Please Don't Feed the Zombies!

Paul Krugman is not happy with Geithner's apparent plan to keep feeding cash to the zombie banks. He has a nice quote from the guy he calls the leading expert on Japan's lost decade, Adam Posen:

The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …

{From Posen's prepared testimony for congressional hearings}

Maybe Geithner is not the guy who can pull the trigger on his old colleagues and Wall Street buddies. When the "stress test" results start rolling in, it might be time to call in the out of town button man.

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