That’s Not a Stress Test

Image courtesy of flickr/Stuart Crawford

Image courtesy of flickr/Stuart Crawford

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.

See my comments on this topic on BNN.

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One Response to That’s Not a Stress Test

  1. Wiliam X Wu says:

    I saw you on BNN, and I was shocked that you believe the worst case scenario is not really a worst case. I am to pursue my research as a visiting scholar on such topics as financial risks and crises in the US. I wish I have opportunities to do copperative research with you.

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