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Time to Stress Out About Stress Tests

Washington is leading us to a second crisis: Krugman

By Jason Farago, Newser Staff

Posted May 8, 2009 7:22 AM CDT

(Newser) – Sure, yesterday's release of the stress tests' results felt pretty anti-climatic. But while bankers might be reassured, Americans have no reason to be, writes Paul Krugman. For the New York Times columnist, the less-than-rigorous stress tests are part and parcel of an Obama administration strategy to "muddle through the financial crisis," creating "a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout."

It's bad enough that Washington is failing to recapitalize the cash-poor banks further, which will encourage "a prolonged, Japanese-style era of high unemployment and weak growth." Worse still, Wall Street is watching the Obama team's mild response to the crisis as encouragement to go back to its work excesses. Tim Geithner might think the stress tests' results are "reassuring," says Krugman, but "the rest of us should be very, very afraid."

[Images (4)]

[Quotes (2)]

Citibank was one of the banks to require further capitalization after the completion of Washington's stress tests. (AP Photo/Matt Rourke)

A sign for a Bank of America branch is shown in downtown Philadelphia, Thursday, May 7, 2009. (AP Photo/Matt Rourke)

Timothy Geithner, Treasury secretary, speaks while Barack Obama watches, May 4, 2009. (AP Photo/J. Scott Applewhite)

Barack Obama and Timothy Geithner, in Washington, May 4, 2009. (AP Photo/Ron Edmonds)

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The economy may no longer be plunging, but it’s very hard to see where a real recovery will come from. And if the economy does stay depressed for a long time, banks will be in much bigger trouble than the stress tests captured. - Paul Krugman

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. - Paul Krugman

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Time to Stress Out About Stress Tests