How Washington Can Prevent “Zombie Banks”

The word “zombie” describes a corpse-like being, under a spell that allows it to move about, but not undertake any deliberate or meaningful action on its own. Such is the term used by former James Baker, former US treasury secretary, to describe banks that accept huge government bailouts, but don’t go about the business of lending. When Japan suffered economic collapse in 1990, the US sternly urged closing or recapitalizing of such bank and opposed piecemeal bailouts, and Baker now urges the US to follow that advice from nearly two decades ago. Shareholders and investors would lose money, but swift moves to close what he calls hopeless banks would boost the healthy ones and restore public confidence in the system. “The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment,” Baker advises. For now, uncertainty and a lack of trust paralyze the system, encouraging more zombie-like behavior. – YaleGlobal