Only yesterday did the Fed announce that the 19 major banks are basically ok. Well, half of them have to raise capital, but they won’t be allowed to fail, and with the stroke of some accounting trick (converting preferred stock to common stock) the top 20 banks would be not-so-stressed.
Bad timing. Today's labor report shows that over 500,000jobs were lost in April. This raises the unemployment rate to 8.9% from 8.4%,and there are no signs that future months will generate significantly smaller job losses. Here is the issue: 8.9% was already the worst case scenario assumed by the "Stress Test" administered by the Fed to the Banks. The FED guidelines are in Table 1
Table 1: Economic Scenarios: Baseline and More Adverse Alternatives
|
|
2009 |
2010 |
|
Real GDP 1) |
||
|
Average Baseline2) |
‐2.0 |
2.1 |
|
Consensus Forecasts |
‐2.1 |
2.0 |
|
Blue Chip |
‐1.9 |
2.1 |
|
Survey of Professional Forecasters |
‐2.0 |
2.2 |
|
Alternative More Adverse |
‐3.3 |
0.5 |
|
Civilian unemployment rate3) |
||
|
Average Baseline2) |
8.4 |
8.8 |
|
Consensus Forecasts |
8.4 |
9.0 |
|
Blue Chip |
8.3 |
8.7 |
|
Survey of Professional Forecasters |
8.4 |
8.8 |
|
Alternative More Adverse |
8.9 |
10.3 |
|
House prices4) |
||
|
Baseline |
‐14 |
‐4 |
|
Alternative More Adverse |
‐22 |
‐7 |
Notes: 1) Percent change in annual average. 2) Baseline forecasts for real GDP and the unemployment rate equal the average of projections released by Consensus Forecasts, Blue Chip, and Survey of Professional Forecasters in February. 3) Annual average. 4) Case‐Shiller 10‐City Composite, percent change, fourth quarter of the previous year to fourth quarter of the year indicated.
It is a bit worrysome that practitioners, who are required to do do stress tests on a regular basis, judge the whole exercise was more like a spa treatment than a workout.
