A popular attitude is that zombie banks must be avoided at all costs, and that we must have a healthy financial sector before we can hope for an economic recovery. Japan is cited for proof.
Thus we’re told, we need to bite the bullet, restructure bank balance sheets and inflict some real pain on bank lenders (insurance companies, pension funds, etc.) in order to restore health to the banks.
Funnily enough though, many of the advocates of the short, sharp, shocked approach to dealing with the banks (like Paul Krugman) advocate just the opposite when it comes to actual real businesses and consumers.
Rather than let the wave of foreclosures run its course, we have to have zombie homeowners who are pressured to stay in homes they can’t afford for as long as possible (see mortgage modification).
Rather than force people to take the painful step of learning new skills or accept a worse job, we prop up industries with high levels of employment.
And more generally, rather than letting consumer fall of the consumer-debt treadmill, we look for ways to keep interest rates low so that spending is maintained.
What happened to inflict-the-pain-now? Not clear. When it comes to consumers and their own broken business models and household balance sheet problems, the answer is apparently to hang on as long as possible.
But if a nation of zombie banks seems scary, we’re terrified by the possibility of an actual nation of zombie people, utterly dependent on government-subsidized debt, without the job security or skills to stand on their own in this economy.