Painted Into A Corner

Ryan Avent, who has taken over Felix Salmon's old gig blogging at Portfolio, is worried about the administration's stress tests:

...if the administration releases information suggesting that the tested banks are all basically fine, then the data is worthless. Markets will go on speculating on which banks are in the most trouble (and possibly be more pessimistic, generally, based on the government's bungling of the tests). If the administration provides meaningful information of any kind, on the other hand, markets will naturally assume that the weakest looking banks are the weakest banks, and will begin trading accordingly.

Felix Salmon interjects:

The way out of this problem I think is for the government to recapitalize the weakest banks before it releases the stress-test results, and then to release post-money stress tests showing that, as a result of its recapitalizations, all the tested banks are basically fine. It’s a risky strategy, but I don’t think Treasury has much choice at this point.