Is Steven Mnuchin, the Treasury secretary-designate, a heretic? In his Senate confirmation hearing last week, he laid out positions that don’t quite jibe with Republican orthodoxy. And when it comes to the strength of the dollar, he differed from his boss, Donald Trump.
President Trump won the election by refusing to follow the budgetary constraints at the core of GOP principles. For instance, he wants to launch a costly infrastructure building campaign and resists whittling down even more expensive old-age entitlement programs, namely Social Security and Medicare.
By the same token, Mnuchin showed the Senate Finance Committee on Thursday that he split from fellow Republicans on a host of issues in the economic and financial realm. These ranged from the Volcker Rule -- prohibiting banks’ from using their own accounts for risky investments, a ban many in the GOP believe is too stringent -- to supporting the housing giants Fannie Mae and Freddie Mac.
While the odds favor Mnuchin’s bid to become the nation’s economic suzerain, in light of the Republicans’ Senate majority, he does face staunch Democratic resistance. He ran into controversy when it emerged he hadn’t disclosed to Congress some $100 million in real estate holdings he owned in an offshore account.
Senate Democrats have also set up a website soliciting stories from homeowners who were foreclosed upon by the bank Mnuchin took over in the wake of the financial crisis, Indy Mac, now known as OneWest.
No one expects Republican senators to break ranks and vote against Mnuchin. As investment bank FBR wrote in a research note, “Overall, given his performance, we believe Mnuchin is likely to be confirmed.”
And where the former Goldman Sachs (GS) partner disagrees with Mr. Trump, it’s wise to remember that some of the new president’s ideas are far from chiseled in granite. Mnuchin’s remarks may be an effort, whether deliberate or not, to temper the president’s off-the-cuff expressions.
Of course, Mnuchin is far from alone in setting out a differing viewpoint from the president. Sen. Jeff Sessions, R-Alabama, the Trump appointee as attorney general, took issue at his confirmation hearing with the president’s desires to ban Muslims from entering the country.
Here are four key areas where Mnuchin strikes out into his own territory:
1. The dollar. Treasury secretaries traditionally promote a strong dollar, which is wonderful for Americans buying abroad but not for U.S. exporters. That’s because foreign competitors can underprice them. Mr. Trump has termed the dollar as “too strong.” The greenback has risen 9.3 percent against a basket of other currencies since June, and 3.5 percent since Election Day.
“The long-term strength -- over long periods of time -- is important,” Mnuchin said, noting that this owes to the relative robustness of the U.S. economy, compared to much of the rest of the world. Plus, inflation has ticked up a bit in America, also helping prop up the buck.
“As long as Trump’s policies remain on track and the U.S. economy continues to perform well, reflationary impulses should push the dollar higher despite rhetoric from the administration,” Morgan Stanley analysts pointed out in a research note.
Mnuchin, who has a long background as a financier, surely knows that the U.S. these days refrains from intervening in foreign exchange markets -- unlike the Chinese, who regularly buy and sell dollars to control the value of their currency, the yuan.
And besides, his voice won’t be the loudest on the currency front: Wilbur Ross at the Commerce Department, Robert Lighthizer as the U.S. Trade Representative and Peter Navarro at the new White House National Trade Council will be prominent on the dollar question.
Nevertheless, Wall Street and financial centers around the world take a Treasury secretary’s pronouncements very seriously. And this cabinet post has long been regarded as the chief defender of the dollar. In 1985, Secretary James Baker was the leader in crafting the Plaza Accord: He put together a consortium of other major powers to push down the surging dollar, which was harming the U.S.’s export effort and stirring protectionist sentiment.
2. Volcker Rule. Reining in banks’ desires to magnify their earnings using derivatives, exotic mortgage-based vehicles and other non-vanilla investments is supposed to safeguard the nation from another financial crisis. The last one was sparked when the housing market collapse toppled a row of dominos that almost crushed many major financial institutions.
“I do support the Volcker Rule,” Mnuchin told senators, saying there had to be clear lines between what was and was not proprietary trading -- banks’ using their own funds.
Republicans in Congress, led by House Financial Services committee head Jeb Hensarling of Texas, have largely opposed the rule. It’s named after its originator, former Federal Reserve Chairman Paul Volcker, and was enacted in 2010 as part of the Dodd-Frank law. They believe it thwarts banks’ legitimate need to hedge day-to-day activities and maintain liquidity, meaning their ability to turn investments into cash quickly to meet current requirements.
3. Glass-Steagall resumption. This Depression-era law was axed in 1999. It prohibited commercial banks from also acting as investment bankers, such as underwriting stocks. To Republicans, who hate the Volcker Rule and the rest of Dodd-Frank, it seemed to be a good substitute, one that Democrats don’t own.
The trouble is that it would mandate the dismemberment of large entities like Citicorp (C) and JPMorgan Chase (JPM). For that reason, Mnuchin said, “I don’t support going back to Glass-Steagall as is.” He contended that Glass-Steagall is a “very old law” and resurrecting it today would “have very big implications to liquidity and capital markets.”
Instead, Mnuchin called for a “21st Century Glass-Steagall,” but didn’t sketch out details.
4. Keeping Fannie and Freddie. The two government-run housing giants are anathema to many Capitol Hill Republicans. They used to be privately run, but Washington took them over during the financial crisis. Fannie Mae and Freddie Mac package mortgages into bonds, which eases the flow of housing credit. The House GOP especially wants abolish them or at least severely cut them back.
Mnuchin said he wanted to keep them because they serve a vital function. At the same time, he doesn’t want to restore them to their status as independent bodies.
All in all, and ironically given Mr. Trump’s anti-Washington bent, the Treasury secretary-designate has shown he has what Beltway insiders prize -- flexibility and nimbleness in his views.