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Attack of the Living-Dead Companies

Published 01/20/09 Dustin Ensinger - Print Article
E-mail - editor@economyincisis.org

A new threat to the economy is emerging, BusinessWeek is reporting. Zombie debtors - companies with no hope to stay alive - are propped up by the government, taxpayers, investors and others, sucking the life out of the economy on their preordained path to failure.

Those companies, doomed to failure but propped up with taxpayer dollars, consume tax money, capital and labor that could be better put to use by more healthy companies or industries. In addition, these companies often drastically reduce prices, forcing competitors to do the same and dragging them down with the ailing company.

A large portion of the Troubled Assets Relief Program has gone to zombie debtors. Two of the largest and most well known are Citigroup and American International Group, but others are also seeking handouts, namely the steel, airline and retail sectors.

Many experts believe that this practice is nothing more than throwing good money after bad.

"If an institution is poorly managed and does not have a reasonable plan for working out its problems, they ought to go ahead and shoot it," says William M. Isaac, a former Federal Deposit Insurance Corp. chairman who now heads bank consultancy Secura Group.

Those experts say that in some circumstances aiding ailing industries or companies is a wise move. This occurs mainly when a company’s core business is healthy but is shut out of private financing, they say. In most of the instances of TARP funds, this is the case.

Experts say that propping up zombie debtors is capable of creating long-term economic problems. By aiding failing businesses, the government simply prolongs the inevitable and slows down the necessary reallocation of resources that naturally come with failing industries or businesses. That could potentially stunt long-term growth.

Instead of propping up failing industries and businesses, the government should focus on protecting American workers as they transition between jobs.

"You don't want to protect the jobs," he says. "What you want to protect is workers' income during the transition from one job to another." says Yale University economics professor Eduardo M. Engel.

Source BusinessWeek:

Zombies. Seen one lately? If not, you may soon, because they are about to menace the U.S. economy. In financial lingo, zombies are debtors that have little hope of recovery but manage to avoid being wiped out thanks to support from their lenders or the government. Zombies suck life out of an economy by consuming tax money, capital, and labor that would be better deployed in growing companies and sectors. Meanwhile, by 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, General Motors, and insurer American International Group. Other sectors with their hands out include steel, airlines, retail—and homeowners, who may be the scariest zombies of all.

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