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Unemployment and the Stress Tests
| Fri Jun. 5, 2009 7:56 AM PDT
This is, obviously, nothing new, but Felix Salmon is right to remind us that the "adverse" scenario for Tim Geithner's stress tests — that is, the worst case doomsday projection — used an unemployment rate of 8.9% for 2009. The reality, though, is already much gloomier: we're only up to May and the actual unemployment rate is 9.4% and still heading north.
One number doesn't represent an entire economy. But this one is pretty important, and Treasury's forecasters weren't even in the right ballpark. It makes you wonder how realistic the rest of their assumptions were.
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Comments
We knew the stress tests
Submitted by g. powell on Fri Jun. 5, 2009 8:40 AM PDT.
We knew the stress tests were overly optimistic months ago, this should come as no surprise.
The stress test were designed to give political breathing room for the "muddle-along" approach and to kill the idea of nationalization. They were never meant to be an objective measure of bank health.
I think they made the wrong choice here, but as an Obama supporter, I hope it works because failure will be a huge blow to the economy and the administration.
layman's logic
Submitted by felinecannonball on Fri Jun. 5, 2009 9:01 AM PDT.
My layman's logic: the most valuable information from the stress tests was a crude relative standing of the banks and a slightly more open tabulation of their assets and liabilities. Presumably the banks would be screaming bloody murder if their relative positions in the stress test results didn't reflect reality.
I'd also guess that the smart folks out there are going to be able to take the stress test reports and view them through 9.4%-unemployment glasses. In as much as they put more information in the public domain and did so in a way that wasn't filtered differently from bank to bank it was a good thing.
Stress tests and unemployment
Submitted by Matt (not verified) on Fri Jun. 5, 2009 9:17 AM PDT.
The stress test assumes a peak unemployment rate of 10.4% under the adverse scenario, in the second half of 2010. Unemployment is assumed to average 9.5% in the second half of 2009 (much lower during H1 gives you the full-year 2009 average of 8.9%). Thus far, unemployment has risen faster than assumed under the adverse scenario. Whether it will eventually rise farther remains an open question.
Actually we should be giving Geithner credit now
Submitted by Tony Raza (not verified) on Fri Jun. 5, 2009 5:48 PM PDT.
Yesterday's payroll numbers indicate that unemployment should peak earlier then either the base or adverse case scenario. Some analysts are saying that at if the moderation in job losses continues at the rate of the last two months then unemployment may not even hit 10%. Also, all the other variables in the stress test are tracking the base case scenario.
I don't think many people realize the rabbit Geithner just pulled out the hat. He should go down as the man who saved the American banking system. Just a few months ago the pressure to nationalize the banks was enormous. Now the banks are getting all the capital they need from the capital markets. BOA raised $13bn in capital in one day and sold a $7bn stake in Bank of China at a good price in rebounding markets. The government would have been on the hook for supplying on this capital. I'd admit that I don't really think this is what Geithner expected, but the fact is he held out long enough for private capital to take over. Its saved 100s of billions plus a ton of headaches for the govt.
"Its saved 100s of billions
Submitted by Anonymous (not verified) on Fri Jun. 5, 2009 8:59 PM PDT.
"Its saved 100s of billions plus a ton of headaches for the govt."
Don't you think it's a bit early to conclude this?
The banks have played accounting games with first quarter results and are reportedly in the process of doing so again this quarter using different mechanics.
Eventually the losses will exceed their creative accounting capacity - based on the CRE loans going bad, the Alt-A, Optio-ARMs, I/O ARMs, and even Prime delinquency rates' rapid recent increases.
What then? The market expects them to be bailed out. If the regulation that allows the FDIC to seize the BHCs (bank holding companies) has passed, the government will no longer be in a position to do so.
All the fear that the market felt about the financial sector has only been deferred - it hasn't been resolved since the toxic assets remain on the banks' balance sheets.
Arguing that the "stress tests" showed the banks were much healthier than previously assumed will convince people only for a couple of quarters - then the loan delinquency rates will be impossible to ignore.
As far as delinquency rates go, the level of household debt that Americans have is unsustainable without loose credit. Banks are unlikely to make loans to people who aren't creditworthy now that they will be more closely regulated.
The only way out is to try to inflate away or default on debt. The U.S. can't afford to try the former since it is dependent on its AAA rating to continue operating till the day comes when the external deficit turns to a surplus.
All this leads me to wonder how long it will take before people notice that the rabbit that Geithner pulled out is quite dead.
Unemployment Surged
Submitted by TysonL (not verified) on Wed Jun. 10, 2009 2:17 AM PDT.
The US unemployment rate surged up after the economic collapse and bailouts. With the struggling economy, a lot of people think of giving up on job searching are called discouraged workers. Discouraged workers are often people that are overqualified for the jobs they apply for, or older veteran workers that would be too costly for many companies to hire, or people in areas where employment prospects are scant. A lot of people are unemployed, and looking for a pay day that doesn't come in the form of a government check. It's best to keep faith, and keep on keeping on looking for work. The economy is predicted to begin recovery later this year, so there may be cash today for discouraged workers before they know it.
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