The Only Clear Priority in Mnuchin’s Record is Wealth Maximization

January 25, 2017

Economist Douglass Cliggott says Trump's appointments from the financial service industry have not made clear what their priorities are on basic policy questions

Economist Douglass Cliggott says Trump's appointments from the financial service industry have not made clear what their priorities are on basic policy questions



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Story Transcript

SHARMINI PERIES: It’s The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

As senate hearings for Trumps cabinet picks continue, some have faced strong questioning over their ethics and financial disclosures. Trump’s pick for Secretary of the Treasury, Steve Mnuchin, faced particularly strong questioning when he said it was an oversight when he failed to report nearly $95 million in assets, held in an offshore account.

Also, he was questioned for his role in the aftermath of the 2008 financial crisis, when he was in charge of the mortgage bank, OneWest, which was responsible for evicting countless families from their homes.

Here is what Senator Ron Wyden had to say when he interrogated him.

RON WYDEN: In early 2009, Mr. Mnuchin led a group of investors that purchased a bank called IndieMac, and they renamed it OneWest. Colleagues, OneWest was truly unique. While Mr. Mnuchin was CEO, the bank proved it could put more vulnerable people on the street faster, than just about anybody else around.

SHARMINI PERIES: Trump’s treasury nominee, Mnuchin, defended his banking records and his actions while he was a part of OneWest as follows.

STEVE MNUCHIN: Since I was first nominated to serve as Treasury Secretary, I have been maligned as taking advantage of others’ hardship in order to earn a buck. Nothing could be further than the truth.

SHARMINI PERIES: Mnuchin, as you can see, responded vehemently by denying his portrayal, and saying that this bank actively sought to make sure families could refinance their mortgages and remain in their homes.

Well, joining us now to talk about the Treasury Secretary nominee Steven Mnuchin, is Douglas Cliggott. He is lecturer in economics at the University of Massachusetts in Amherst, and former Management Director and U.S. Equity Strategist at JPMorgan Chase. Thanks for joining us today, Douglas.

DOUGLAS CLIGGOTT: Thanks for having me, Sharmini.

SHARMINI PERIES: So Douglas, let’s begin by Mnuchin’s background and his qualifications. He would be the third Goldman Sachs alum to head up the Treasury Department, following Hank Paulson, who served us under Bush, Jr., and Robert Ruben, under Bill Clinton. Also, Mnuchin is the third Goldman Sachs appointee from Trump thus far, which also includes Steve Bannon, as White House Advisor, and Gary Cohn as Economic Advisor. What do you make of all of this?

DOUGLAS CLIGGOTT: Well, I think, Sharmini, it’s almost become a regular, expected course of events in the United States. Where we see the people with a lot of experience, a lot of management experience, even CEOs of large financial firms, moving into a senior role in the government. Very important government jobs, that have responsibilities for, in effect, not only coming up with ideas about what to do with our economy, but actually responsible for executing those ideas.

I think it’s important to understand that, while it’s very common in the United States that we have this so-called revolving door of financial services to government, and then oftentimes from government back to financial services, it’s uncommon many places in the world. And, in fact, it’s deemed inappropriate, because there are so many obvious potential, and actual, conflicts of interest.

And so, I think in this case, it’s sadly just more of the same. That we’re bringing in people that have achieved a lot in the financial service industry. Where really the goal is just to maximize wealth, and while they’re doing it, maximize their own wealth. It’s not clear at all, what their priorities will be, in terms of making economic policy for all American citizens.

SHARMINI PERIES: Right. Douglas, what do you make of Mnuchin’s… the fact that he did not declare this $95 million in real estate holdings, which some speculate is in an offshore account. Is this a norm, that he wouldn’t know that he had $95 million?

DOUGLAS CLIGGOTT: Well, my guess is he probably knew that he owned those assets, but what could very well have been the case is, whoever it was that was filling out the forms, I’d actually be surprised if Mr. Mnuchin was filling it out himself, that those assets would have been listed separately. I don’t know how well-known this is, but when a lot of so-called hedge funds, or private investment vehicles, the actual custody of those assets, the firms that actually hold the assets, are domiciled offshore of the United States.

So, in that sense, Mr. Mnuchin isn’t unique at all. That’s very much the status quo of the hedge fund industry in the United States. Whether it’s appropriate or not, I think is a whole different question. But I think it’s important to recognize that it is very much the way things work in the U.S. hedge fund industry today.

SHARMINI PERIES: Right. Now, as I stated earlier, that there is a heavy influence of Goldman Sachs in the Trump administration. But as you know, this is not unique, our Treasury is always controlled by one powerhouse from Wall Street or another. And this, of course, leads to a lot of issues of ethics, and as you just pointed out, this is actually not the norm in other countries, but it is here.

Given all of this, what can we expect in terms of the management of our treasury, and in terms of financial policy, with the Trump administration?

DOUGLAS CLIGGOTT: That’s a great question, and I wish I had a really clear, definitive answer. Sadly, I think the truth is, we really don’t know what Mr. Mnuchin’s priorities are going to be as Treasury Secretary, because he hasn’t been on the record, or had much of a track record, in terms of his views of public policy.

Questions like, will he be supporting increases in the minimum wage, will he be supporting increases in taxes to help those American citizens that are less well off? I think we can guess, and our guess probably is, no. That he will follow the standard Republican methods, if you will, of saying that the free market is the answer to all our problems. And not be a strong advocate for market interventions that historically have been very good, for working men and women in America.

But again, we really don’t know, because of his very, very limited public comments, or clear indications of his priorities on these really important issues.

SHARMINI PERIES: Right. Getting back to Mnuchin in particular. Mnuchin had invested in Freddie Mac, the mortgage bank that is currently owned by the federal government. But Mnuchin recently said that the government should divest itself from Freddie Mac and, of course, the stocks soared.

So, there are various kinds of financial market management. Should this action alone disqualify him from running for U.S. Treasury?

DOUGLAS CLIGGOTT: Well, I think that the good news there is, my understanding is, it would take an act of Congress to change the corporate structure of Fannie Mae and Freddie Mac, that it won’t be so one human being’s decision. I also actually believe that it’s a little ambiguous whether Mr. Mnuchin himself would be advocating the federal government, in a sense divest itself of Fannie and Freddie, the popular terms for these two mortgage giants.

And if it were to come about, I think, what kind of capital structure they have, would be really, really important. Because right now, a very, very significant share of all new mortgages being originated in the United States, have some type of involvement with those two mortgage entities. And so as you’ve highlighted, they’re very important institutions.

What happens with them in the future is very important. But, again, I think because they are so central, both the administration, but as well as Congress, will be involved in — if there is any change, and exactly what type of change occurs with the structure of them both.

SHARMINI PERIES: Right. One of the priorities that both Trump and Mnuchin have referred to is, reducing the corporate income tax to 15%. Now, whose interests would that serve?

DOUGLAS CLIGGOTT: Well, it would clearly serve the corporate interest. But, I guess the $64,000 question, if you will, is what in fact would corporate America do with the increase in after tax earnings that could result from a lower effective tax rate? We’ve done quite a bit of research on what corporate America is doing with its after tax earnings now, and it’s in effect, not a pretty picture, unfortunately.

What we’ve seen over the past 20 or 30 years, but particularly in the last five, seven, ten years, is corporate America focusing an increasing, and a rapidly increasing, share of its profits, not investing in new technology or new equipment or new training of its workers, but rather buying its own shares back in the public market. Effectively manipulating the price of their own shares to the benefit of all shareholders, but especially the corporate management.

And so, I think whether cutting corporate taxes is a good or bad thing, I think, really depends on what corporate America does with the money. And what we’ve seen recently is what corporate America is doing with the money, is enriching itself, rather than really focusing on productive investment in worker training, helping our society as a whole.

SHARMINI PERIES: Right. And there were various policies recommended where, for example, for the Obama administration to actually regulate that aspect of it, particularly after the bailout where they asked the financial institutions to… you know, who was bailed out, to be required to reinvest that money. But a lot them chose not to do it.

Which brings me to the issue of Dodd-Frank. Now, Mnuchin himself has argued that it is too complicated and we should roll back aspects of Dodd-Frank. What do you make of this argument? Is Dodd-Frank strong enough to regulate Wall Street, or should it be rolled back?

DOUGLAS CLIGGOTT: Well, I think that like, a tremendous amount of legislation, that sort of reaches fruition in the United States, Dodd-Frank is messy. It’s the result of almost an infinite number of compromises to essentially make its way through the entire Congress. So, it’s… Dodd-Frank’s a lot of things. Some of the most important things, and one that a lot of folks focus on, is clearly this idea of a severe limit on the ability for pure speculative activity, on the part of large financial institutions.

I personally think that that’s a good idea, that it doesn’t make a lot of sense that institutions that are, in effect granted government guarantees, can take funding that in many ways they’re only getting because of those government guarantees, and then turn around and take extraordinary risks in very speculative ways. So, I think limiting, dampening, speculation is a good goal, I believe, and I think it’s something that Dodd-Frank has — I wouldn’t say completely accomplished — but done a lot to achieve. And so, I certainly don’t think it would be a great idea to remove that piece of the legislation.

But in other ways, I think there’s a lot of regulation yet to be done, if we’re truly interested in a robust, healthy financial sector in the United States. A key one the Federal Reserve has been working on, isn’t really a part of Dodd-Frank, is increasing required capital for large financial institutions, essentially so they become safer corporations.

When you look at the amount of debt that large financial institutions have, relative to their assets, their debt levels are still of the order of 90% of assets, which is extraordinary. You couldn’t find a corporation in another industry, like manufacturing, or retailing, or high technology that had such a high level of debt, relative to its assets.

So, while I think it would not be a good thing for American society to see Dodd-Frank rolled back, I don’t think we should be comfortable where we are right now. In fact, I think there’s quite a bit more to be done, especially in this area of continually requiring very large, systemically important, financial institutions, to have a lot more equity for their financing, and significantly less debt for their financing.

SHARMINI PERIES: So, that they won’t be too big to fail, and if they are too big, they should bail themselves out.

DOUGLAS CLIGGOTT: Well, they’d be in a much, much stronger position not to fail. The reality is, none of us can accurately predict the future. We’re going to make mistakes. We’re going to make mistakes, when it comes to lending people money, lending corporations money, and so to lower the risk of those mistakes to all of us in society, is a real tried and true method for doing that, and that’s just requiring the lenders, the financial institutions, to have a lot more equity.

So, when they make a mistake, they can absorb those losses themselves, and not require the government, or ineffectively, society as a whole, to step in and help them out because of their mistakes.

SHARMINI PERIES: Right. Douglas, I thank you very much for your very sober analysis of the current situation, and I thank you so much. And I hope you join us again very soon, because I think we’ll have to be prepared to analyze, on an ongoing basis the new developments coming from Washington.

DOUGLAS CLIGGOTT: I would really like to do that. Thank you so much for having me this time.

SHARMINI PERIES: And thank you for joining us on The Real News Network. You’ve been listening to Douglas Cliggott, from the Economics Department at the University of Massachusetts, Amherst. Thank you so much.

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