Mostly conservative commentators, when not deriding the Swedish model of complete but temporary nationalization of the banks, have turned their deer-in-the-headlight gazes eastward to shudder in horror at the specter of "zombie banks" and "Japan’s lost decade" as a possible American future if their version of strong, decisive action is not taken to return U.S. banks to profitability.
James Baker, in a recent Financial Times column described zombie banks as follows: (Link provided below)
Beginning in 1990, Japan suffered a collapse in real estate and stock market prices that pushed major banks into insolvency. Rather than follow America's tough recommendation - and close or recapitalise these banks - Japan took an easier approach. It kept banks marginally functional through explicit or implicit guarantees and piecemeal government bail-outs. The resulting "zombie banks" - neither alive nor dead - could not support economic growth.
The schemes favored by the right run the gamut from A to B. They include doing nothing and allowing the invisible hand of the market, now evidently otherwise engaged, to heal itself. This, I think, would qualify as the "shock and awe" option. Another favored conservative approach supported by the likes of James Baker and put into practice by Henry Paulsen prefers government intervention up to a point: just enough so that gains are generated and privatized while losses are born by the tax payers.
This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan's secretary of the Treasury, I abhor the idea of government ownership - either partial or full - even if only temporary. Unfortunately, we may have no choice. But we must be very careful. 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."
James Baker,"How Washington Can Prevent Zombie Banks", Financial Times 3/2/09
How have tax payers fared under under TARP so far? According to Elisabeth Warren, head of the Congressional Oversight Committee overseeing the bank bailout, public monies have been provide to the banks at considerably less favorable terms than has private money. Initial infusions of billions of tax dollars bought us about 66 cents on the dollar in bank equity and warrants and those values have dropped considerably since then. Private investors on the other hand, such as Warren Buffet and foreign princes, got full value or better.
Elisabeth Warren was recently interviewed by Terri Gross on NPR's Fresh Air:
Terri Gross: Do you think the current crisis we are in will change who the haves and have-nots are?
Elizabeth Warren: I think the big changes will be what rules we make coming out the other side...Are we going to reregulate the economy in a way that continues to make profits private and to shuffle losses off to the tax payer?... Are we going to say...its no longer a profit scheme to take advantage of people who can't read mortgage documents?
http://www.npr.org/... Elisabeth Warren: Foreclosures Threaten Economy
In a recent blog, Paul Krugman, in spite of his disapproval of "dithering" when it comes to Obama administration bank policy, appeared to view the zombie bank model with some degree of equanimity. Japan Reconsidered
A couple of the comments in response to Mr. Krugman’s remarks are well worth reflecting upon. These comments remind us that markets exist to serve all the people, not just capital. Tuey inspired me to dust off and read a book that has been gathering dust on my shelf for years, Steady State Economics by Herman Daly.
The fact is that the wealthiest 10 percent of American households own 85% of all stock, and only 25 percent of households own more than $25,000 worth of stock. The notion that most - or even a large percentage - of Americans’ wealth is invested in the market is simply wrong. Nevertheless, that hasn’t stopped policymakers and talking heads from trying to shape economic policy to cater to shareholders
— jjcomet
Anyone who traveled to Japan during the Lost Decade must have experienced similar cognitive dissonance. This is "lost"? Well, it certainly looks better than anything we "found". One problem with some economists is that their measurements sometimes betray a prejudice, such as a rising stock market being an ipso facto social good, or low taxes being prima facie evidence of a strong economy. That’s why actual Americans were struggling during the best of times and many are utterly untethered from any safety harness today. Japan is a functional, some might say optimal, social democracy. The US, by contrast, is a Randian dystopia where losers outnumber winners yet the winners whine anyway.
— walt