So the banks' stress tests were finally released, and it was received with much enthusiasm. $75B in new capital. Roger that! Now the stock market can boom, we can talk of all the green shoots we see ... life is beautiful! It's a fiction we all want to believe. I know I do. I have one of my best friends without a job, and tepid economic environment causes me some discomfort personally. Plus, the booming stock market can make me feel like investing guru ... the next Warren Buffet.
Maybe it's the pessimist in me, but I say hold on to your horses! My initial suspicions arising from the relatively small size of the capital requirements ($75B is peanuts in today's bailout world) are unfortunately being confirmed by a couple of disturbing pieces of evidence.
First are the assumptions of the stress test themselves. The "adverse" scenario assumes 8.8 percent unemployment for this year, and 10.3 percent next year. Umm, newsflash - unemployment is already 8.9%, and it seems like 10.3% next year should be the baseline, not an adverse scenario.
Then there is news that the Fed modified the deficit computations under pressure from banks. Bad move! If there's one thing Japan should teach us, it's that a loss of confidence can be incredibly detrimental to the recovery of the financial system. At this point, it feels a lot like the regulators are becoming salesman for the banks, while shoveling public money with no end in sight.
So be nervous ... while we'd all like the dark clouds to pass, things might not be as rosy as they seem.