Are Economic Happy Days Here Again?

Most people, of course, pay little attention to the wily moves of the Federal Reserve Board. We like to keep our eye on them, though, just to be safe since we are living in an era some are now calling a “bankocracy.”

That’s how I found myself the other day wrestling with a press release put out by the best and brightest of our economic minds at the Fed. It said they’ve completed the latest round of CCAR tests of the nation’s banks. CCAR stands for Comprehensive Capital Analysis and Review. It’s a sort of “stress test” for banks. In this case, 19 of the country’s biggest (not necessarily strongest) banks were thrown under the CCAR, as it were.

To the extent it’s possible, the Fed was actually crowing about the results. Here’s what that looks like in “Bureaucratese,” the official language of government agencies:

“…The majority of the largest U.S. banks would continue to meet supervisory expectations for capital adequacy despite large projected losses in an extremely adverse hypothetical economic scenario.”1

Translation into terms we can comprehend: “If another Great Recession hits, most of our banks won’t fail! Don’t worry, be happy!”

Now to be fair, it’s closer to an 80% survival rate. According to the results of the test, only 4 of the 19 major banks got a failing grade.

I’m sorry for going “glass half empty” here, but 20% of our banks imploding is not a good thing. Right now, the Federal Deposit Insurance Corporation is on the hook for nearly $5.5 trillion in deposits. It has only a tiny fraction of that in reserve, so more failures of any significance will further stress the system.

The problem is that in an election year, the Fed has to show that the bank bailout plan worked and our financial system would remain solvent even if another shockwave hits our economy.

The markets, of course, took the announcement as the glass (more than) half full. Investors responded with near euphoria, and all sectors rose sharply on the “positive” news.

But it’s worthwhile to look at the Fed’s report to see what they consider a financial crisis, particularly if the institution holding your deposits is among the flunking four: SunTrust, Ally Financial, MetLife and Citi. You can read the full report here:

In a nutshell, here’s what the “extremely adverse hypothetical economic scenario” looks like:

  • Peak unemployment at 13%
  • A 50% drop in equity (stock) prices
  • A 20% drop in house prices
  • Total duration of 9 quarters or 2 years, 3 months.

If that happens, the Fed estimates the nation’s 19 largest banks alone would take it on the chops for $534 billion. That doesn’t begin to estimate losses for the entire banking system.

Another dubiously positive figure from the Fed’s test shows real estate related losses amounting to less than a third of the total hit taken by the big banks. Tangent Capital Partners’ Christopher Whalen is skeptical: “Since real estate is half the total $13 trillion balance sheet of the US banking system and more like 3/4 of total exposure if you include RMBS [real estate mortgage backed securities], how does the Fed manage to keep total real estate losses below $150 billion in the stressed scenario?”2

Considering the impact of the subprime housing bubble’s burst in 2008 that brought on the Great Recession, the Fed’s latest CCAR estimate seems weak (IMHO). According to The New York Times, roughly 4 million people in America lost their homes to foreclosure between 2007 and early 2012. With the overall median value of a home in the U.S. estimated to be $128,000 by the National Association of Realtors, the real fallout of residential real estate loss could reach closer to $300 billion should we experience another economic shockwave.

Add to that another 20% drop in homeowner equity and the underwater mortgage to default to foreclosure spiral would be in full force again.

Seemingly unburdened by wisdom from past experience, sophisticated investors in the “smart money” crowd aren’t nearly as troubled as I am over the Fed’s rose-colored report. The Dow Jones Industrial Average has gained back the ground it lost to the Great Recession.

In my view, the economic picture in America can be compared to a tightrope walker crossing a great chasm. In 2008, turbulent conditions caused our economy to wobble from side to side and nearly fall to its death. Shaken, but not mortally injured, its forward progress stalled and all observers realized that calamity was only one misstep away. Many watching were seized by fear and doubted the economy’s ability to recover.

Now the headwinds have lessened and the experts are saying the economy is back on its feet and will press on to victory across the perilous chasm even if those storms return with substantially more force.

What they are not telling us is that the “rope” our economy stands on is fraying at both ends, temporarily kept from snapping by more strands of sovereign debt. They would have us keep our eyes on the tenacious performer and not the thinly stretched twine temporarily holding the rope in place.

My advice, remain cautious. The forecast calls for more headwinds ahead.

I would love to hear your thoughts, post them in the comments below.

1Board of Governors of the Federal Reserve System Press Release, March 13, 2012 accessed 3/14/12 at

2Christopher Whalen, “Bank Stress Tests and Other Acts of Faith,”, accessed 3/14/12 at

About Chuck Bentley

CEO, Crown Mininstries
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16 Responses to Are Economic Happy Days Here Again?

  1. matthew says:

    Last week I heard “B” saying “should a credit event occur” only to find out that a “credit event” means “default”. Every time the “Fed” speaks I somehow reduce to a limited vocabulary, the only words I understand are the constant uhh’s, sincerely I wish I could comment but I do not understand what the Fed is saying………………………..sorry:(

  2. Laureen says:

    Thanks for your perspective. I keep hearing that we are on our way back up in our economy but my understanding is the government and the liberal news are feeding us lies. I think we have some very difficult times coming. Please continue telling us the truth even if it hurts, it’s better to prepare and know then to be caught off guard.

  3. Joel says:

    John 16:13 “But when he the Spirit of truth, comes, he will guide you into all the truth. He will not speak on his own; he will speak only what he hears, and he will tell you what is yet to come. I think what we all need is an intimacy relationship with the Holy Spirit, learn to be still, hear & obey his voice; He will guide us and reveal us what to do, because of that, we are not like those who have no hope, history shows that in times of crisis is when more opportunities are found and because of that we must be discernible and take action, He has given us the promise land, but “it must be conquered”.

  4. Thanks for interpreting their “so called” good news. Run away energy prices and out of control federal govt. spending don’t bode well for a full and strong recover. We are preparing for some real serious disruptions in our supply of goods and money. That will also make services scarce. Continue to help us interpret what the Fed and Secty of the Treasury are saying and more likely “not saying”?-huh? God bless and keep you, Crown Financial Ministries management team, as well as, the 100’s of volunteers.=[Time to impliment our S.A.L.T. Plan>>>>>>><<<<<<<<<<]

  5. Roger Wrench says:

    I appreciate your straight-forwardness on this important issue. As a small business owner who has witnessed first hand what rising energy and transportation costs are doing to the price of goods and services, and the added burden of government regulations for health care and other things, I do not see the bed of roses the government would have us believe exists, except maybe for the thorns. Caution is in order, and I am working drastically to pay off my business debts and keep current on my bills. Now is not the time for more debt! God watch over you and all at Crown.

  6. Mike says:

    Back in the 1990’s during the time Newt Gingrich was Speaker of the House (during Clinton’s administration) Congress along with the President changed the banking laws that had been in place since FDR’s New Deal, that kept a reign in on the banks from making the foolish, poor investments, giving mortgages to folks who couldn’t afford them, etc, etc. Now with those New Deal regs that had worked well for 60+ years having been tossed aside during the 1990’s the banks have made many poor choices, not to mention the banks have been allowed to grow too big (too big to fail) what ever happened to anti-trust laws? See there needs to be balance, some regs, not too many, some regs, but not no regs. Many of you here may not like FDR and his New Deal, because he was an “evil” Democrat, etc, etc, but some of those programs actually did work and worked well. Some didn’t, but the banking ones did. Again, balance.

    Question, has Congress reinstated those New Deal banking laws to regulate the banks so they don’t put us in that type of problem again? Probably not. The question is why not? Those rules worked great for over 60+ years. My guess is the GOP who want even less regulation are against reinstating what worked, those New Deal era banking regs.

    In the interest of full disclosure, I’m a registered Independent, whose a moderate that leans right so I’m not loyal to either party. I’m also a Born Again Christian, so now you’ve met a follower of Christ who’s not a Republican. I’m not alone.

    Yes the economy is improving, but not as fast as we’d all like. I agree with Mr. Bentley that we all should be cautious. Playing the Stock Market is legalized gambling. Much like going to the race track. You read the stock prospectus to better understand the performance of the stocks you are interested in (the racing form at the track is so you can study the horses running in that day’s race). You make your best guess on which stocks to invest your money (you make your best guess on which horse to place your bet or place your money). The idea of playing the stock market is the same as going to a horse race, place some money down on some stocks or a horse or horses, and later collect far more money than you started with. Both are legal. Both are a form of gambling. The stock market is how companies fund themselves, the races are how the owners of horses fund their small business. I find it amusing how we Christians condemn the guy who went to the track and lost his money playing the ponies, but would feel bad for the guy who lost all his money playing the stock market. Seems hypocritical to me. I went to a race track one time 35 years ago, frankly thought it was boring, have never been back. I used to play the stock market with my 401K and after losing most of that money numerous times, I now have it in a stable fund, because I might have better luck picking horses than I’ve had picking stocks. To me, both are legal forms of gambling, and I don’t know of any Christian church that endorses gambling. Well that ought to throw a cat out amongst the pigeons for a discussion point.

    But to get back to Mr. Bentley’s point, yes, be careful. The stocks have gone back up, but just as they can go up they can go down. Until our government reinstates those New Deal banking rules again or comes up with new ones that accomplish the same thing, I totally agree with Mr. Bentley our economy is built on a house of cards. So be frugel with your money. As all of us who call Christ our risen savior, we should trust in him by being faithful in our giving to our home church, and other Christian charitible agencies who are helping the lesser than thee while spreading the Good News to these folks by the work they do.

    Here’s a question to ponder, IF the government stopped allowing tax deductions, would YOU continue to tithe? The answer should be YES. We give to God and his church, NOT to get a tax deduction or so we might get a mystery check in our mailbox (aka the Prosperity Gospel), it’s great that we get a deduction, but if it were gone tomorrow, that shouldn’t affect our level of giving to God’s church and related ministries. Just something to ponder.

    • Troy says:

      Your post is right on with one minor disageement. Simple movement along a path does not mean recovery when the fundamentals of the economy are broken. A wise man once explained it to me this way: “A ship without a rudder pointing in the right direction does not mean the ship is moving in the right direction.” We are pointing in the right direction with our economy but that is by accident not because of design. Not sure that I would call this a “recovery.”

    • Dave says:

      Thank you for your insight.I totally agree.The analogy you made with the stocks and a race track is good.My retirement money is in the market and I do feel like I watch the results if I’ve won or lost that day.What other options are available for retirement money.You mentioned a stable fund but were’nt specific.What type of stable fund options are available?

      • Mike says:

        One of the options my company’s 401K offers is what they call a stable fund, it doesn’t grow fast, and is more like getting interest, but with that last major down turn we had in 2008, I didn’t lose anything as I have the previous 3 or 4 times. I’m sorry I don’t really understand it any better than that.

    • Chuck Bentley says:

      Mike, thanks for your reply. There is a significant difference between gambling and investing. Gambling necessitates that many must lose in order for one to win. Investing allows for all to win. While both involve risk of loss, investing enables the investor, the company and the consumer of the product or service to experience gain. Compare the outcomes of those that purchased a lottery ticket to anyone who purchased shares of AAPL in 2007.

      • Mike says:

        Mr. Bentley, thank you for your reply, I realize that you don’t normally post replies so I’m blessed that you took the time to reply, Thank you. Sorry I forgot about this posting until I came across it tonight while cleaning out my inbox.

        The difference is the house sets the odds in a card game or casino games, just like at a carnival, sure the house has the odds in its favor, but what if everyone at the track that day picked horse #5 and horse #5 wins. The track loses and everyone else wins, maybe not as much money if only one person picked that horse, but the stock market works in a similar way, too many people pick the same stock to sell in one day and the price drops and you may actually lose money depending where you are in that selling flow. It’s still a gamble, because most folks do not know what they are doing when picking stocks any more than the gambler at the track does in picking horses. I’ve listened to investment shows on the radio, one guy says this and the other show the guy says that. This is not any sort of science. There’s no logic to it at all, it is purely by luck. I understand your point, I just don’t agree with it. Again, thank you for taking the time to offer a reply.

  7. Frank says:

    We could collectively reverse the an economy driven by debt to an economy driven by saving? Moving from inflated asset prices to real asset prices? The answer lies in God’s Word – “look at what the ants do”

  8. travis says:

    Good analysis Chuck! Thanks to Crown and a tape series from your late, great predecessor, we are weathering this thing OK. Kids like mine will look back on it as the best thing that ever happened because it’s easy to spend time with Dad, there isn’t enough work to keep him away. We’ve had epic family time during our three day weekends and I’m rarely late for supper. Type a’s like me thank God daily for taking away the opportunities of a thriving economy that we couldn’t pass up otherwise. It’s also good to see first hand what happens when fear and greed collide, this generation won’t soon forget what happens next, they may be the “greatest generation” yet. Keep up the good work.

  9. Terry Austin says:

    What is the purpose of this post? Are we supposed to be afraid? Worry? Are you asking us to do somthing? Save more money? Give everything away? Sell our stock? Pay off our debts? Stuff our money in a mattress? Fill a storage shelter with supplies? Are you simply saying the economy is going in the tank? Not recovering as fast as you would like? You shared some information that few people understand and, according to your own statement, most experts interpret differently than you. I realize you just might want us to be aware of something (that most of us have no clue what it means) but why not come out and say what we can do to be better off.

  10. Christopher de Vidal says:

    Chuck is there any hope, outside of a miracle, that this Titanic won’t sink? Do you see anything positive in the fundamentals (figures/stats) which might give you hope? Or is it time, in your opinion, to head for the hills? Maybe you’ve already blogged about this; if so please link me.

    • Chuck Bentley says:

      Christopher, there is always hope – including a miracle – that our economy will recover. I share the same view that Joel Rosenberg writes about in his soon to be released new book, Implosion. We need the Third Great Awakening in America for our nation to get back on track to real recovery. I read lots of data by some smart analysts that are optimistic…from an economic standpoint only. One of them is John Mauldin. You can get his fee newsletter at I will write about the optimistic viewpoint in a future post. My latest HOTW…The Coming Cashless Society will be out later today. Keep the faith – we don’t have to head for the hills even if it gets far worse.

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