The entire financial system that everyone, including all businesses, depends on sits on the need for trust. And in a couple eof tweets, the Treasury Department and Treasury Secretary Steven Mnuchin may have shaken that trust loose.
Today I convened individual calls with the CEOs of the nation's six largest banks. See attached statement. pic.twitter.com/YzuSamMyeT-- Steven Mnuchin (@stevenmnuchin1) December 23, 2018
The Treasury Department said that Mnuchin held a series of calls with CEOs of major banks: Bank of America, Citi, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo.
The CEOs confirmed that they have ample liquidity available for lending to consumer, business markets, and all other market operations. He also confirmed that they have not experienced any clearance or margin issues and that the markets continue to function properly.
Equity markets have been rocky for various reasons, including tariff wars, general uncertainty, and the Fed increasing interest rates. No markets rise forever and we've seen a long run. A recent survey of global CEOs showed that chief financial officers overwhelmingly expect a recession by 2020 and many think 2019 will be the year.
In turbulent times, there are tremendous reasons for businesses to be wary and for governments to be concerned about basic banking issues like liquidity. Without enough money available, institutions can't lend money and an economy can grind to a halt.
But aside from public inquiries like bank stress tests mandated by law, deep inquiries happen out of public views. No one wants to start a panic, undermine public confidence, and potentially start runs on banks, with people looking in total to take out more money than the banks actually have. (The lending business depends on institutions leveraging deposits, which means lending out many times more than they have on hand.)
Mnuchin's move might have made sense if there were public concerns about bank stability. Bank stocks have been taking a hit with market oscillations. When people worry about the economy, they expect that banks may suffer. When things slow, fewer people and companies take out the loans that are the source of institutional income.
But there hasn't been a lot of concern about underlying bank stability. At least, there wasn't until Sunday evening when the tweets hit the fan. Particularly as Mnuchin was reportedly on vacation in Mexico.
Here's what MarketWatch had to say:
While apparently intended to as a pre-emptive reassurance to investors, the tweet may have done just the opposite, stoking fears that the government is bracing for the worst.
MarketWatch then copied a number of investor tweets. Here's one.
This is amazing. It's as if Mnuchin was trying to create a panic over something nobody was worried about until this release 1/ https://t.co/YJsGnEyOQD-- Paul Krugman (@paulkrugman) December 23, 2018
The substance was much of what I heard in my circle of financial people and business and economics reporters. One could only manage "WTF?"
It may be that all is well. But markets react to expectation and emotion and things have been shaken already. You now much reexamine your strategy in the wake of decreasing confidence in the economy and keep a close eye on new statements that could further shake things up.