Caution: Zombie Economy Ahead

"Zombie banks" was the term for Japanese financial institutions propped up by government in the 1990s despite their basic insolvency after a real-estate bubble. These unprofitable banks, in a financial revenge of the living dead, cast a decade-long pall over Japan.

At the time, American officials like Pres. Barack Obama's economic guru Larry Summers urged the Japanese to give up on failed institutions. Instead, Japan pumped 12 percent of its gross domestic product into saving the banks and got a "lost decade" of economic stagnation in return. Economic analysts across the board agree that the Japanese example must not be repeated, even as our lawmakers stumble into repeating it. [snip]

The awful truth is that the financial system has at least another $1 trillion hole in it. Either the U.S. government has to continue to try to patch it over with massive--and perhaps ever-escalating--injections of money à lá the Japanese in the 1990s, or it has to take the painful, risky step of letting some of the big, irreparably wounded financial players go down.

As it stands now, the U.S. government is keeping alive banks that would otherwise go bust at the same time it is hectoring them about lending more money--in other words, Japan redux. During the stimulus debate, Obama often cited Japan's cautionary example. But Japan tried a big stimulus, too, even as it left in place its zombie banks. Will Obama heed his own admonitions?

[Given history Obama's policies don't seem sane when speaking of resuscitating an economy. Now if the goal were to expand the size and power of government control...

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