Sunday, April 26, 2009

Stress Tests: Down the Rabbit Hole
Category: News and Politics
There were many things that were deeply disturbing about the Bush Administration, but perhaps nothing was more so than its willingness to make blatantly false statements in the face of obvious evidence to the contrary. When a government commits itself to upholding obviously false positions, all rational discourse and debate is short-circuited. Once that happens, there is no limit to the atrocities that the government can commit in the name of protecting the public interest.

Whereas it is possible for reasonable people to disagree as to whether it is acceptable to use military force against a country that poses a threat but has not actually attacked us (e.g. Iraq, Iran, North Korea), when Dick Cheney repeatedly asserted that Iraq was linked to 9/11, logic and reason were left without a foothold. How do you argue with someone who states that up is down and down is up? Ordinarily we put such people in mental institutions, but when these people are our leaders, the entire country becomes a nut house. And unfortunately it seems that the Obama Administration is picking up right where its predecessors left off.

Case in point is the current hubbub surrounding the Federal Reserve’s “stress tests” of our nation’s banks. The stated purpose of the stress tests is a reasonable one – i.e. to analyze how the banks will fare in the event of a further deterioration in the economy. However, as we learn more about the methodology of the stress tests, it becomes clear that the whole thing is nothing but an exercise in fantasy every bit as divorced from reality as the most outlandish statements of Bush & Co. A careful reading of a recent article by the Associated Press highlights the many ways in which the Administration is trying to sell a blatantly false bill of goods.

In the second paragraph, the article states that, “Federal Reserve officials held top-secret meetings with bank executives to give them preliminary findings of how each bank would fare if the recession got much worse.” However, in actuality the stress tests look at how the banks would hold up under two different economic scenarios. The first assumes an unemployment rate of 8.8% and a decline in housing prices of 14%. The more negative scenario posits unemployment of 10.3% and a 22% fall in real estate. Later in the article it is pointed out that the actual state of the economy is already close to the latter case. Therefore, the original assertion that the stress tests will reveal how banks will fare if the economy gets “much worse” is obviously false.

The article then goes on to report that the Fed announced that the banks under examination would be required to raise additional capital in order to supplement their reserves against continuing credit loses. However, the Fed cautioned that this should not be taken as a measure of the “current solvency or viability of the firm”. In other words, the government has lent, and will continue to lend, hundreds of billions of dollars to keep these banks afloat, yet the public should rest assured that the companies are solvent and viable. (At the same time, banks are being chastised for their unwillingness to lend. What is glossed over is the fact that simultaneously asking the banks to increase their reserves while also increasing their lending is impossible. The two are in direct contradiction to each other. This is a level of absurdity that would make Lewis Carroll proud.)

The article concludes by discussing the possibility that the stress tests might harm the weaker banks by highlighting their precarious financial positions and encouraging speculators to bet against their survival. However, it goes on to say that, “Friday’s announcement put some of those fears to rest, underscoring that the Fed will not say any bank lacks the reserves it needs to survive (italics added).” In other words, pay no attention to logic and facts – just listen to what we tell you. And, to me, this is the most frightening aspect of the whole situation.

Regardless of whether the government is able to prevent a total collapse of the financial industry, the results of such an all-out assault on the truth could have far-reaching consequences that extend way beyond our current financial problems. Proving himself to be a typical politician, rather than the straight-shooter that we all hoped he would be, President Obama is overseeing a deliberate effort to obscure the truth about the banking industry. One can almost imagine him borrowing the immortal words of Colonel Nathan Jessup…”You Can’t Handle The Truth!!”

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