June 19, 2013
Decade of the Living Dead
Posted on Mar 15, 2012
By Nomi Prins
“Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy”
A book by Yalman Onaran
Yalman Onaran’s new book, “Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy,” makes it clear. The practice of subsidizing zombie banks (those that without support would be dead, but with support are the “walking dead”—sucking at our economic flesh through endless government life support), which began in the U.S. and was adopted in Europe, has dire ongoing economic implications for the global population. Onaran’s highly engaging prose is sometimes amusing, always scary in its content and imminently accessible to an economic layperson. He combines his considerable journalistic skills and powers of insight so concisely that the book can be read and digested in one or two sittings—depending on how much your stomach can take.
Onaran, a senior writer at Bloomberg News, admits right away that “although as a reporter I shy away from reflecting my own viewpoint in the articles I write, in this book, I did not pull any punches.” The result is a hard-hitting, exhaustively researched, passionately argued book.
Former FDIC Chairwoman Sheila Bair states in the book’s foreword, “[B]y propping up failing firms, we penalized the well-managed institutions and interfered with the basic function of the market.” She warns, “Governments around the globe continue to nurture and support a bloated financial sector built around an unsustainable model. …” And that is the problem—the model is unsustainable, yet politicians and central bankers continue to attempt to sustain it.
Onaran takes us on a global and historical journey of zombie banks, dotted with colorful anecdotes and searing analysis. He contextualizes zombie banks and Japan’s lost decade. Reading these chapters, I was reminded that we are already five years into our own lost decade, with no end in sight.
He moves on to the banking systems of Iceland (whose government chose not to sacrifice its population’s well-being to support zombie banks), Germany (whose Chancellor Angela Merkel has a love-hate relationship with zombie banks and the subsidies they are devouring out of Europe) and Ireland (which is a mess, held hostage by zombie banks).
Zombie Banks: How Broken Banks and Debtor Nations Are Crippling the Global Economy
By Yalman Onaran
Bloomberg Press, 184 pages
Onaran then turns to the United States. He exposes the U.S. zombies as capital deficient entities on “IV drip” and uncovers the political infighting, missed opportunities, the “extend and pretend” (extend money and pretend everything’s fine) mentality that prevents meaningful reform or policy change, and the path from zombie banks to the housing market crisis, laying blame where it’s due.
Finally, he focuses on the enduring risk of these zombie banks and their global implications. He makes it clear that regardless of whether U.S. banks lend to Greece, Ireland or Portugal, the fact that they are engaged in a complex $700 trillion derivatives market is more than enough to suffer tremendous reverberating losses.
In the last chapter, Onaran presents a set of well-reasoned, eminently accomplishable remedies for the problem of zombie banks. These include breaking up the big banks, a rigorous restructuring of debt that would involve U.S. zombies realistically evaluating and writing down the mortgage losses they carry, and European banks doing the same with sovereign debt. The weakest would have to be allowed to fall and the strongest to survive, rather than perpetuating an illusion of health while sucking in subsidies. Will this cause banks to take losses? Absolutely. But the alternative is our current slow burn through an economic hell.
After reading “Zombie Banks,” I interviewed Onaran. His responses underscore the importance of his book and the ongoing fallout of the widespread governmental subsidizing of zombie banks.
Nomi Prins: How would you rank the top U.S. banks from worst to least in terms of “zombieness”?
Yalman Onaran: No. 1 Bank of America, 2 Citigroup, 3 Morgan Stanley, 4 Goldman Sachs, 5 JPMorgan.
Prins: How does their zombie status hurt ordinary Americans?
Onaran: The zombieness of some of the largest banks hurts our economy because the zombies cannot fulfill their most important role of lending to consumers and companies. They try to use the money they get from the government to patch up their consistently bleeding wounds. They also make riskier bets with their money—such as writing complicated derivatives connected to the debt of troubled countries in Europe—which increases the likelihood that their final blowup will be even costlier to society than if they were stopped right now. That’s what happened in the past when zombie banks weren’t stopped in time. Taxpayers end up paying for the final mess every time and they will this time too.
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