Treasury's Stress Tests Weren't Stressful Enough

I said at the time they were nowhere near "stressful" enough in their "more adverse" scenario.

I was right.

Here's the table (thanks to Northwoodspete for pulling and posting it on the forum)

How about a bit of reality?

Real GDP looks to be a fairly decent guess on "more adverse", but the problem is unemployment. The "average" estimate for 2009 was 8.4%, the "more adverse" was 8.9.

But we are now at 10.2, and that's the "headline" number, not including the "disgruntled" or "not in labor force" folks.

The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number.

That hasn't happened, as I reproduce again in this chart:

The turn upward in this chart was a near-exact correlation with the end of the recession in the early part of the decade. Not only are we dramatically worse now, we haven't even begun to turn, and those who have exited the labor force continues to skyrocket.

The key item here is loan losses.

They will not begin to stabilize until year-over-year job loss turns.

The Treasury "stress tests" did not envision this outcome. I said at the time they were nowhere near pessimistic enough and did not demand enough capital be raised (probably because they couldn't.)

But one of the premises of modeling outcomes is that your "worst case" scenario has to be worse than the expected range of outcomes. That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are.

I'd argue that based on the stress tests and actual economic performance the answer is a resounding NO!

Comments

[Anand Hira:]

First of all those were AVERAGE estimates for the YEAR... Unemployment at 10.2% is not the average figure for the year its the current figure.

"The entire premise was that we would turn the corner on or before now, with the usual "lagging indicator" factor on the headline unemployment number."
We are turning the corner thats why the numbers have been improving. Just look at the feds numbers they expect it to be a while or they wouldnt have an ave of 8.9 for 2009 and an ave of 10.3 for 2010 if we were peeking at 10.2.

Nov 06 03:23 PM

[Roger Knights:]

"That clearly has not happened, and leaves open the question of whether the banks that were pronounced "safe" really are."

The decline in bank stocks over recent weeks may be a harbinger of that concern.

Nov 06 03:39 PM

[jambo:]

On Nov 06 03:23 PM Anand Hira wrote:
> We are turning the corner thats why the numbers have been improving.
> Just look at the feds numbers they expect it to be a while or they
> wouldnt have an ave of 8.9 for 2009 and an ave of 10.3 for 2010 if
> we were peeking at 10.2.

With all due respect Anand, we cannot "turn the corner" on numbers and wishful thoughts alone, let alone when "aided" by more government debt.

No, someone has to actually make something of value and sell it and get real pre-existing (as opposed to freshly printed) dollars for that effort in order to turn any sort of financial corner. Anything less is tantamount to self levitation by tugging upon ones own bootstraps.
Much as we may wish otherwise, we havent yet been able to suspend physics either. Alas gravity still exists- and these are grave times indeed.
Thanks Karl for more of your graphic perspective.

Nov 06 04:42 PM

[Dave Wrixon:]

They were never intended to be. It was all a smoke screen to pump tax payer dollars in and to monetize much of the debt.

Nov 07 03:37 AM

[David White:]

I agree with Dave Wrixon. The tests were never intended to be too stressful. They were intended to pump up confidence in the banks. They were also intended as a tool to use against banks to manipulate them into making themselves more solvent (selling more stock, etc.). This scheme worked magnificently. The renewed confidence in the banks allowed the Fed/Treasury and GS et al to pump up the prices of the banks, so they could raise more money with less stock. This made them safer than they were. A truely frightening stress test would likely have had the opposite effect.

In this case the small deception by the Fed/Treasury is palatable. It was done with the best of intentions. Yes, the banks may still experience further problems, but they are in a better position to deal with them. A second stress test may eventually be done. It may again have the same intention. It is still possible it won't be necessary.

Nov 07 04:32 PM