On February 12 Treasury Secretary Tim Geithner announced he would make investors and the public trust banks again. The idea is that in a few weeks from mid-February — that date is approaching — the results of a bank stress test of the largest banks would be known.
The stress test is supposed to give a realistic picture, transparency, and thus confidence about these important institutions. Stress testing your new relationship might entail wrecking your boyfriend’s new car. You’d learn valuable information. A stress test is a little exercise aimed to identify which banks could fail under the most dire circumstances: Many people lose jobs and default on credit card etc. The stress situation is supposed to be the worst of the worst — a 3 standard deviation event. But if the stress conditions are just the status quo, the stress test creates stress. Are you satisfied to know your plane can take off in 35 Fahrenheit degree weather? I didn’t think so. You want that plane’s integrity tested at a gazillion below zero.
By asking how bad banks look in conditions that are unthinkable and not probable you know which are likely to do fine in probable, but bad times. The problem is that the simulated worst of the worst looks better than, say, Michigan today, its February jobless rate was 12.0 percent, and not much better than the rest of the country.
The Obama stress test assumes unemployment would shoot up to 8.9 percent this year and hit 10.3 percent in 2010, it also assumes a 3.3 percent contraction in gross domestic product in 2009, which would be the worst performance since 1946. Well, the unemployment rate is already 8.1 percent; and, based on the recent GDP numbers we are in the worst depression since the 30s. The U.S. economy contracted at 6.3 percent in the fourth quarter of 2008. To make a comparison to the Great you-know-what GDP fell 4 percent in 1930, 6 percent in 1931, 13 percent in 1932.
