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Treasury’s Mnuchin, Former Pillager, Now a Faker

May 20, 2017 (EIRNS)—This time, on May 18, in clearly rejecting the reinstatement of the 1933 Glass-Steagall law in front of the Senate Banking Committee, Treasury Secretary Steven Mnuchin went out on at least two limbs. Unfortunately, Sen. Elizabeth Warren was a bit too non-plussed at Mnuchin’s craven lying, to saw them off on the spot.

Mnuchin essentially admitted that during the campaign, he advised President Trump to fool American workers and liberals who support Glass-Steagall, by using the term as a campaign come-on which had no content that he would admit. (Whether Trump thought he was doing that, is a different question.)

And secondly, Mnuchin dropped the vaguely claimed "Volcker Rule studies" from his confirmation hearing questioning by Sen. Maria Cantwell, and directly claimed that Glass-Steagall will have large negative effects on bank lending and bond markets. This was a major fraud; ideally Warren should have immediately confronted him on it: "What do you base that on? Where is the data you are using?" etc.

Mnuchin would hardly claim banking expertise ("pillaging") was how his former Goldman co-worker described his occupation); but the argument of some who do, which he wanted to ride on, goes that American businesses get increasing amounts of their credit from issuing bonds and stock. This is true, and an increasing trend since the mid-1990s (when Glass-Steagall was eliminated). But what for? The recurrent stock bubbles (IT, "green energy," dot-com, oil/gas, etc.) have seen large numbers of companies, often start-ups, raising huge sums by selling stock, while having no profits and little revenue. Where have those sums gone? To new office buildings and executive stock holdings—only in oil/gas have they been used for capital investment and that for less than a decade.

And then the bond markets—this is where the biggest corporations have gotten their immense masses of "financial engineering" debt since 2005, with which they bought their own stock, carried out M&A, paid large dividends, etc., all to play the stock market.

Would all these wonderful activities get "badly disrupted" if companies had to use separated investment firms to underwrite them?

No. The economic data shows that what has been badly disrupted since the end of Glass-Steagall, is commercial and industrial (C&I) bank lending, which companies use for capital investment—which has also been badly disrupted.

If companies could not go public or underwrite stock issuance through their main bank, they would use investment firms —as for 60 years under Glass-Steagall—which would have to insist that the capital raises were justified. They would also have to do that if they wanted to issue bonds below AAA—banks can buy AAA corporate securities under Glass-Steagall.

This certainly will slow down these companies’ speculative stock market games with Wall Street banks’ credit. But, it would increase their more productive borrowing for capital investment.

American Banker, "The Real Story Behind the C&I Lending Slowdown," completely understates the problem, but points to it. It finds that the slowdown is connected to the drop in business capital investment. Particularly smaller and medium-sized firms, which generally do not use the bond market, are affected by the drop.

"Business loans are usually an important source of funding for business investment, and a critical factor shaping the outlook for economic growth. In some cases, slower lending rates may threaten the ability for small to midsize businesses to expand operations and create jobs. Bank lending is especially important for smaller businesses that are unable to fund investment by issuing bonds or stock. Small to midsize businesses in particular are the engine of job creation.

"C&I loan growth has fluctuated since the crisis and recovery, and has been on a gradually downward slide since 2012. But that rate has fallen sharply since late 2016. At the end of 2016, C&I lending was falling absolutely.

"Companies’ investment spending has nosedived, falling far below its post-recovery (2010-12) pace in 2015—from an average annual pace of 1.2% during 2012-15, to an average of 0.4% in the second half of 2016—despite interest rates having declined to historically low levels."

This despite zero borrowing rates.

That’s why the stock and bond markets have become so much more important without Glass-Steagall, and why bank C&I lending would rebound, along with capital investment, if Glass-Steagall is restored. Not what Mnuchin cares about.