A Better Stress Test For Healthy Banks

Just look for the ones that are saying ‘no thanks’ to being run by Barney Frank.

[Thursday morning update]

Related thoughts from Megan McArdle:

What to think of this? One’s first instinct is to say that this is an unalloyed good–the restrictions have made taking the funds costly enough that only truly troubled institutions will do so.

The problem is, that’s precisely what the Fed was trying to avoid. Central bankers have long made a practice of keeping it a secret who borrows from them at the discount window, because publishing the names of those who need a temporary cash infusion could trigger a bank run. In order to get the money into the banks that needed it to stave off a liquidity crisis, Bernanke and Paulson very deliberately asked banks that were widely believed to be sound to take the money too. Otherwise, the government bailout funds might have touched off the very crisis we were trying to avert.

It doesn’t do us much harm to put taxpayer funds into banks that don’t need it–we’re borrowing at low rates right now, and the banks that don’t need the money are the ones with very low default rates.

It’s also possible that some of the measures that express our collective rage at the bankers could tip the banks over the edge. It’s satisfying to make AIG cut out junkets for independent insurance agents, but it also probably means that fewer AIG policies will be sold. Since we now own the company, we probably cost ourselves money in order to express our outrage.

But it feels so good. And feelings, not thought, are what counts with the new regime.

[Bumped]