A Stress Test Called “The Market”

posted by Nima

April 18, 2009 · Posted in General Economics 

In a usual display of incompetence Bank Regulators Clash Over U.S. Stress-Tests Endgame:

The disarray highlights what threatens to be a lose-lose situation for Treasury Secretary Timothy Geithner: If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

“There are plenty of ways to go wrong here,” said Wayne Abernathy, executive vice president of the American Bankers Association in Washington. “It might have sounded good at the time, but now looking back, it has far more risk than benefit.”

Hey Mr. Geithner, why make it so hard on yourself? What are you trying to accomplish? You say you want to find out which banks are sound enough to weather the storm. There is a pretty interesting concept to find out. It’s called the “market“. You know, that place where producers go to sell goods and services to consumers. You heard about that, right? I am saying “heard” because you obviously haven’t experienced it in your life as government bureaucrat and bank executive.

It’s that place where entrepreneurs exchange their consumer goods and services against money offered by consumers. It’s also the place where entrepreneurs obtain the resources to produce those goods. When they obtain these scarce resources they withdraw them from other uses. Then follows the stress test: If the goods produced are more demanded by consumers than the previous occupation of these resources, they make an entrepreneurial profit. If they are not they incur a loss. If they incur a loss they have to change what they are doing and listen to the consumers, or they need to release the resources they are squandering and make them available to entrepreneurs who know what the consumers are asking.

But this thing called market presupposes voluntary choice on the part of the consumers and entrepreneurs. Nobody can force them to buy or sell something. It is the concepts of liberty, peace, happiness, and prosperity in action.

When, due to the interventions of a government backed central bank, the majority of people in society is withdrawn from productive sectors and employed in an industry whose main objective is to make loans day in day out, the market will send a signal at one point. Some banks will report losses. This means they have failed the stress test. They need to adjust their operations or release their resources. Some banks will remain profitable. Those banks have passed the stress test.

If you keep using tax money or newly created fiat money in order to bail the failed banks out, you are doing the opposite of a stress test. You are giving their executives what is commonly referred to as a free ride. It’s really pretty harmful. Because they will be inclined to keep doing what they have been doing. They will make the majority of the people poorer and poorer.

It’s very simple, this neat little thing called market. You should try it out sometime, unless you want to be remembered as the worst Secretary Treasury this country has ever seen.

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