The first sign the Obama Administration was seriously uninterested in fixing the US financial system occurred when then US Treasury Secretary Tim Geithner unveiled the bank stress tests.  These tests violated the very basis on which the US financial system operates.  They did so when they were first unveiled and they do so today as part of complying with the Dodd-Frank Act passed by the Obama Administration.

The US financial system is based on transparency and caveat emptor.  The government is responsible for ensuring all publicly traded securities provide the necessary disclosure so investors can know what they own.  Under the principle of caveat emptor (buyer beware), investors are responsible for all losses on their investments.  This gives investors an incentive to use the disclosed information to assess the risk of each investment and only invest as much as they can afford to lose.

Please note, the government’s role is limited to ensuring disclosure.  It is not responsible for making investment recommendations.

Why?

Everyone recognizes when the government makes an investment recommendation the taxpayer is committed to preventing investors from suffering losses from investing based on the government’s recommendation.

What are stress tests if not the government recommending investment in the Too Big to Fail banks?

After each stress test, the government declares the banks well capitalized and able to withstand a significant economic downturn.  Having said this, on what basis can the financial regulators then step in and close a bank that passed the stress tests?  Certainly not for the failure to be inadequately capitalized.

Restoration of our financial system begins with ending the public release of the stress test results and having the banks provide the information the investors need so they can know what they own by conducting their own stress tests.

I am all for financial regulators testing the viability of the banks.  There is no legitimate purpose served by having the government announce the results of these tests.