President Obama means well and is doing a great job in many areas. However, I fear that we are perpetuating the same policies of the previous administration when it comes to the financial sector. It is simply not fair that each of the 19 big banks are bailed out. If you take risk, then there must be some consequence. Right now it is a blanket insurance policy that will lead to similar problems down the road.
Stress testing the banks
The so-called stress test is a sham. They delayed the release of the test because it is really hard to explain why so many of the banks (including the very largest ones) are offside when the adverse scenario is looking like an optimistic scenario. Note the adverse scenario has 8.9% unemployment in 2009. We could be there next week. It has 10.3% in 2010 and we could be there by the end of the summer. The whole idea of a stress test is to see what happens in a scenario that is worse that what we expect. The test fails on that dimension. It is misleading, increases uncertainty, and decreases confidence.
Professor Harvey interviews Len Blum of Westport Capital
Westport Capital conducted a stress test based on leaked information. They estimate a further impairment of $200 billion. I question why they would use the government rosey assumptions. I specifically ask for their assumptions on the prime mortgage impairment. It is rumored that the U.S. Treasury is using an assumption of 5% impairment which, in my opinion, is way too low given the surging unemployment.
Are we seeing the end of the recession
While the stock market is up and consumer confidence is up, it is hard to see any economic fundamentals that point to a trough. In particular, the surging unemployment will likely cause a second wave of mortgage defaults. We don’t see the defaults right now because people are drawing down their savings. We will see it soon.