Olafur on: Zombie Banks and Zombie Pensions

Written by Olafur Margeirsson Tuesday, 17 July 2012 19:49
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The term "zombie bank" is sometimes used for banks that are effectively in negative equity - technically bankrupt - but with assistance, sometimes from the State, or accounting gymnastics they manage to stay "alive".


Zombie banks are more often than not troublesome creatures for multiple reasons. One thing they try to do is to gamble for their own resurrections. That they do by investing in very profitable but risky projects that could possibly heave them out of the most severe equity problems. This gamble is considered "OK" from their point of view since the most dreadful thing that could possibly happen is that they would have to cheat a bit more on the accounting rules - maybe post a different LIBOR rate than the true one is? - or ask for more assistance from the State.


Zombie banks also suck capital from profitable investments. The capital that is used to keep them alive could be used for anything else, such as housing for the poor or lower taxes. This is effectively what Austrians call "malinvestments".


Finally, zombie banks are sometimes kept alive by the public administration if they are "too big to fail." The banks, zombies or not, are so systemically important that their bankruptcies would wreck havoc to the economy. This havoc could be for the shorter or the longer term, nobody knows. And exactly because nobody knows, no one is willing to stare the devil in his eyes and allow the capital sucking gamblers for resurrection to go bust. Least of all politicians who are more concerned about getting re-elected than anything else.


It is a lot better for the longer term to get rid of zombie financial institutions rather than allowing them to wander around in the economy, spreading economic disease. But "I'll be gone, you'll be gone" is a real problem in this case as in any other case when somebody has to take initiative in tough short term problems with huge long term benefits. There are normally plenty of ostriches around.


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