US Risks 'Lost Decade' With Zombie Banks

Japan's mistake of liquidity vs. solvency being repeated: Baker
By Nick McMaster,  Newser Staff
Posted Mar 2, 2009 2:52 PM CST
James A. Baker III, former head of the US Treasury and State departments, says the country is in danger of repeating the very mistakes for which it once chastised Japan.   (AP Photo)
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(Newser) – Japan’s economic troubles in the 1990s—the so-called “lost decade”—provides a cautionary tale for America’s current problems, writes James Baker, a Reagan Treasury Secretary, in the Financial Times. Japan used piecemeal bailouts and implicit guarantees to insolvent banks rather than swift action. So the “zombie” banks limped along somewhere between solvency and insolvency, too fragile to support the growth Japan needed.

It is now likely US banks face a solvency problem. To avoid its own “lost decade,” it should divide the big banks into three categories: “the healthy, the helpless and the needy. Leave the healthy alone and quickly close the hopeless.” The needy should be recapitalized, preferably privately, but with taxpayer money if necessary. It’s tough medicine, Baker writes, but anything less could result in “truly historic folly.”