2/17/2009

Zombie Banks Coming – Run!

Income tax returns are the most imaginative fiction being written today.  - Herman Wouk

I heard a good piece about “zombie banks” this morning on NPR. "Zombie banks" was the term for Japanese financial institutions propped up by government in the '90s despite their basic insolvency after their real-estate bubble. In a financial "revenge of the living dead", these unprofitable banks cast a decade-long pall over Japan. US banks like Citgroup, Bank of America and others are now in the realm of the living dead. zombiebankl

US officials urged Japan to give up on failed institutions. Instead, it pumped 12 percent of its gross domestic product into saving the banks and received a "lost decade" of economic stagnation in return. Sound familiar? Economic analysts across the board agree that the Japanese example must not be repeated - even as our government proceeds to do precisely that!

Members of the House Financial Services Committee grilled banking CEO's about their lending practices and bonuses. Rich Lowry says they should have been asking, "Why does your company still exist?" A zombie bank keeps draining bailout capital from the government but doesn't respond with any meaningful lending that helps the economy recover.

Estimates show that even after the Government's huge recent cash infusions, the financial system still has at least another $1 trillion hole in it. The US government has to either continue to try to patch this with massive injections of cash like Japan did in the '90s, or take the gutsy, painful step of chopping off the zombies' heads right now and splitting them up to save the good parts and come up with new, smaller, healthy banks. One expert on the NPR piece said that if they wait another year to do this things will get very, very bad indeed.

There are thousands of small, local, healthy banks that were smart enough not to get caught up in the funny money greed cycle. I think I’m gonna give my money to them and tell them to keep doing what they’ve been doing, just more of it. The morons running Bank of America don’t deserve my money.

When President Obama was asked in his first prime-time press conference if it would take another trillion dollars to rescue the financial sector, he dodged - because a simple "yes" would be just too much the blunt truth.

As it stands now, the government is keeping alive huge zombie banks that would otherwise have gone bust many months ago. Bankrupt banks that really are "too big to fail" need to be taken over by the government, broken up until they're small enough to fold or for a new, healthy bank to be created, with government eating the toxic assets for the time being. That kind of  quasi-nationalization can set the stage for new, healthy banks that won't be long-term wards of the State or long-term drags on growth. Nobody likes nationalization of banks, but what we’re doing now is just throwing our grandchildren’s tax dollars down the toilet. The Japanese already proved that doesn’t work, why can’t we learn the lessons of history? I mean, are our elected representatives really THAT dumb? OMG! The Zombies are coming! Quick – print more money and throw it at them!

You know, I've watched a few of those zombie movies, and you cannot "cure" zombieism - you have to shoot 'em, cut their heads off.

Oh, and while we're at it -- we've got some zombie automakers that need the same treatment. Sorry, but it’s the truth. Help! I’ve fallen, and I can’t get up! Feed me money!  I leave you with the comments of Marc Faber, writing in the Feb. 18 2009 Wall Street Journal:

“The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgiveable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump – possibly an inflationary depression with dire social consequences.”