Japan’s Depression and Zombie Lending
With the United States in recession, some folks are wondering if we might enter into a "lost decade" as the Japanese did the in 1990s. There are several important differences between the U.S. today and Japan back then, the most dramatic being Japan's "Zombie lending." Remember that zombies are the living dead. The best American examples (outside of Creole legends) were the savings and loan institutions of the 1980s. They had more liabilities than assets, but were permitted to live on. In Japan in the 90s, companies that were essentially bankrupt were allowed continued access to credit. The modern equivalent: sub-prime borrowers protected from foreclosure by public policy.
There's a new academic paper on the subject of Japan's Zombie lending. Here's the abstract:
flowing to otherwise insolvent borrowers (which we call zombies). We examine
the implications of suppressing the normal competitive process whereby the
zombies would shed workers and lose market share. The congestion created
by the zombies reduces the profits for healthy firms, which discourages their
entry and investment. We confirm that zombie-dominated industries exhibit
more depressed job creation and destruction, and lower productivity. We present
firm-level regressions showing that the increase in zombies depressed the
investment and employment growth of non-zombies and widened the productivity
gap between zombies and non-zombies.
The authors are Ricardo J. Caballero, Takeo Hoshi and Anh K. Kashyap. The full paper is available here.
One of our banking industry's strengths is that it writes off bad loans and stops throwing good money after bad.
