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More Stress Test Shenanigans
AFP reports:
The
Federal Reserve will expand its so-called stress tests of the banking
system to ensure they have enough capital during difficult periods, Fed
chairman Ben Bernanke said Friday.
Bernanke highlighted
the positive impact of stress tests conducted earlier this year on
major banks, a move aimed at ensuring their financial health and
building confidence.
"Building on the success of this
initiative, we will conduct more frequent, broader, and more
comprehensive horizontal examinations, evaluating both the overall risk
profiles of institutions as well as specific risks and risk-management
issues," Bernanke told a conference organized by the Boston Federal
Reserve.
The highly publicized stress tests conducted
earlier this year focused on 19 major banks, and indicated 10 needed
additional capital.Bernanke said the Fed would step up
efforts to review bank capital requirements to avoid a recurrence of
the credit crisis that has spread around the world.
"Additional steps are necessary to ensure that all banking organizations hold adequate capital," he said.
He
noted that the Financial Stability Board -- a global watchdog made up
of senior representatives of national financial authorities -- had
called for "significantly stronger capital standards," and that the
Group of 20 "has committed to develop rules to improve both the
quantity and quality of bank capital."
"The Federal Reserve supports these initiatives. The structure of capital requirements should also be reviewed," Bernanke said.
Should we be reassured by the new round of stress tests?
Well, let's take a look:
- Time Magazine called the previous stress tests a "confidence game" and Geithner a "con man" for running them deceptively
- Paul Krugman called the stress tests a mere "self-esteem class" for banks that no bank would be allowed to fail
- Nouriel Roubini said the stress tests "fail the basic criterion of a reality check"
- William K. Black called them "a complete sham"
- FDIC head Sheila Bair didn't believe they were credible
- The stress tests were a P.R. stunt devised by the banks themselves
In addition, AFP quotes Bernanke as saying:
"For
example, to reduce the tendency of current capital requirements to
promote credit growth in booms and to restrict credit during downturns,
the Federal Reserve has supported international efforts to develop
capital standards that would be countercyclical," or require firms to
build larger capital buffers in good times and allow them to be drawn
down in times of stress.
But as I have previously noted:
One
of the Fed's main justification has been that it can provide a
"counter-cyclical" balance. In other words, during boom times it can
put on the brakes ("take the punch bowl away right as the party gets
started"), and during busts it can get things moving again. But as
economist Jane D'Arista has shown, the Fed has failed miserably at that task:Jane
D'Arista, a reform-minded economist and retired professor with a deep
conceptual understanding of money and credit [has a] devastating
critique of the central bank. The
Federal Reserve, she explains, has failed in its most essential
function: to serve as the balance wheel that keeps economic cycles from
going too far. It is supposed to be a moderating force in American
capitalism on the upside and on the downside, the role popularly
described as "leaning against the wind." By applying its leverage on
the available supply of credit, the Fed can slow down a boom that is
dangerously overwrought or, likewise, stimulate the economy if it is
sinking into recession. The Fed's job, a former chairman once
joked, is "to take away the punch bowl just when the party gets going."
Economists know this function as "counter-cyclical policy."
The Fed not only lost control, D'Arista asserts, but its policy actions
have unintentionally become "pro-cyclical"--encouraging financial
excesses instead of countering the extremes. "The pattern that
has developed over the last two decades," she wrote in 2008, "suggests
that relying on changes in interest rates as the primary tool of
monetary policy can set off pro-cyclical foreign capital flows that
tend to reverse the intended result of the action taken. As a result,
monetary policy can no longer reliably perform its counter-cyclical
function--its raison d'être--and its attempts to do so may exacerbate
instability."...
The new stress tests will be a meaningless p.r. stunt, just like the originals. The Fed largely caused the financial crash, and shouldn't even be given an electric razor, let alone financial or economic oversight.
I agree that a large part of the "rah-rah" in the MSM and associated organizations (NAR and many others) over the past couple of years have been an attempt to prop up animal spirits. I fear that the more propping that is done, the more damaging the next collision between economic reality and perception will be when it occurs.
I would like to heartily second Anonymous's post #109297's recommendation of the article "The Quiet Coup" by Simon Johnson and James Kwak in the Atlantic (http://www.theatlantic.com/doc/200905/imf-advice). For folks who are newer to the financial arena, it is a very illuminating article, and will give you a different perspective on the Ken Lewis/Bernanke/Paulson "he said, he said" affair and the breaking of omerta. There just aren't enough chairs for the TBTFs.
Their blog at http://baselinescenario.com/ is also usually an interesting read.
Stressed are the banks and streched are the salaries and the boundaries of immunity.
Bloomberg Oct 24th
Citi, Bank of America Managers Averaged $18 Million Pay in 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aikhP_Hlb_0U
nothing wrong with animal spirits, eveything wrong with animal spirits that could be directed to making the cake bigger and better, rather than making it smaller and worse. if a system fails why pursue the political equivalent of "whig" policies to preserve its failure? the madness of king george etc springs to mind.
its about the animal spirits isnt it?
I'm stressed and I dont need a test to prove it. Most stress tests I see ..check for the impact of skinny tail events. Like 25% unemployment or GDP of -6% (like the UK just reported). I see things slighlty differently tough. Whilst most think the con by the banks is retricted to losses paid for by the taxpayer, they rather miss the point that the majoirty of taxpayers are being ripped off in the mainstream by far more than the incremental 5% or so in defaulters to an average of 10% across the economy from 5%. 90% of people and companies dont default and the impact on the economy of usurous interest rate and lending practices by banks to the tune of around 5% overcharging of interest, is much larger than worring about whther the default rate is 30% on 10% of the borrowing community with around half as a recovery rate. In other words, 90% getting walloped with a 5% charge is more significant than the current incremental 5% in default with a recovery of 50%. Let's face it the ludicrous situation where the government/fed/regulators of banks with worse balance sheets than the majority of those they lend money too are able to charge 5% borrowing costs whilst simultaenouslyborrowing at zero from the Fed.
We have all been focussing on the escalation in u/e 6 to 16%, the default rate average across all loans escalating to 10% whilst missing what crime is being perpetrated on the say, 75% (maybe not 90%) of people and comapnies who have LTV's of 60% 50% 40%. The Government is as usual busy muddying the waters by trying to lend 80%/90%/ or 120% FHA sponsored mortgages, to use mentally retarded logic to create a whole new strata of people who live beyond any means in cloud cuckoo land.
Let me put it another way. Banks have 10% Tier 1 capital (leave aside how they got it or whether its real or whether tangible common equity is a better measure), this means they have an equivalent loan to value ratio of 90%. These banks receive money at zero from the Fed, they take this money with this crap balance sheet and lend it individuals and companies with 50% loan to value at 5% (whether through mortgages or loans). I am not talking about the fails and defaults that make the headlines and the blogs. I am talking about the majority of company and individual balance sheets that are sound and have only an average of 50% loan to value of assets...even after market sell-offs of assets such as houses and machinery.
Here is the rub, who on earth says that our Government should sponsor a structure where those who are highly leveraged (banks) should receive a 5% cheaper funding rate than those who are lowly leveraged (companies and individuals). Fed Funds Rate = zero, mortgage/loan rates = 5%. This is sickening and even worse, the longer it persists, the smaller will become the pool of companies and individuals with lower loan to leverage ratios. It has always failed, it will always fail and why on earth are we still supporting a failed (bank based) model?
There should be an instution that can lend money at lower than bank borrowing rates because the security is better..why don't we have a system that charges interest according to loan to value, so that those with high ratios (banks) pay more than those with low ratios (majority of companies and individuals).
somewhat off-topic but still germane is a well reasoned article The Quiet Coup by Simon Johnson which details the origins of the crisis, why its solution is intractible, and possible ways of dealing with it....
after reading the article it becomes clear that the stress tests totally miss the point as they are nothing but a variant of the extend and pretend game so popular with obama, bernanke, and the wall street elite....
if you can't them with brilliance baffle them with bullshit...bernanke is a past master of that quackery...
the world is still in denial and wedded to failed leaders...
http://www.goldstandardinstitute.com/html/the_quiet_coup.html
The Obama abdication of populism and embracement of crony capitalism is 1. reprehensible, or 2. phony, setting the stage for a shock and awe reversal. One strategy path for year one would have been to keep some of the old regime around and provide them with just enough rope
The lack of liquidity not asset quality was the issue last year. The stress tests miss the point.
asset quality played a prominent role starting
with a lot of the securitized crap including
sub-prime loans....
prior to september 2008, how much liquidity
was pulled from the economy? the banks?
the larger problem is that consumer and business
was over-extended....no amount of liquidity
can solve that problem....lots of leverage
ate people and companies alive....
liquidity has origination with the banks and thus
stress tests belong there even though they were
a complete sham....
This whole thing is one big abortion!
You Obamunist should be so proud.
shutup logic!
The hell with the stress tests. Let's have a FDIC bank failure Friday dif test!
good idea cistercian. better yet, federal reserve stress test? oh wait
It's BarriO's version of "Leave no bank behind".
HA HA HA HA HA HA HA :-)
Has anyone seen Geitner on TV in the last few months? He's disappeared.
rahm is not stupid. he knows that timmy is a disaster in front of the cameras and a disaster in interviews. it's embarassing
how could it be any different....little timmy
has failed at EVERYTHING he has ever done
including handling of the currency crisis in asia during
the 1990s....the man is a complete and utter
fool....however he is valuable to the cia-fed
because as an inadequate person he can be easily
manipulated to do the will of the oligarchs...
rahm "fuck you" emmanuel knows this....and lets
the oligarchs running him like a whore..
my god, the man can't even cheat on his taxes
without getting caught or telling pinochio lies...
Should we be reassured by the new round of stress tests?
Well, let's take a look:
"Deadhead said the stress tests were a sack of lying shit"
Let's call this nonsense anything other than
"shenanigans".
"What a long, strange trip it's been."
Perhaps the FDIC needs a stress test...oops, it is undergoing one as I type!!