Tuesday, July 18, 2017
I meant to address this issue a couple of weeks ago when the results first came out, but then a vacation interrupted my life and the rest is history. Anyway, the findings of the Federal Reserve's "stress test" completed on 34 large U.S. banks were released on June 22, 2017.
The results indicated that all 34 banks passed for the third consecutive year. The banks were put through financial simulations to determine if they could survive a 2-year economic slump that included a 10-percent national unemployment rate, a 50-percent decline in stock valuations, a 25-percent drop in home prices, and a 35-percent decline in commercial real estate prices.1
Basically, this means that the tested banks have enough capital to withstand a massive financial shock and deep recession. These tests were created in 2009 as a response to the housing crisis and recession that took place in 2008.
This news made me think about a stress test for our government. At the end of June 30, 2007, the national debt was $8.868 trillion. Comparatively, the national debt was $19.846 trillion as of June 30, 2017.2
Our nation's total outstanding debt has increased 124 percent over the last 10 years. The bank stress tests were put in place by the government because our government blamed the banks for the panic that took place in 2008 and are designed to prevent another market failure.
In my personal review of history, the biggest threat to prosperity has never been market failure; instead, the biggest threat appears to be government failure.
Markets didn't fail in the Soviet Union, North Korea, Puerto Rico, Detroit, or Illinois. For example, three different states that were shut down last week at various times because none of their political leaders could agree on a budget. Illinois has not run a balanced budget in more than 15 years and is technically bankrupt. Moody's estimates that Illinois' unfunded pension liability for its five public pension systems is $250 billion, double the $127 billion estimate from the state's accountants.3
How can the Federal Government and various state governments run deficits year after year and project deficits for decades into the future, yet keep spending as if all is well?
The United States is in the midst of one of its longest recoveries and yet our government continues to run deficits. Where are the stress tests, regulations, and claw backs to punish our politicians who are responsible for this financial mess?
At this point in history, it seems that government employees seem to think they have more claim to the income and assets of its citizens than the citizens themselves. This is a pending disaster that could and should have been avoided.
Simply put, our governments - state and federal - need to spend less money than they bring in each year. Each family in this country has to live by this simple rule or the result does not end well.
I won't hold my breath waiting for the government to stress test itself. I already know what an honest assessment would say; that the present course of government policy in many states and the federal government is unsustainable.4
1 Federal Reserve
2 Treasury Department
3 Moody's Investors Service
4 The opinions expressed are subject to change with economic and market conditions. They are not meant as investment advice. Forward looking statements and market forecasts cannot be guaranteed and may not come to pass.