Connecting the Dots

As the “Swine Flu” garners headlines and worries across the country, it is drawing attention away from a potentially more deadly, super, super pandemic. This pandemic has been dubbed the “Stress Flu” and could affect more than 90% of Americans. There is no easy cure for this flu. Its symptoms are as follows: nervousness, nausea, irritability, insomnia, inability to focus, blowing things out of proportion, yelling at people for no good reason, reticence to spend uncontrollably, and spasms that cause uncontrollable finger gestures.

The government in its pernicious wisdom has found one potential source of the flu, the nation’s largest banks. Over the last few months, they have been conducting “stress tests” to determine possible cures of the economic strain of this bug. The results of these tests are scheduled to be released on Monday.

So, what is a stress test? The secrets of it can be found in the black boxes located inside of the Treasury and FDIC. Rumors of what it entails have been leaked by participants of it to the media, but there is no real public picture that wholly encompasses the actual processes and methods regulators and bankers are using to conduct these tests. The theory is to shock the portfolios of the nation’s largest banks by assuming a host of worsening economic conditions to determine the solvency of these banks and their need to add additional capital. Forms of these tests will probably be rolled down to smaller institutions over a period of time.

What does this mean for you and the Coachella Valley? Well, we have all been gong through a significant stress test for a period of time. As one of the hardest hit areas in the nation in real estate depreciation and unemployment, most of us are very familiar with the concept. We have had our stress test and are now looking for some relief.

The relief actually has been coming for some time. The massive amount of stimulus and support of banks have kept a steady flow of funding and liquidity in the market since the peak of the economic crisis last fall. While real estate values are still significantly down and foreclosures are still rising, the actual numbers of home sales have substantially increased from a year ago. Increased affordability of homes, along with low interest rates and liberal financing programs through FHA and Fannie Mae, have brought many new buyers into the market.

The stress tests the banks have undergone will not do much directly for the Coachella Valley. But, the entire economy wins by having solvent banking institutions. These institutions need to play a vital role in future economic growth. Furthermore, the failure of any one of the largest financial institutions would create a global, systemic, economic failure, which inevitably would cause the fatality rate of “Stress Flu” to skyrocket.

Once the super-banks are stabilized and we have had a cleansing of the other organizations that need to fail, attention will be focused on dismantling the systemic threats these large institutions represent. It is my hope that regulators, Treasury, the Fed, Congress and the Obama Administration realistically study the causes and effects of this crisis. Perhaps, chief among those causes is the size, complexity, and the lack of accountability in these massive financial institutions.

Finally, recent economic data provide some reason for hope. And, I like to believe in hope because the alternative leads to “Stress Flu.” This week unemployment claims are down, there is a slight increase in confidence and spending and, as mentioned earlier, the real estate market is showing some signs of life. To quote Winston Churchill, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning...”