How Obama's best economic policy of 2009 cost us ... exactly nothing.

[dtotire]

Stress Reliever
How Obama's best economic policy of 2009 cost us ... exactly nothing.


In a year when the government enacted one of its largest-ever stimulus bills, guaranteed hundreds of billions of dollars in bank debt, bought hundreds of billions more in mortgage-backed securities, took 60 percent ownership of one car company and put up billions in financing for another, it’s not obvious why you’d dwell on an initiative that basically cost nothing. I nonetheless submit to you that the government’s stress tests—an eight-week effort to vet the balance sheets of the country’s biggest banks—was the single most consequential economic policy of 2009.

Granted, it certainly didn’t feel that way at the time. When Treasury secretary Tim Geithner announced the stress tests back in February, they didn’t even register as one of the three most talked-about initiatives in that speech. The market and media reaction focused on Geithner’s plans to improve the availability of credit, stabilize the housing market, and help banks offload toxic assets. The Wall Street Journal’s initial write-up didn’t mention the stress tests until paragraph 14 of an 18-paragraph story.

And whatever attention the stress tests did attract was promptly lost amid the palpitations of the next several weeks. Bank stocks plummeted 40 percent in the month after Geithner’s speech. Most commentators attributed the free-fall to confusion over how the toxic-asset plan would work, and to investor concerns about a government take-over of troubled banks. Then, as the Obama administration dispelled the nationalization rumors and Geithner forked over more details, the market rebounded sharply.

more:
http://www.tnr.com/article/economy/obamas-most-underrated-move-the-year?utm_source=TNR+Daily&utm_campaign=5e05d0abaa-TNR_Daily_123109&utm_medium=email

[notesdev]

1. Stress tests were a joke

their "pessimistic" assumptions figured on a 9% unemployment rate. We're officially over 10% already.

But yes it was the best economic policy of the year to come out of DC, considering all the rest were giveaways to failed businesses and political cronies/sponsors.

[MannyGoldstein]

2. Best Info On The Stress Tests Here:

http://www.nbc.com/saturday-night-live/video/clips/geithner-cold-open/1099562/

They were quite something.

[bfarq]

3. What, exactly, changed as a result of the stress tests?

We are still seeing failures at more or less the same rate. We are still seeing the banks with the biggest bailouts paying huge exec packages. We still see small businesses having lots of trouble getting credit.

[On the Road]

5. Apparently, Here's What Changed

Within a week, the banks had raised some $20 billion from investors thanks to rising confidence in the financial sector. The Journal reported this week that the banks had raised $136 billion in stock since May.

And here's one reason why:

What people like Smith and me missed was the power of transparency. We worried that the government would have a big incentive to fudge the numbers, because the consequences of pronouncing any bank a failure would be too grim to contemplate. We didn’t realize that there was only so much fudging the government could get away with given the detailed information it was making public. The stress test report broke down losses for each of the 19 banks across eight asset classes (mortgages, credit cards, mortgage-backed securities, etc.). A leak suggesting that one or more of those numbers had been fabricated—and there was no shortage of leaks—would have discredited the entire exercise and possibly sent the financial sector into another funk.

The level of specificity also assuaged investors in more direct ways. During the initial phase of the crisis, the Bush administration forced all the major banks to accept government support so there wouldn’t be a stigma associated with it. (Stigmas can pose existential problems during a financial crisis.) That was arguably the right move at the time. The problem is that, as the months went by, lumping all the banks together made them all look equally shaky in the eyes of investors. As Yale economist Gary Gorton notes in his much-acclaimed paper about post-modern bank runs, investors who don’t know where the land mines are buried simply mark down everything during a panic. The stress tests solved that problem by differentiating between the sick and healthy, and offering reams of data to back it up. This restored confidence in the majority of banks that were being dragged down by the wheezing minority.

Finally, the transparency did a lot to discipline the banks themselves....

[madrchsod]

4. he has less than 5 months to convince america that things are better

if he does`t he`ll lose the house and some senate seats.