When Dr. House wants to test if someone has a heart condition, he puts them on a treadmill. This is designed to get the heart rate up and subject it to stress levels it may not normally face. Under these conditions he can monitor the heart’s condition and make a diagnosis as to that patient’s health. Tim Geithner and his band of merry men just wrapped up doing a similar thing to our nation’s banks.
The way Geithner and his team were able to subject banks to stress tests was by creating “what if?” scenarios. The idea being what if the economy got worse, how would the banks handle it? Each bank is unique and is in a different condition, so each banks would either do well (relatively) or not so well. The results of the stress tests were released last week. In case you were wondering what the results were I’ll put it this way, your 401(k) finished last week on a high note.
But that doesn’t mean the news was good. In fact a whole world of controversy has emerged from the results. Everything from banks having input on the measurement methods to arguments that they were not subjected to enough economic stress to fully measure their strength. An example of this would be assuming unemployment went to 10.3% instead of 10.8%. Testing at 10.8% could yield different results.
But, I’m not here to analyze these results. Anyone that wastes their time on it is much better off watching Family Guy. The intellectual utility of either action is comparable. Yes I’m looking at you, Barry. The important thing here is the psychology of the results. Despite many banks needing to raise new funds as a result of the test, Wall Street loved the results. They loved it so much Morgan Stanley and Wells Fargo raised new money basically hours after the results were released. In order for them to do that they needed to find people willing to give them money, which proved to be very easy.
Wall Street went on a rally, institutional investors are getting back in to finance stocks because they don’t want to miss out on this good news. This is how confidence returns to the market. Restoration of confidence is the only thing that will ever dig us out of a recession.
Do I think we’re out of the woods? My opinion doesn’t matter here, I’m merely pointing out that the stress test, even if flawed, seems to have restored confidence to the markets. Like Dr. House, it’s not so much what the results of a stress test we care about, sometimes it’s how the patient reacts to the news. Let’s see what happens over the next couple of months.
Click here for an interactive graph of the stress test results.
Click here for a simple graph of the capital needs based on the results.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
