Muddling Through

The Lehmann Letter ©

Today the government released the results of its stress test of the nations’ banks. The Findings: Some banks will require more capital if the economy deteriorates more than forecast. Others will not.

But the most important and apparently overlooked point is that the nations’ major banks have survived the crisis. The bailout worked.

Moreover, the banks’ enhanced capital requirement is a safety cushion. The banks will take on more capital even if worst does not come to worst. They’ll be safe either way.

That’s a much rosier set of circumstances than that perceived six months ago. Last fall there was talk of systemic collapse. You don’t hear that today.

So we’ve muddled through.

But what about the Japanese precedent? Their banks muddled through the 1990s with impaired balance sheets, unable to do the lending expected of them. They, too, wrestled with difficulties brought on by asset deflation.

Will our banks also under-perform in the coming decade because of the lingering consequences of our asset deflation?

We’ll see.


© 2009 Michael B. Lehmann