When it comes to the stress tests, is grade inflation a good thing?

I'm no expert in financial wizardry.  But I do know something about public psychology.  And for me, the stress tests raise a question both deeply philosophical and urgently relevant:  What is anything worth?  What is the true value, say, of a derivative composed of slices of slices of pooled mortgages, themselves based on hype and hope?

When so many assets are so essentially imaginary, how does one rate a bank's stress-resistance except relative to expectations?  And doesn't the act of conducting a stress test and saying a bank has passed actually alter those expectations?

The stress test exercise reveals that a complex national economy is, to such a great extent, a collective and mutual agreement to pretend that things are worth something.  That web of mutual pretense is strong when invisible but surprisingly fragile when seen.  And so recovery relies in good measure on the very dynamic that got us into recession:  wishful thinking.

I don't say this to be critical of the administration.  Faith is very much like wishful thinking, and Geithner is trying to get us to believe in recovery, so that the belief itself inflates the value of assets and becomes self-fulfilling.  It can work.  But if it works, it'll be because of the compounding nature of confidence -- not because we've truly changed the underlying bad habits of overleveraged overconsumption that got us here.

If we come out of this period and look hard at all the short-sighted behaviors and choices that created the cascade of crisis -- and change those habits -- then good.  But if a recovery serves only as a breather before we return to those bad behaviors, then a day of reckoning still awaits.  Grade inflation can't last forever.

Braintruster Eric Liu is an author and former Clinton domestic policy adviser and speechwriter.