http://www.tnr.com/article/economy/obamas-most-underrated-move-the-yearStress Reliever
How Obama's best economic policy of 2009 cost us ... exactly nothing.
Noam Scheiber
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.snip//
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. Investors knew how much a Citigroup or a Bank of America had to raise in order to satisfy its government overseers, and they could chart the progress with nothing more sophisticated than a balky Internet connection. That focused the minds of the problem banks. Citi redoubled its efforts to sell off too-risky assets on its too-large balance sheet—last quarter it offloaded a Japanese brokerage and consumer lending businesses in Norway and Portugal. Bank of America recently conducted its own government-style stress test to gauge the health of its subsidiaries.
In the end, the stress-tests were a nice metaphor for Obama administration economic policy writ large: The communications aspect was a bit muddled—who outside Wall Street has more than a vague idea of what they entailed? The macro forecasting was a bit off--the stress test’s pessimistic scenario assumed unemployment would average 8.9 percent in 2009; the actual number will be at least 9.2 percent. But the tests and their aftermath were well-thought through--top officials like Geithner, Larry Summers and Christie Romer spent hours gaming out every possible scenario (including a meeting during Passover that ran so long Geithner’s special assistant passed out matzah to stave off starvation). And, most importantly, they backed us away from the brink of disaster. Not bad for a policy that cost about $787 billion less than the stimulus.
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