Here’s the economic strategy update. Yesterday, Ben Bernanke apparently convinced the market that no major banks will need to be taken over due to lack of capital. If he knows this, I’m not sure exactly why we need the stress tests. But we now know the outcome of those tests.
At the same time, Chairman Bernanke has made (or reiterated) a clear call on the economic recovery. Look at p.A2 in your morning WSJ; in the third panel of the chart, the heading tells you all: “Real GDP contracts… Bounces, then moderates.”
There is no sign of a potential lost decade here. The central range of the forecast for 2010 is entirely above 2 percent, leaning towards 3 percent (Q4 on Q4).
So the banks have – by assumption – sufficient capital. The stress test will be relative to this baseline; you can see that the “maximum stress” will be pretty mild and, very important, short-lived.
President Obama therefore can present and emphasize his (admirable) long-term goals, as he did last night.
I just have one question. How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system. Monetary policy sounded bold a month ago; now less so (again, if your central forecast is so rosy, why embark on risky or controversial further monetary expansion?)
The answer is: wait and see. If we get a recovery, then we are fine. If there is no recovery, we’ll deal with it at that time and we can bolder at that time.
I remember hearing the exact same thing from the Paulson Treasury after the failure of Bear Stearns.