Getting Off

Dr. Krugman has a few words to say about those tests.

...Even before the results were announced, Tim Geithner, the Treasury secretary, told us they would be “reassuring.”

But whether you actually should feel reassured depends on who you are: a banker, or someone trying to make a living in another profession.

I won’t weigh in on the debate over the quality of the stress tests themselves, except to repeat what many observers have noted: the regulators didn’t have the resources to make a really careful assessment of the banks’ assets, and in any case they allowed the banks to bargain over what the results would say. A rigorous audit it wasn’t.

But focusing on the process can distract from the larger picture. What we’re really seeing here is a decision on the part of President Obama and his officials to muddle through the financial crisis, hoping that the banks can earn their way back to health.

It’s a strategy that might work. After all, right now the banks are lending at high interest rates, while paying virtually no interest on their (government-insured) deposits. Given enough time, the banks could be flush again.

But it’s important to see the strategy for what it is and to understand the risks.

Remember, it was the markets, not the government, that in effect declared the banks undercapitalized. And while market indicators of distrust in banks, like the interest rates on bank bonds and the prices of bank credit-default swaps, have fallen somewhat in recent weeks, they’re still at levels that would have been considered inconceivable before the crisis...

...what worries me most about the way policy is going isn’t any of these things. It’s my sense that the prospects for fundamental financial reform are fading.

Does anyone remember the case of H. Rodgin Cohen, a prominent New York lawyer whom The Times has described as a “Wall Street éminence grise”? He briefly made the news in March when he reportedly withdrew his name after being considered a top pick for deputy Treasury secretary.

Well, earlier this week, Mr. Cohen told an audience that the future of Wall Street won’t be very different from its recent past, declaring, “I am far from convinced there was something inherently wrong with the system.” Hey, that little thing about causing the worst global slump since the Great Depression? Never mind.

Those are frightening words. They suggest that while the Federal Reserve and the Obama administration continue to insist that they’re committed to tighter financial regulation and greater oversight, Wall Street insiders are taking the mildness of bank policy so far as a sign that they’ll soon be able to go back to playing the same games as before.

So as I said, while bankers may find the results of the stress tests “reassuring,” the rest of us should be very, very afraid.

Fear isn't an effective way to deal with junkies, Dr. Krugman. Like Harriman at BagNews says:

...Instead of investigative journalism, the public is fed executive hagiographies and paeans to entrepreneurship and productivity. Even after the downward spiral of the last few months, the analysis often is devoted too much to praising the intelligence of the players and the complexity of the deals. The accompanying photos of gilded office towers and middle-aged guys in sharp clothes hardly diminishes the luster of those supposedly being scrutinized...

You see, the downturn is supposed to be a natural cycle. Just give the banksters the Treasury's account numbers, and everything will be all right. As long as the rush lasts, anyway.