Hurry up and Do Nothing?
This is continuation of my post below on the stress arising from the US Treasury’s “stress tests”. Tim Geithner writes today in NYT that
… Because of concern about future losses, and the limited transparency of bank balance sheets, banks were unable to raise equity and found it difficult to borrow without government guarantees. (emphasis added)
The effect of (the stress tests) will be to help replace uncertainty with transparency.
But if the problem is the possibility that balance sheets are ugly, how would disclosing that balance sheets are ugly restore confidence? In other words, the stress tests will only restore confidence if they disclose that overall, balance sheets are more robust than one thought. And how could that be after the financial meltdown?
This is the major concern of the Treasury’s critics. For example, Simon Johnson writes that this is all “spin”. Naked Capitalism thinks it is “Orwellian” manipulation to pump up bank stocks.
Hmmm …. one point is worth considering. If stress tests work, reform of financial markets may become more difficult (the system will appear to be no longer broken). If they don’t work, we are waisting time.
I am in the “we are wasiting time” camp. What do you think?
FOLLOW - Here is the “spin” given by Eric Dash and Louise Story at NYT. They see the “feel good” effect.
2d FOLLOW - Here is a link to yet another cogent post by Simon Johnson on why the stress tests may not insure liquidity but instead create “co-dependency” between government and bankers. The simpler solution is receivership for insolvent big banks using the FDIC. This would wipe out shareholders and vested management interests. Ok. That is an “ouch”. But I agree. At some point this will probably happen.