Zombie Banks: How Broken Banks And Debtor Nations Are Crippling the Global Economy. Yalman Onaran. Bloomberg Press, 2012, pp. 184, $34.95 Over the past several years, both the Tea Party and Occupy Wall Street (OWS) have been at the forefront of criticizing the federal government’s bailout of large financial institutions. While their criticism is generally [...]
Zombie Banks: How Broken Banks And Debtor Nations Are Crippling the Global Economy. Yalman Onaran. Bloomberg Press, 2012, pp. 184, $34.95
Over the past several years, both the Tea Party and Occupy Wall Street (OWS) have been at the forefront of criticizing the federal government’s bailout of large financial institutions. While their criticism is generally merited, it is unclear whether it would have been realistic, not to mention politically viable, to have let the big banks fail. Such a move truly could have had devastating effects on the American economy, dwarfing the Great Recession and its aftereffects.
Letting the banks survive to see another day, however, led to the creation of financial zombies, dead, but still living. Not only do they linger in our midst, zombie banks are also holding back our economic recovery. Such is the thesis of Yalman Onaran’s recently published Zombie Banks: How Broken Banks are Crippling the Global Economy. Onaran, a reporter at Bloomberg News, builds upon the notion of zombie banks, a concept first utilized by finance professor Edward J. Kane in a 1987 academic paper. “In its simplest form,” writes Onaran, “[a] zombie bank refers to an insolvent financial institution whose equity capital has been wiped out so that the value of its obligations is greater than its assets.” In its simplest formulation, these are banks that are, for a lack of a better term, broke, but kept alive through government intervention or, as the case may be, non-intervention.
Onaran’s intention in writing this book was to provide a big picture analysis of the global financial crisis. The author argues that many of the current policies employed by both European and the American polities have resulted in the creation of zombie banks. These financial zombies remain alive due to, among other factors, government backing of bank debt and near-zero interest rates. Onaran contends that, “it’s the taxpayer money that zombie banks eat and that’s where their harm to society is.” In a series of vignettes written in a lively, accessible journalistic style, he is generally successful in showing the interconnectedness of the distressed banking sector, government policies on both sides of the Atlantic, and economic stagnation. Indeed, he boldly contends that, “despite their claims to the contrary, politicians worldwide have not tackled the structural problems in the financial system underlying that crisis.” Temporary fixes, it could be said, are not solutions.
Onaran utilizes a comparative approach, one that is notably lacking in many journalistic accounts of the financial crisis. In detailing the differences in how Iceland, Ireland, and the United States handled their respective countries’ banking difficulties, he provides particular insight into the problem of zombie banks. The United States took somewhat of a middle course between the two aforementioned island nations’ approaches to troubled banks, a trajectory more akin to that taken by Germany, which created its own zombies.
Whereas the Irish government initially guaranteed the liabilities of the country’s national banks in 2008 in response to the credit crunch, the Icelandic government embarked upon a starkly different course, seizing the banks and restructuring them, effectively letting the bad banks die. “So while one island’s banks were kept alive as zombies for two more years before they brought down the whole country with them,” writes Onaran, “the neighboring island’s troubled banks were allowed to die.” He points out that, while Iceland has not had it easy since 2008, the country did two notable things correctly; first, private bank debt was not converted to public debt and second, Reykjavik did not prop up failed banks, allowing them to continue artificial lives as zombies.
The relationship between the private debts of financial institutions and sovereign debt is a significant one. “As is the case with most financial crises,” posits Onaran, “the problems of the banks are closely associated with the debt overhang society faces after a decade or two of binging on cheap credit.” He raises thought-provoking issues regarding central bank policies that keep interest rates at a near-zero level.
Onaran contends that these exceedingly low interest rates designed to keep zombies alive and to aid them in healing their balance sheets has harmful societal effects and terms it “a wealth transfer from pensioners and others relying on fixed returns of their savings to the banks’ coffers.” This results, for a segment of society, in reduced disposable income and reducing spending. He also highlights what he perceives to be the connection between quantitative easing and events abroad, positing that it has led to commodity price increases and bubbles in emerging markets. Cheap money, it would seem, needs a home. One could easily imagine a future study detailing the largely unforeseen effects that quantitative easing had had on the politics of foreign lands.
In conclusion, Zombie Banks is a useful addition to the growing corpus of literature on the global financial crisis. While the author could have devoted more attention to the issue of moral hazard in banking regulation, free market advocates will be heartened by Onaran’s contention that propping up banks that should have died is not fair to competitors. “In a real market economy, those companies that take the wrong risks and lose out are supposed to fail, their customers and market share shifting to the surviving firms that were more prudent.” Onaran’s suggestion that governments need to kill the zombies off so that economies can recover is perhaps theoretically correct, though it is probably politically impossible at this time, at least in the United States. Bailouts may be, for better or worse, the new normal. If that is the case, then zombies will continue to stagger among us.
Jon Lewis (c) 2012