Bernanke likes stress test results

Federal Reserve chairman Bernanke liked what he saw from the "stress tests" conducted on the 19 largest U.S. banks. That would make sense since his agency was probably heavily involved in setting the criteria for the evaluations.

His comments are an example of the government's PR campaign aimed at telling the public and business sectors that big banks are now "safe."

According to Reuters, Bernanke told a conference in Georgia yesterday, "Many of the banks are well ahead in finding private-sector options for increasing their common equity, and several have announced plans for new equity issues."

While what Bernanke says is true, it is only a partial picture of banking in America. The "stress tests" also indicated that losses at the big banks could total $600 billion between now and the end of next year. Figures from the IMF and other analysts indicate that the number could be much higher.

Bernanke cannot know, because no one can know, how bad the write-offs from consumer credit defaults and commercial real estate loans will be. There is still a reasonable chance that unemployment will rise above 10% and stay there for more than one quarter and that joblessness will remain high for at least another two years.

As the economy moves into the latter part of this year and early 2010, banks may stumble again and need yet another round of capital. If that happens, talking up the results of the "stress tests" will only make the government's analysis of the sector look foolish and raise questions about its ability to evaluate the financial sector.

Douglas A. McIntyre is an editor at 24/7 Wall St.



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