It is Halloween and so it is fitting that we reflect on the zombie companies that ambulate among us because the Federal Reserve (and other central bankers) continues to inject them with regular doses of interest free money (ZIRP), which makes them appear to be alive.
“Zombie company” is a media term for a company that needs constant bailouts in order to operate, or an indebted company that is able to repay the interest on its debts but not reduce its debts. There are several types of zombie companies. The term regained popularity in the media during 2008 for companies receiving bailouts from the U.S. Troubled Asset Relief Program (TARP). A 2002 New York Times article about Japanese companies kept on “life-support” with loans include a headline that stated, “They’re Alive! They’re Alive! Not!; Japan Hesitates to Put an End to Its ‘Zombie’ Businesses.”
In a “free market” economy, companies that are mismanaged or make bad bets on the market place end up going out of business and this good because, otherwise, capital will be misallocated. After the financial crisis of 2008, there should have been a flood of bankruptcies of American corporations. General Motors, Chrysler, and some Wall Street financial entities come readily to mind. It wasn’t allowed to happen. Instead, the Federal Reserve, with its Quantitative Easing (QE) and Zero Interest Rate Policy (ZIRP) and you the taxpayers, however unwillingly, have been propping up an untold number of zombie corporations.
Elizabeth MacDonald, a senior editor at Fox News, has written an excellent article on the subject: Zombie Land, U.S.A. Do yourself a favor and read her article. You will begin to understand why we are living through the worst excuse for a recovery in US history. For now, I will share with you this quote:
“Capitalism without bankruptcy is like Christianity without hell,” Frank Borman, former head of Eastern Airlines, once quipped. Meaning: If capitalism is going to be truly free, companies must not be bailed out for making the wrong choices. Else, they’ll increasingly make reckless and bad bets, and we’ll all have to pay for it.
Have a happy Halloween, my friends, and keep an eye out for the zombies.
Well, that’s what I’m thinking. What are your thoughts?