All About The Baseline

The U.S. government has released more information about the stress tests it'll be preforming on the banking system in the coming weeks. The tests will measure a bank's situation against a pair of economic scenarios for the end of 2010 — "baseline" and "more adverse" — to see whether it can survive.

In the baseline scenario, the economy is growing at 2.1 percent, unemployment's at 8.8 percent, and housing prices have fallen 4 percent from the end of 2009. In the adverse scenario, those numbers are .5, 10.3 and -7.

Which brings us to Simon Johnson, of Baseline Scenario.

Johnson writes that the government's plan allows regulators to know the outcome of the stress tests already — unless, somehow, its projections don't pan out. Johnson asks:

How exactly do we get growth over 2 percent in 2010 (and after)? The global economy is getting worse, consumer and business confidence is weak everywhere (tell me if you know different). There is no sign of housing turning around, consumers are cutting back, and large organizations are all planning to trim costs for the next financial year. Our policy response so far: moderate fiscal stimulus, underfunded housing policy, and small potatoes for the banking system.

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