Zombie Banks, Corporations Destroy Economic Prosperity

The WealthCycles Staff

Zombies are the monster du jour in America right now, their popularity reflected in everything from movies and TV series to Homeland Security training exercises. Even major stars such as Brad Pitt are being featured in zombie-themed movies. Even programming on Montana ABC affiliate KRTV and its CW station was interrupted by news of a zombie apocalypse today:

"Dead bodies are rising from their graves" was broadcast across several Montana counties via the Emergency Alert System.
"The alert claimed the bodies were 'attacking the living' and warned people not to 'approach or apprehend these bodies as they are extremely dangerous.'"

Zombies, with their lurching gaits and brain-craving mindlessness, are fun, lending themselves easily to ironic black humor and camp—lots more fun than those moony, overexposed vampire kids.

But real-life zombies, in the form of zombie banks, zombie corporations, zombie government agencies and zombie markets, are truly scary and life-threatening. Zombie institutions are those companies that should be dead but instead are kept alive only by the artificial life support of taxpayer-funded subsidies. The very real damage these zombies wreak on economies struggling to correct and rebound, and the life-draining, one-sided competition they inflict upon newly emerging companies is a killer.

WealthCycles wrote back in 2010 about the parallels between the United States’ bailouts of failing mega-corporations and Japan’s “Lost Decades” of propping up zombie institutions:

For almost two decades, Japan’s market was in a “sideways crash.” By mid-2009, Japan’s nominal GDP stood at 1992 levels, and deflation, despite government efforts to throw money at the problem, was again in the headlines.
Had Japan’s government allowed the sick and ailing banks and corporations that caused the crash to fail, new, healthier enterprises could have sprung up to take their place. Cumbersome, oversized organizations would have split into smaller, more efficient pieces, re-emerging leaner and stronger. New entrepreneurial start-ups would have opportunity to grow, creating new wealth. But by simply keeping inefficient companies on life-support, Japan’s government merely transferred wealth from its taxpayers (a productive sector of the economy) to those zombie corporations (an unproductive sector)—exactly as our own government is doing today.
While Japan’s central bank eventually reined in its currency creation activities and contented itself with mild deflation, the Fed is unlikely to be so moderate. The Fed’s historic reaction, and Chair Ben Bernanke’s admittedly favored strategy, has been to err on the side of inflation.

During the January 2013 World Economic Forum in Davos, Switzerland, Nouriel Roubini, a New York University economist, evoking zombies once again, commented on the impact of quantitative easing on the economy.

Roubini said the quantitative easing (QE) programs pursued by the Federal Reserve and other central banks may overwhelm the economy with debt-strapped banks, businesses and consumers, according to The Guardian.

“Over time, you get zombie banking, zombie corporates, zombie households, which is damaging in the long term.”

Zombie banks and zombie corporations are organizations that continue to operate even though they are, by all objective evidence, insolvent. Their costs exceed their revenues, or they have sacrificed long-term financial solvency for short-term windfalls; or they bet client fortunes on losing propositions. The periodic bailouts of allegedly “too big to fail” (TBTF) banks, insurers and carmakers leaves in its wake bloated, impotent institutions with little or no incentive to improve efficiency, slash runaway expenses or provide better stewardship of client assets: Their leaders know that, once the clamor of public criticism has died down, politicians and central bankers won’t dare leave them to live or die by their own devices. Rather world leaders will strap on the electrodes and crank up the juice—to the political and banking establishment, a zombie economy that continues lurching along for another year or three is immensely preferable to letting the sick and ailing sectors fail and die off, making space for green shoots of new, healthy growth.

Not for us to worry, though: the Federal Deposit Insurance Corp. (FDIC) insures consumer bank deposits, so even if the bank does ultimately fail the depositors’ funds are safe. Or maybe not. In our article, How to Protect Your Family – QE3 Proves Zombie TBTF Banks are Getting Sick,we demonstrated that counting on the FDIC to save your wealth is a faulty assumption.

But when one too-big-to-fail, zombie mega bank goes down, hundreds of billions of deposits will need to be insured, a tidal wave over the system. It would be naive to think this would not, in turn, create chain-reactions of exposure for the other mega banks, which then would succumb themselves to similar troubles of illiquidity.

As recently as 2009, the FDIC’s Deposit Insurance Fund (DIF) was suffering from a $20.9 billion dollar deficit. In the last three years the DIF has taken steps to resolve the deficit, current estimates are that the reserve ratio of 1.15%, which is legally mandated, will not be reached until sometime in 2018. Five years is a long time in an era when the towering global monetary and banking pyramid scheme grows more wobbly at its top with every passing day. Do we have five years before depositors become anxious enough about bank solvency and the purchasing power of their paper currency that they demand their money?  And how many more banks by then will have joined the zombie ranks?

Very well said.. Excellent article. However, how these banks are capitalized? basically, Banks will send Bonds/ securities to Govt.. which is JUNK. Govt will print money and load t to bank deposits to transact the business. I think Capitalization is nothing but QE mini... All terminology bullshit...

I remember Mike that you said once 'Once our citizens understand the Banking system one fine morning, there will be RIOTS'

Mike was correct to paraphrase Henry Ford:

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

They are right. More here.

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You are right, the zombie banks are using Treasuries as their principle assets.

Check out how the Fed is bankrupt if interest rates rise, the commercial banks are in exactly the same position.

 

 

Mike, I see no real solution to the financial woes we are facing. The Liberal group want to keep everything as is. With the cronyism all the way through the US government system, with the Liberals on top are getting rich as the middle class disappears. This is a fact; it is theft. And, the worst part is that the moral fiber of our country and the world is also disappearing at an alarming rate, it is self only and will not stand for long. I am doing everything I possibly can to be ever-ready and thrifty. Thank you for your support in a Morally Strong Position and furnishing your insight to those who will listen. David

Along with hundreds of trillions in taxpayer dollars
given to the big banks the contributions of small
hometown banks to the DIF has been disproportionally increased. The thousands of smaller banks that employ real-world GAP accounting while doing the lion's share of loans to small businesses and individuals are unfairly treated.

Excellent, well-informed comment. Absolutely correct.

When we save and transact in dollars, we should use institutions that are not the worst of offenders, despite excellent ATM coverage...

Excellent article. Thought provoking. Thank you. Is this the announcement that the Fed won't like?

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