Stress Test Shenanigans: Round 2

10-23-2009 • Washington's Blog

Should we be reassured by the new round of stress tests?

Well, let's take a look:

Time Magazine called the previous stress tests a "confidence game" and Geithner a "con man" for running them deceptively Paul Krugman called the stress tests a mere "self-esteem class" for banks that no bank would be allowed to fail Nouriel Roubini said the stress tests "fail the basic criterion of a reality check" The stress tests were a P.R. stunt devised by the banks themselves
The government has more or less admitted that the stress tests were meaningless (see this and this)

In addition, AFP quotes Bernanke as saying:

"For example, to reduce the tendency of current capital requirements to promote credit growth in booms and to restrict credit during downturns, the Federal Reserve has supported international efforts to develop capital standards that would be countercyclical," or require firms to build larger capital buffers in good times and allow them to be drawn down in times of stress.

But as I have previously noted:

One of the Fed's main justification has been that it can provide a "counter-cyclical" balance. In other words, during boom times it can put on the brakes ("take the punch bowl away right as the party gets started"), and during busts it can get things moving again. But as economist Jane D'Arista has shown, the Fed has failed miserably at that task:

The new stress tests will be a meaningless p.r. stunt, just like the originals. The Fedlargely caused the financial crash, and has no place running an electric toaster, let alone financial or economic oversight or policy.