Today’s unemployment numbers should obliterate any confidence in the so-called “stress tests” the government is using to measure the financial health of banks. The “baseline scenario” of the stress tests saw unemployment hitting 8.4%. Official unemployment figures hit 8.5% today.
We’ve said it before: the stress test isn’t stressful enough. It’s outlook on our economy is far too rosy. The “adverse scenario” that the Treasury Department has described as “highly unlikely” predicts just 8.9% unemployment in 2009. Since there are nine months left to go in year, we’re almost certainly going to pass that. We could pass it as soon next month.
What this means is that the stress tests are useless exercises that will tell us nothing at all about the health of the banking sector. Even worse, they could actually undermine confidence since the regulators will be seen as unrealistically optimistic.