This doesn't look so hard.
The Fed released its “white paper” outlining the methodology of the stress tests, and at first glance, they’re not stressing anybody out.
The tests used a “baseline” view that unemployment would average 8.8% in 2010 and a “more adverse” view that unemployment would average 10.3% at the end of next year.
Skeptical bloggers were quick to note that the 10.3% figure doesn’t seem so outlandish. FusionIQ CEO Barry Ritholtz says the parameters weren’t stressful enough.
“Let me point out that the consensus estimates, professional forecasters and blue chip surveys have all been awful — terribly wrong — during this entire fiasco,” he says. “Using their wildly optimistic estimates impugns this entire process. When your marriage is on the rocks, you don’t ask the same jamoke who introduced you to your spouse for marital advice.”
Newswires senior editor Rick Stine also says one would assume the “more adverse” scenario would characterize a worst-case situation.
“Either we are getting some interesting, updated forecasts from the Fed or they are making it easier for the banks in the stress test with forecasts that aren’t really worst case,” Stine writes at Randomly Noted.
But Portfolio.com’s Market Movers blogger Ryan Avent says he doesn’t see the point in pushing for a scenario worse than 10% unemployment.
“Things don’t have to get much worse than the one they chose before every bank is once again in serious trouble, and before things get unpredictable in any case,” he says.
And are there models that would determine what the banking system would look like if unemployment skyrocketed to, say, 13%, he asks. “I suspect no one can say much more than ‘awful,’ and with a lot more government intervention, or immediate necessity.”
All along, people have debated the merits of running stress tests and releasing the results. Former Dallas Fed president Bob McTeer certainly isn’t a fan, but Justin Fox at Time’s Curious Capitalist blog says trying to determine which banks need more government aid and intervention is a good concept.
“How that aid and intervention are handled, now that’s another matter entirely,” he says.
April 24, 2009
[...] DJIA rises 119 (1.5%) to 8076, down about 0.7% on the week; S&P 500 rises 14 (1.7%) to 866, Nasdaq Comp rises 42 (2.6%) to 1694. Financials rally after the stress tests come out; stocks briefly dipped on the release itself, but rose when it was apparent there weren’t any bombshells. [...]