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  • irishtimes.com - Posted: January 13, 2009 @ 2:36 pm

    Zombie Banks

    Harry McGee

    The Japanese policy was called forbearance. It meant that banks did not call in loans on defaulters even though the money would never be repaid. Alan Ahern in NUI Galway has argued (for a long time now) that it delayed the recovery of the economy.

    In Tokyo this morning, we were given a dazzling briefing by Dr Robert Feldman of Morgan Stanley this morning. He said that one of the events that helped the return to growth was the decision that 140 top executives of a major Japanese bank needed to be fired in return for a major capital injection by the State.

    The bottom line is that tough medicine needs to be applied. And everything that happened in Japan in the 1990s and 2000s should be noted as a forewarning by Brian Cowen and his Cabinet.

    That was then. This is now. Now is sadly very much like then. The Japanese economy has bombed since September with all the tentive growth of the past three years being wiped out almost overnight. Feldmans’ concise summary a tht end of the brifing was that the economy here is terrible and is going to stay terrible.

    He drew a very interesting graph showing the policy spectra of the two major parties. Within each party, there are individuals and group who alternatively believe in small government or in large government.

    In other words, they are all drinking out of the same trough.

    As Irish political parties are. What’s has been successfully imported annd exported between governments and financiers all over the developed world is the same sense of hubris. that they had finally beaten the cycle. During the good times political parties jostled into the same patch of ground in the centre. You wonder is the opposition here, or indeed the opposition in Ireland, in a position to come up with any radical, novel or different ideas about to get out of the mess we all find ourselves in.

    Japan is a country that has a strange hold on a surprisingly large Irish cohort, many of whom came on FAS courses or to teach Englisha decade or two decades ago and stayed on. You can see the immense appeal it has. It is very different but there are so many aspects of Japanese society and living that are appealing.

    And for all the posturing at home about us hanging around wit the ‘big boys’, direct trade between indigenous Irish companies and Japan is surprisingly low.  It is currently worth €95 million. Even with a looming recession, that’s dismal. The property boom and the comfort zone supplied by foreign direct investment into Ireland has masked some fairly ordinary performances by Irish industry and serives over the past decade.

    Back to forbearance. There are many lessons to be learned from the previous Japanese experience. In a way you can understand how it happened because of the system of honour and culture. But what could ever justify its existence in Ireland other than the succumbing to soft sentimentality:  ‘ah sure, behind it all, he’s not a bad fella”.

    We can’t afford to have such attitudes any more.

    • paul m says:

      Between zombie banks and toxic credit has the press got lost in a Swamp Thing or 1950′s sci fi comic?

      This association of fantasy terminology with what is a very real, very serious and incredibly damaging state of affairs in banking and all associated financial markets is really not helping matters and only further undermines efforts to try and make the public snap out of its bubble and realise we have to face up to responsibility.

      If coining phrases like ‘zombie’ banks is the best the media can come up with i suggest you ask the person in the street what they think of these arrogant, bloated, corrupt, deceitful, errant, fabulist, greedy, half-witted, institutions. I bet they can go from A to Z with the possibilty of some printable words scattered amongst those 26 definitions. I’ve included eight already as a starter.

    • Harry says:

      Paul M,
      Actually, the first person I heard using the expression was Alan Ahern of NUI, Galway who is an economist.
      He used the expression to describe banks in Japan who didn’t have the bottle to take the hard decisions and call in loans. The drift and inertia prevented recovery.
      Newly-coined phrases can be very exciting the first time you hear them. Toxic loans had a certain ring to it as did zombie banks. Better than the dead-hand jargon used by business to communicate. Problem is that once they are out there they quickly become used by every hack in the universe and before you know it, they are cliches.

    • Aristophanes says:

      I worked in Japan during the crisis and afterwards.

      Not only would the banks not call loans in on failing clients, they would persist in managing themselves as if nothing was wrong. The government dropped interest rates so low that the banks could effectively borrow for free, and then participate in the Yen carry trade as a means of keeping some operating cash flow to pay rent and salaries.

      The government did not want the companies who were in default to have their loans called in for fear of unemployment stats jumping. Nor did they want the banks to be declared insolvent as this would further destroy a large portion of the commercial real estate market in the core downtown areas of Tokyo. Due to the staggering real estate run-up in Japan prior to the collapse, most commercial sites were paying rents far above a building’s net worth. Just to keep some velocity in the market the government had to at least l stop a mass wave of devaluations for fear that every bank would collapse and the entire system would have to be nationalized. All the government was doing was keeping some cash flow going to provide at least a patina of functionality.

      Domestic Japanese banks then stopped lending domestically. They sat on vast piles of cash but did not effectively participate in normal banking activity.

      Th same is happening in the US. Until the Administration nationalizes banks with poor balance sheets and forces mergers with the rest, the US banking system will be moribund for years no matter how much money the Fed pumps into the system.

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