Friday, February 27, 2009


The Treasury Department's "stress test" of large banks looks at how they would do under two economic scenarios, a "baseline" scenario and an "adverse" scenario. The baseline scenario assumes a 2.0% GDP decline this year, while the adverse scenario assumes a 3.3% GDP decline this year. With the adverse scenario in mind, today's GDP news is a bit disheartening:
GDP fell at a 6.2% seasonally adjusted annualized pace in the final three months of 2008, revised from the initial estimate of a 3.8% drop, the Commerce Department reported. It was the worst decline in GDP since a 6.4% decrease in the first quarter of 1982.

By the way, the adverse scenario assumes a 22% decline in housing prices this year, followed by a 7% decline next year.

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