Stress Testing the Banks

If you have to prove you are worthy of credit, your credit is already gone. –Walter Bagehot

Timothy Geithner, the Treasury Secretary, has come out with a plan (really more of a vague idea) to “stress-test” American banks to determine whether they can survive this current recession. To be conducted in April, this testing will be performed on banks of over $100 billion who have taken government money. Using assumptions of average unemployment of 8.9% in 2009 and 10.3% in 2010, Treasury will determine whether they can survive.

There are two problems with this plan. The most obvious is that we haven’t been in a crisis like this before so we don’t know whether those unemployment assumptions are too pessimistic, too optimistic, or just right. We won’t find that out until it’s too late, but that won’t stop Treasury from spending more tax dollars based on the model.

The more fundamental problem is that the very fact that these banks are being stress tested indicates that they are on the road to failure. People don’t ask whether your company can survive if they think it can; they ask to confirm that it can’t.

My opinion is that this is all political theater to convince the American people that their money has not been thrown down a giant rathole and to pave the way for a more smooth nationalization for some of the ratholes banks that have already received government funds.