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Tag Archives: M3

Nouriel Roubini’s article The ‘Stress Test’ Are Really ‘Fudge Test’  in Forbes today is excellent. Here are 3 reasons.

1. The banks have been telling us that everything is fine even as they were failing.

2. Around 2005 I completed the 3-month Treasury rate model, based on M3, that forecasted interest rates 1 year out to within an accuracy of 100 basis points.

Unfortunately the Fed stop publishing M3. The value of M3 as an economic indicator  has been grossly underestimated. But the point here is that the model recognized that there are economic feedbacks going back 20 years, that need to be taken into account to forecast rates reliably.

My point is that you have to take what the banks tell you about their health with a pinch of salt, and it is not the banks that are driving the economy. It is the economy that is driving the banks.

We fail to realize that the banks are only successful because Other People place their money with them.

A test of bank management prowess would be to ask them to make these types of profits in say Irian Jaya. They cannot because there is not enough of Other Peoples’ Money there.

3. We have to realize that there is a difference between the measure of reality and reality itself. Mark to market is an example here. Changing the rules to allow the banks to ‘look good’ does not change their reality.

I have a great respect of Bernake and Bair, but underestimating the severity of the problem as Roubini has pointed out does not help anyone.

Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.