Reports from the Economic Front

a blog by Marty Hart-Landsberg

Grade Inflation

The government is working overtime to convince us that the banking system is now stable and the economy poised for recovery.  It just isn’t so and this continuing effort only delays the kinds of discussions and debates needed to fashion a useful recovery strategy.

So far according to Bloomberg news, “Government loans, spending or guarantees to rescue the U.S. financial system total more than $12.8 trillion since the international credit crisis began in August 2007.”

That is a lot of money and we have gotten relatively little for it.  The Treasury Department’s survey of lending by the nation’s biggest banks revealed that “Bank lending to consumers and businesses for many types of loans fell in February despite the billions of dollars in government support the banks received. . . . While the median level of activity in mortgage lending rose 35.4 percent and home equity lines of credit grew 17.7 percent, lending to businesses for commercial and industrial loans plunged 47 percent.

The government has now completed its stress tests on the country’s 19 largest banks.  The tests were designed to reveal whether the banks had adequate capital.  The tests themselves quickly became suspect when the government announced that it was sure all the banks would pass.

In fact, its criteria for measuring stress are inadequate because conditions have been rapidly deteriorating.  For example, as reported earlier, its baseline scenario included unemployment rates of 8.4% in 2009 and 8.8% in 2010.  We are way past that.

The banks will pass not only because the stress levels are too low, but also because the government has relaxed the standards banks must use for valuing their assets.  Most importantly it is now allowing banks to use their own models rather than the market to determine the value of their toxic assets.

Passing grades are getting easier, but that doesn’t mean that economic conditions are really improving.

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