TARP overseer Elizabeth Warren was on CNBC this morning, and since she’s always kind of a downer they stuck her on at 7:10, while people were in the car or the shower. But she actually had some interesting and reasonable points to make, including the fact that since unemployment is now beyond the Fed’s worst-case scenario, we should run the stress tests all over again.
CARL QUINTANILLA: PROFESSOR, UNDER WHAT CIRCUMSTANCES WOULD THE PANEL RECOMMEND DOING THIS ALL OVER AGAIN, OR HAVING A SECOND ROUND?
WARREN: WE ACTUALLY MAKE RECOMMENDATIONS TO DO IT ALL OVER AGAIN RIGHT NOW. THE ECONOMIC CONDITIONS THAT ARE IN THE STRESS TESTS HAVE ALREADY SHIFTED.
QUINTANILLA: SO WE NEED TO START FROM SCRATCH AS OF NOW?
WARREN: WELL, WHAT WE — WHAT WE RECOMMEND IS GIVEN THE CURRENT ECONOMIC CONDITIONS, WE ACTUALLY — YOU’LL WAIT ANOTHER MONTH OR TWO TO SEE HOW THE AVERAGES ARE WORKING OUT FOR THE YEAR, BUT THAT WE OUGHT TO BE RERUNNING THESE STRESS TESTS. REMEMBER, THESE NUMBERS WERE PUT TOGETHER IN FEBRUARY AND AS I SAID, WE’VE ALREADY BLOWN PAST THE WORST CASE SCENARIO ON UNEMPLOYMENT. THAT MEANS IT’S TIME TO RERUN THOSE NUMBERS AND FIND OUT IF THE STRESS TEST IS STRONG ENOUGH TO GIVE US A GOOD PREDICTION AND TELL US THESE FINANCIAL INSTITUTIONS ARE SOLID EVEN IF UNEMPLOYMENT IS HIGHER THAN THE MODEL PREDICTED.
Will that happen? No, duh.
The stress tests weren’t about arriving at a true picture of bank health. They were about restoring confidence in the system, and that’s been achieved. Heck, 10 banks are repaying TARP and the rest have been told that their capital plans are adequate. There’s no crisis (currently) so only if Tim Geithner and Ben Bernanke were masochists would they choose to run the stress tests again and come out with all new numbers and needs.
When the bank stocks crash again, then we can take the prudent steps of updating the stress tests. In the meantime, nah.