George Michael once told me that I've gotta have faith. But if I'm not mistaken, he was talking about matters of the heart, not the health of the nation's banking system.

Confidence is definitely important. Any lack of it in the economy or the banking system can produce nasty side effects: bank runs, falling stock prices, and consumers hoarding money instead of spending it. Worse yet, pessimism like that can feed on itself, creating a self-fulfilling prophecy.

But does this mean that we should blindly put on a happy face when it comes to the banking system?

No stressing out over stress tests!
Some indications suggest that the government is trying to use the age-old Bobby McFerrin strategy: "Don't worry, be happy." Stress tests being conducted at banks such as Bank of America (NYSE: BAC), Citigroup (NYSE: C), and JPMorgan (NYSE: JPM) have become a particularly confusing part of this approach.

The New York Times quoted a senior policy official who said "the purpose of this program is to prevent panics, not cause them." That's actually funny, because I figured the purpose of a "stress test" would be to poke and prod the major banks, figuring out who's in good shape and who's still coughing up blood -- not to gather data in support of a predetermined, rosy stamp of approval.

But it looks like the latter may be a better assessment of the government's approach. To many, the stress tests don't appear to include much stress at all in their assumptions. Nouriel Roubini recently wrote:

The FDIC and Treasury used assumptions for the macro variables in 2009 and 2010 [and] both the baseline and more adverse scenarios ... are so optimistic that actual data for 2009 are already worse than the adverse scenario. And for some crucial variables such as the unemployment rate ... current trends show that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009! In other terms, the results of the stress test -- even before they are published -- are not worth the paper they are written on ...

Of course, Roubini's known as "Dr. Doom," so maybe we should expect such a proclamation from him. But he hasn't been alone in suggesting that the banks are in much worse shape than the bulls want to believe. And the fact that we have folks like Dick Bove assuring us that the banks are fine and dandy just emphasizes how opaque the banking balance sheets are, and how important an honest assessment of banking health is.

Even if we throw out the proclamations of guys like Roubini and Mike Mayo, the fact that the government is expressly withholding stress test results because it doesn't want to dampen the recently euphoric mood just makes me wonder more about the intentions behind these tests.

The Wells-Sachs tell
Defenders of the system may retort, "What about Wells Fargo (NYSE: WFC) and Goldman Sachs (NYSE: GS)? Don't their results signal an all-clear for the rest of the financials?"

Not really. As fellow Fool Alex Dumortier pointed out, Wells Fargo's quarter wasn't much of a surprise, although the company might be $50 billion short. Not only have competitors in the banking sector been eliminated, but banks are borrowing at near-zero rates. Also, most investors have known for some time that banks such as Wells and US Bancorp (NYSE: USB) are in a much different class than, say, Citigroup and B of A. Continued...