Nouriel Roubini, the economist formerly known as Dr. Doom (who now prefers “Dr. Realist” given his improved outlook) takes on the stress test in a must-read Wall Street Journal op-ed this morning co-authored by his New York University colleague Matthew Richardson. While Roubini may now shun the moniker Dr. Doom, it’s clear he still views the world in less of a rose-colored tint than the U.S. regulators who seem to be drinking a bit of green-shoot flavored Kool-Aid lately.
Roubini and Richardson argue that the stress test likely underestimates losses on U.S. loans and securities and employs an overly optimistic model for the economic situation over the next two years. The “stressed” scenario assumes an upper limit of 10.3% unemployment in 2010, all too rosy in their view.
“…the first quarter's unemployment rate of 8.1% is higher than the regulators' ‘worst case’ scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.”
Roubini and Richardson also outline several interesting proposals to make the PPIP work better, prevent the abuse of taxpayer-provided financing, and gain the necessary authorities to better respond to future crises. Well worth a read and an important counterpoint to the dangerously buoyant and (as I have written previously) possibly unfounded mood of optimism currently infecting the markets.
- Taylor Griffin
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