We finally got the information on the stress tests.
The government will consider two scenarios: baseline and worst case.
The goal of the stress test is to see if banks have the capital to weather a darker storm.
However, and incredibly, the worst case scenario is not really a worst case.
The government’s idea of the worst case is a GDP decrease of 3.3% this year and growth of 0.5% in 2010; 8.9 unemployment rate in 2009 and 10.3% in 2010.
That is not the worst case! That is what I call the “baseline”. We are probably at 8% unemployment in February.
As a result, the stress test is a sham. It yields very little information. The government’s rosey worst-case scenario perpetuates the incompetent risk management that got us into this mess.