Incredible Stress Tests

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Reading Noam Scheiber and Willem Buiter (I found the links at the WSJ blog) and then reading Nouriel Roubini, I think it is fair to doubt the credibility of the bank stress tests.  Roubini writes,

The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario...Put plainly, the results of the stress test--even before they are published--are not worth the paper on which they are written.

There appears to be a remarkable disconnect between the policymakers and the peanut gallery. 

 Andrew Leonard lists some peanut gallery folks.  The policymakers appear to be counting on the banks to pull through.  Those of us in the peanut gallery are doubtful that this will happen. Thanks to Bernanke, Paulson, Geithner, Bush, and Obama, all of us taxpayers have effectively sold credit default swaps on these banks.  Good luck to us.

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Arnold Kling

Arnold Kling earned his Ph.D in economics at MIT. He was an economist on the staff of the Federal Reserve Board. From 1986-1994 he worked at Freddie Mac. He started Homefair.com in 1994 and sold it in 1999. His fourth book, From Poverty to Prosperity, co-authored with Nick Schulz, is due out in April of 2009. He blogs regularly at Econlog.
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