Now it’s official. Prosperity is right around the corner. We have heard the good news from both Wall Street and Washington. President Obama is careful not to use those very words, since this is what Herbert Hoover kept telling Americans during the country’s ugly, post-1929 slide into the Great Depression. But the Obama administration sees “green shoots” sprouting all around and it offers hard evidence in the long-anticipated results of its “stress tests” for major banks. Good news! Nobody is insolvent. Some major names need to raise more capital–a not exactly trivial $75 billion more–but not to worry. They can all weather the storm, with a little more aid from Uncle Sam.
The stock market turned bullish in anticipation, and so has Federal Reserve chairman Ben Bernanke. With few qualifiers, the Fed chairman announced a recovery is likely in the second half of the year. Well, maybe not for employment, but that’s a lagging indicator and financial markets always lead the way. If these forecasts are true, the celebrated “stress tests” are an anticlimax. Things already are on the mend in the banking system. When the $800 billion economic stimulus spending fully kicks in, the animal spirits will also return to the real economy of producers and consumers. There will be “a chicken in every pot,” as Herbert Hoover used to say.
Barack Obama’s wholesome optimism is doubtless sincere, and so was Herbert Hoover’s. But in Hoover’s day, people did not believe him. They could see for themselves it wasn’t true. In time, Americans came to revile Hoover for his repetitious happy talk.
President Obama is now flirting with the same fate. He and his lieutenants, much like the Bush administration before them, are convinced that the nation’s crisis can essentially be reversed by restoring “confidence” among investors, producers and buyers. So they talk up every budding blossom as proof. So did Hoover.
Reality is unlikely to cooperate, because the core of this crisis is not psychological. It is about real breakdown and real loss–trillions of dollars lost to the collapsing financial values, thousands of businesses and banks deeply damaged by collapsing balance sheets and markets. Wishing does not necessarily make it so. Talking up the economy prematurely may actually yield an opposite result–deepening cynicism and mistrust, a sense that the authorities do not know what they are talking about or, even worse, are concealing the truth.
More bearish analysts look beyond the good talk and they see deepening troubles for the banking system. While Obama’s technocrats captured the big headlines with their encouraging “stress test” results, a private firm produced its own “stress test” on the very same day and it told an opposite story. The Institutional Risk Analytics Bank Monitor produces quarterly reports for investors on the health of individual banks and the system as a whole. IRA has gained enormous prestige in financial markets during the last few years because it has consistently been far ahead of government regulators and economists in warning about big trouble ahead.