Bold Colors Blog

Stickin’ it to the libs, one day at a time

What the U.S. can learn from Japan’s failed experiment with “zombie businesses”

Posted by Liberty on December 22, 2008

Return of the Living Dead

“After Japan’s asset bubble burst in the late 1980s, their economy took a sharp downturn, prompting government officials to try bailing out banks and investing in infrastructure, much like the activity and proposals floating around America today. The results were terrible.

With the government propping up poor business models rather than allowing further job losses, firms wound up operating over the long-term without making a profit or adding any value to society. Their utter lack of vitality earned these perpetual money-leaching entities the moniker ‘zombie businesses.’ And unless American policymakers understand the failures of the Japanese response, we will suffer the same zombie fate.”

Check out this article in Reason Magazine today that foreshadows the consequences that we’re likely to face in return for passing out government bailouts like Halloween treats.  Ding dong, here’s $700 billion.  Japan has dealt with a similar economic crisis and they made significant errors that prolonged the problem.  We’re headed down that same road and I predict that Japan’s errors will be our errors.

“First mistake. The Bank of Japan tried to ease economic pains during their downturn through the 1990s by loaning large amounts of money to businesses. However, such attempts to recapitalize the market were counteracted by underlying management problems endemic to the dying firms.”

Check.

“Second mistake. With all those loans, the Japanese government was simply too integrated into the market to have adequate incentives to create the right policies. Daniel Okimoto, former director of the Asia-Pacific Research Center, points out that the interests of Japan’s economic bureaucracies, such as the Ministry of Finance, became interdependent with the banking industry.”

Check.

“Third mistake. The length of Japan’s asset deflation, recession, and liquidity struggles has been blamed largely on the lack of foresighted policies and political leadership. Politicians bent on retaining their power took action that sought to solve the present day concerns, such as infrastructure projects, without regard to their long-term effects. As a result, economic growth was not sustained.”

Check.

“Fourth mistake.Japan tried to climb out of its economic mess by raising taxes and cutting interest rates. Okimoto cites a series of policy mistakes in a report on Japan’s economic stagnation that includes a consumption tax hike, business taxes, and heavy-handed reliance on interest rate cuts that reduced investment incentives.”

Are you getting my drift here?

“Fifth mistake. With the Japanese government enabling lending to zombie businesses, taking cash away from productive ventures, and passing tax laws and other regulations that did not promote growth, the private sector was actively discouraged from investing.”

I encourage you to read the whole article–Anthony Randazzo has done his research.  Clearly our politicians have not.

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3 Responses to “What the U.S. can learn from Japan’s failed experiment with “zombie businesses””

  1. […] What the U.S. can learn from Japan’s failed experiment with … […]

  2. Bert Graef said

    They never learn do they? Throwing borrowed money at the problem is possibly the worst thing they can do.
    And when that runs out and the problem is still not solved then what?
    The rich are buying gold…I hear.
    Too many Madoffs and Trumps are still running around unchecked….
    Governments worldwide are feverishly throwing trillions at the bank and the criminal lenders who got us in this mess, then paid themselves with huge bonuses.
    The problem is systemic and worldwide….what the banks and real estate agents and speculators have done is deplorable. Yet they walked away for years, silently looting the banks.
    Obviously a balaclava and a gun is not necessary to rob a bank. A mortgage is the modern and totally legal way to do it.

  3. Liberty said

    Bert, thanks for the comment. While we agree that borrowing money to inject into the economy is not the solution, I don’t agree that the banks and mortgage companies are completely to blame for this. Meddlesome, social engineering policies like Jimmy Carter’s Community Reinvestment Act forced lenders to extend credit to unworthy borrowers. That practice has been continued and expanded in the years since Carter’s failed presidency. The Federal government never should have been involved in telling banks and mortgage brokers who to loan to. If we would have just depended upon free market capitalism, we wouldn’t be in this mess.
    Also, I lay a substantial amount of blame on the people who borrowed the money in the first place. When people participate in a real estate transaction, they are entering into a legally binding contract and they need to take responsibility for that. How many times do you have to either sign your name or initial something when you close on a piece of real estate? Lots! And if someone is willing to sign their name that many times without fully understanding what they’re doing , then I’m afraid they deserve what ever consequences come their way. If someone isn’t smart enough to figure out ahead of time that they can’t afford the mortgage for a $350,000 house on $50,000 a year, I guess they deserve to learn the hard way.
    It is my opinion that we don’t need more government involvement, more regulation and more bailouts. Let’s just let the market do its work. Some people are going to suffer but if we take away the consequences of bad decisions and effectively subsidize them, we’ll just get more bad decisions.

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