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Peter Schiff - Stress Tests No Sweat

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March 15, 2012 – Comments (1)

The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.

In the wake of the Credit Crunch, the Fed solved the problem of resetting adjustable-rate mortgages by essentially putting the entire country on an teaser rate. Just like those homeowners who really couldn't afford their houses, our balance sheet looks fineunless you factor in higher rates. The recent stress tests assume market interest rates stay low, the federal funds rate remains near-zero, and 10-year Treasuries keep below 2%. Why are those safe assumptions? Historic rates have averaged around 6%, a level that would cause every major US bank to fail!

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1 Comments – Post Your Own

#1) On March 15, 2012 at 3:02 PM, ryanalexanderson (< 20) wrote:

I like the last paragraph of his article. Not sure if I agree with it or not, but still good:

I propose a new rule of thumb: until true economic growth resumes in the distant future, the fed funds rate should also be used as the "Federal Reserve credibility rate." We'll use a scale of 0-20, which is approximately how high rates went under Paul Volcker to restore confidence in the dollar. So, until the end of this crisis, if the fed funds rate is near-zero, all the Fed's statements, forecasts, and stress tests should be given near-zero credibility. When rates rise to 5%, the Fed's words can be assumed to be ¼ credible. When they hit 20%, that would be a Fed whose words you could take to the bank - if you can still find one.  

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