The science of bank solvency

May 19, 2009

Because everyone in Washington wants to take a bite at the delicious apple that is the Wall Street meltdown, the Investigations and Oversight subcommittee of the House Science and Technology committee held a hearing today on the “Science of Insolvency.” Now I was hoping to get a panel chock full of new-fangled “econophysicists.” Instead I had to settle for Columbia’s Jeffrey Sachs, blogger and former IMF economist Simon Johnson, Dean Baker of the Center for Economic and Policy Research and David John of the Heritage Foundation.

To be honest, the best part was when Paul Broun, a Georgia Republican, tersely rebuked Sachs for not submitting his testimony in advance and warned him never to pull such a stunt again. Ouch! But beyond that, there was pretty much uniform agreement that the best-case scenario for economy was a “muddling through” recovery of sluggish growth thanks to the battered financial sector.  But there really wasn’t much science on display since determining the future solvency of banks is economy dependent to a great extent. And calling economic forecasting a “science” is an affront to the term. That being said, none of the panelists would be surprised if big banks needed more capital than called for by the “stress tests” and all of them seemed pretty worried about the impact of commercial real estate and construction lending by small and medium-sized banks. Clearly, all of them read their WSJ today.

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