Daniel Gross is right. Forget about the stress test results:
[T]here are good reasons not to put much stock in the stress tests. The notion of the tests is that regulators, economists, and executives can project the impact of macroeconomic changes on large, highly leveraged institutions and their debt. But if there is anything we have learned in the past year, it's that the entire financial system, from the Federal Reserve on down to the street-corner economic forecaster, has proved catastrophically unable to make such projections. . . .
Other, more easily measurable metrics can give us clues about whether the financial system can function without taxpayer life support. The global financial markets provide the results of their own continuous stress test in real time. And while the results are far from satisfying, the data in recent months haven't been uniformly negative. In fact, there are signs that some components of the system are functioning well without government support. [Emph. added]
Three metrics Gross has in mind are: a) Libor (which is basically back to its old self again), b) non-government-guaranteed commercial paper issuance (which is picking up steadily after it froze up entirely following Lehman’s failure last September), and c) non-guaranteed long-term-corporate debt issuance (ditto). He might have added, too, that credit spreads generally have narrowed across the board and that even the junk bond market is showing signs of life.
