In The New York Times today, we learn that the “stress test” that the Obama administration will apply to banks assumes:
Depression-like conditions, with unemployment surging to 10 or 12 percent, for example, or home prices dropping 20 percent further, Treasury and Federal Reserve officials said. Fed officials emphasized that these hypothetical events were “highly unlikely” to occur.
Well, my crystal ball works no better than anyone else’s, but a recent examination of U.S. financial sector collapses past by Carmen Reinhart (U. of Maryland) and Ken Rogoff (Harvard) suggests that what is being characterized as “highly unlikely” by the Fed is probably the most likely outcome . . . if past is prologue, anyway.