Bank "stress test" a mockery of the term

Dealbook pours cold water on the notion that the proposed stress tests of large banks will answer any meaningful questions:

The government will be stress-testing the banks under two economic scenarios to determine how much capital they might need: a baseline scenario and a “more adverse” scenario. The more-adverse scenario assumes that the economy will shrink 3.3 percent this year, followed by growth of 0.5 percent in 2010. It also assumes that unemployment rises as high as 8.9 percent in 2009 and 10.3 percent in 2010.

Is that pessimistic enough? The government sees the downturn bottoming out in the second quarter of this year — making it long as recessions go, but nowhere near as bad as what the nation experienced during the Great Depression.

In 1930, the first full year of the Great Depression, United States gross domestic product declined 9 percent. Gross domestic product then fell by another 6 percent in 1931, followed by a 13 percent drop in 1932.

The administration repeatedly invokes the Great Depression in seeking to rally popular support for its economic spending programs. Some economists may find it puzzling why it doesn’t use a more Depression-like set of assumptions in its “more adverse” stress tests.

These stress tests are public theater, nothing more.

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