Ryan Avent lands at Market Movers

April 15, 2009

I’m very excited to see Ryan Avent off to a storming start at my old home; if you’re not sure who he is, he gives himself a pretty comprehensive introduction here. Ryan is one of the smartest and most perspicacious bloggers out there, and it’s great that he has thrown off the anonymity of Free Exchange: blogging does not generally work well with the kind of anonymous psuedo-omniscience that the Economist specializes in.

Ryan has already managed to encapsulate the problem with the government’s stress tests:

If the administration releases information suggesting that the tested banks are all basically fine, then the data is worthless. Markets will go on speculating on which banks are in the most trouble (and possibly be more pessimistic, generally, based on the government’s bungling of the tests). If the administration provides meaningful information of any kind, on the other hand, markets will naturally assume that the weakest looking banks are the weakest banks, and will begin trading accordingly.

The way out of this problem I think is for the government to recapitalize the weakest banks before it releases the stress-test results, and then to release post-money stress tests showing that, as a result of its recapitalizations, all the tested banks are basically fine. It’s a risky strategy, but I don’t think Treasury has much choice at this point.


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