How to Create Zombie Banks II

Hedge Funds Have $74 Billion as Europe Fire Sale Delayed – Bloomberg.

European banks are in trouble. They have virtually lost the ability to fund themselves in the open market relying on ECB loans, sovereign debt with inflated values and dodgy accounting practices including not marking loan portfolios to the market.

Logically, we expect to see these banks selling assets in order to raise capital, but this is not happening. The ECB’s liquidity programs are propping up the entire system. The problem is that all these banks do not deserve to be saved. They made poor lending decisions and should be allowed to fail. Bank failures raise the overall productivity of the entire system as the unproductive entities leave the business.

If the natural market order is disrupted, you get scads of Zombie banks dragging down GDP growth for years. Japan started printing money to prop up its banks 20 years ago. It is still doing so, and its economy has been stagnant for year with no end in sight to the malaise.



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