The Campaign Spot

Economic Conditions Beginning to Imitate Geithner’s ‘Stress Test’ Scenario

The results of the Treasury Department’s “stress tests” for banks will arrive sometime after the end of the month.

An intriguing detail in coverage when the stress tests were announced:

According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3 percent this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22 percent this year and that unemployment would shoot to 8.9 percent this year and hit 10.3 percent in 2010.

Obama’s budget presumes the economy contracts 1.2 percent this year. So the Treasury Department, not checking with Obama’s OMB, is telling banks to be ready for a much, much worse scenario.

But also note that the dire “stress test” scenario has unemployment “shooting up” to 8.9 percent . . . when it is already at 8.5 percent.

I’m looking at this and thinking, “Hey, guys, we’re experiencing something close to the worst-case-scenario.” 

Rex Nutting, MarketWatch’s Washington bureau chief, noticed as well:

We don’t know how the stress tests turned out yet — we may never know — but it’s clear already that the test is much too easy. The test is supposed to see what the banks would be worth if the recession worsened a lot.

But the recession has already worsened a lot, weakening as much as the stress test assumes — or more. Home prices are falling faster than the adverse scenario. Unemployment is rising faster than the government thought it would. And economic growth now is projected to be nearly as bad as the bad scenario assumes.

The private sector is stepping into the information vacuum left by the opaque and poorly designed government test. Bank stock analyst Mike Mayo of Calyon Securities has essentially done his own stress test on the banks’ assets and found they would be insufficient if loan delinquencies rise as much as he expects.

The government’s stress test has two fatal flaws: It’s being done in secret, and the government is putting its thumb on the scale. It’s almost enough to make you think the regulators are protecting someone.

I realize it’s not as sexy as Michelle Obama’s arms, but considering the stakes, you would think this would be getting non-financial press attention . . .

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