Friday, January 23, 2009

Government Created Zombie Debtors - Another Menace

The term zombie debtors apparently was first used by Glenn Beck, but Businessweek picked up the term and wrote an article describing the menace they pose to the economy. When will we learn that government does not solve economic problems - THEY CREATE THEM. Is it our poor education system that does not prepare us to think things through logically? What the government is doing by propping up bad businesses is creating debtors that use up resources like tax money, capital and labor that could better be used by growing companies. Why prop up the unsuccessful? Government wants power and you get power by being all things to all people and making them dependent on you. slashing prices to generate sales, zombie companies can drag healthier rivals into insolvency.

Sometime in the past few months, zombies went from being a latent risk to a genuine threat—one that is likely to increase in the months ahead. The Bush Administration has already ladled out billions of dollars in assistance to weak banks and automakers. As the economy goes into what may become the worst economic downturn since the Great Depression, the Obama Administration will come under even more pressure to prop up sick financial and nonfinancial companies to save jobs. The debate will center on wounded giants such as Citigroup (
C), General Motors (GM), and insurer American International Group (AIG). Other sectors with their hands out include steel, airlines, retail—and homeowners, who may be the scariest zombies of all.
Japan was plagued by zombies during its lost decade of slow growth in the 1990s. Weak Japanese borrowers used the proceeds from new loans to pay interest on old ones—a process called "evergreening" that kept banks from having to acknowledge losses. In the '80s, the U.S. airline industry was pulled down by Eastern Airlines, which was allowed to keep flying (and charging low fares) while in bankruptcy court. That doesn't help anyone. "At some point, you need to wake up and accept the fact that, 'Oops, that's not going to work,' " says Stéphane Téral, an analyst with Infonetics Research who tracked the demise of scads of telecom carriers in the early 2000s.
Protecting zombies can stunt long-term growth by blocking what economist Joseph Schumpeter called "creative destruction"—the painful but necessary reallocation of resources from declining companies and sectors to rising ones. That turns out to be crucial. In the U.S. manufacturing and retail sectors, a huge share of productivity gains have come from such reallocation, says economist Steven J. Davis of the University of Chicago Booth School of Business. Case in point: the growth of hyperefficient Wal-Mart (WMT) at the expense of mom-and-pop shops, which were allowed to die. The absence of such reallocation could slow productivity growth. (READ)

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