflected a too-timid approach. The Treasury’s appetite for taking on risk in Fed lending programs could shape how many businesses qualify for loans.
The issue has taken on urgency because of uncertainty over how long consumers will shun commercial activities that require human contact and because of partisan differences that could hold up further federal spending.
“Very few of us expect the Treasury not to have to take losses,” Sen. Jerry Moran (R., Kan.) said at the hearing Tuesday. “There needs to be some risk-taking here.”
Mr. Powell said he expected all the Fed’s nine lending programs would be running by early June. The Treasury has committed $195 billion out of the $454 billion so far, and Mr. Mnuchin pledged Tuesday to allocate the rest of that money.
Treasury Secretary Steven Mnuchin said Friday he expects the economy to rebound strongly after widespread shutdowns to contain the novel coronavirus are lifted, adding that the government is working at “lightning speed” to provide support.
Asked if he agreed with some investors’ view that U.S. economic output could expand by 5% in the fourth quarter, Mr. Mnuchin said, “Absolutely.” Federal Reserve Chairman Jerome Powell said this week that the economy may already be in a recession.
The House of Representatives was rushing Friday to form a quorum to pass the $2 trillion economic rescue package, which includes conditional grants for small businesses and aid to heavily affected industries such as airlines.
“The sooner we can execute on this package and the sooner we can win this war against the virus, the economy will bounce back very quickly,” Mr. Mnuchin said in an interview on Fox Business.
If all goes well, Mr. Mnuchin said, businesses by next Friday will be able to access loans designed to cover payroll and overhead for eight weeks. As long as they retain their employees, the firms won’t have to repay the money.
“People will go into banks next Friday and be able to get loans,” Mr. Mnuchin said. “It’s going to be a very simple process where any FDIC-insured institution can underwrite the loan, approve it immediately as a government-guaranteed loan and get money to that small business.”
The Treasury secretary reaffirmed the government’s commitment to rolling out more aid to the U.S. economy if necessary.
“This is a war,” Mr. Mnuchin said. “We’re going to spend what it takes to protect the American people.”
Real Vision CEO, Raoul Pal, examines via Skype the recent turmoil with an international cadre of outspoken experts: monetary economist George Selgin, George Goncalves of The Bond Strategist, Scott Skyrm, executive vice president at Curvature Securities, and Dr. Z. Barton Wang of Barton Research. Join Raoul on this voyage of discovery as he discusses repo and more with some of the sharpest minds in finance. Filmed on January 31, 2020, in Grand Cayman.
< 8 min: I tend to agree with the Fed that the current repo operation is not QE, but that having a standing repo facility handles high demand (like at the end of the month)
There are multiple factors that combine to increase liquidity demand.
12 min: The balance sheet is never going to go down.
13:30 min: The Fed and Treasury don’t appear to be talking. One theory is that Mnuchin is trying to force the Fed’s hand
17:26 If we have a recession, we will see genuine QE that no one can deny.
I worry that they will resort to QE even if there isn’t a recession.
- corridor vs floor system
~19:30 There is a lot of leverage that keeps asset prices high and liquidity is necessary to support this.
I’ll all for the Fed providing liquidity, but there should be a penalty rate
20:10: I agree that QE will happen and it will arrive quickly.
The next QE will be done in such a technical way as to “bore” the public.
33 min: The Equity Markets believe they are doing a version of QE.
(QE) is like a calibration thing.
They are going to have to steepen the curve.
44 min: Most of the Hedge Funds that want cash want it first thing in the morning, but other players come in later (New York time)
48 min: Is excess leverage behind this?
55:50: So what you’re saying is that they can’t run such a large deficit. In a recession they could run a larger deficit.
1hr 01 min: To me, it smacks of leverage (from hedge funds)
1 hr 04 min: Why is the (Fed) balance sheet affecting equities?
According to Basel 3, Banks need assets at the Fed to participate in Repo market
- A lot of banks weren’t able to participate in the repo market,
- This affected the hedge fund’s ability to use leverage from borrowed repo money
- The repo market is the liquidity factor for leverage
- Higher repo interests spikes (2% -> 10%) caused the hedge funds to liquidate their positions
- The equity rallies are a direct consequence of the Fed Repo Liquidity
- Hedge funds are using the liquidity
The Fed is now going to be permanently involved. They messed up and now are going to oversupply, which they don’t view as a big problem.
1 hr 10 min: Treasury Securary Mnuch announced ..
They have tons of ammo to dump money into the economy right before the election.
Bond yields are collapsing.
If the US Dollar Collapses, European and Japanese will not be able to play in Equities so much and Equities could fall.
- Euro Dollar funding depends on Basel 3 regulations
1 hr 14 min: A steeper yield curve helps foreign buyers of Treasuries
- This means that they will likely have to cut rates (given corona virus and deficits)
- They will probably be forced to cut rates soon.
Bonds give better signals about the economic cycle than Stocks.
1 hr 18 min: It all depends on Treasuries (for equity) they have so much cash they can flood the market with $40 billion any time they want. Their action is the biggest contributor to volatility.
Is Mnuchin essentially using this as an economic weapon in his ability to micromanage the economy? (before the election)
I don’t know but he has a lot of ammo. It looks suspicious. We should ask him in his press conferences.
If he decides he wants to put money in his checking, there’s nothing the Fed can do about it without blowing up the markets.
This is unprecedented except during the financial crisis.
Treasure has become the marginal provider of liquidly and that who we should watch.
The Treasury General Account is the “nuclear weapon”.
There is a potential dollar collapse in the future. Markets can’t get enough dollars.