Innovative ways to stimulate the economy: Replace zombie banks with new ones

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I've lost track of how much taxpayer money has gone towards propping up zombie banks -- those that are saddled with toxic assets whose marking to market wipes out their capital and keeps them from lending. TARP gave them $350 billion last year and at least another $350 billion this year -- not to mention another $750 billion that is included in recent legislation. But how much of that capital infusion have the zombie banks lent out? Not much.

If the government's goal is to get lending going, then I think there's a better way to do it -- create new banks. I have posted about the idea at least six times -- first in Memo to Washington: Start 100 new banks and more recently in One more time: Start new banks. If we created new banks, they would be unencumbered by toxic waste, so they would have a strong incentive to lend the money. And if they were careful to lend to borrowers with a good chance of repaying the money, the economy would get the boost it needs. If $350 billion in TARP money were invested in new banks at a 9:1 ratio of assets to equity, those new banks could lend out $3.5 trillion.

My idea has gone precisely nowhere. Why? I can only guess. One possibility is that the new banks lack lobbyists while the zombie banks have plenty of them -- along with a record of political contributions to both parties. New banks would no doubt siphon off the best customers from the zombie banks. And that would put pressure on government to help those zombie banks die a good death -- i.e., one that's planned so that disruption to the global financial system is minimized.

With all the unemployed bankers, empty bank buildings, and companies that provide banking systems, I don't think it would take too long to get the new banks up and running. Unfortunately, the political power of zombie banks is causing a massive and wasteful diversion of taxpayer money to prop up institutions that are too crippled to lend. The fate of the politicians who receive contributions from those zombie banks is evidently more important than the capital needs of the economy.

But I am convinced that we could meet those needs by creating new banks -- and if they succeeded, then politicians would have a whole new place from which to draw their campaign contributions -- not to mention the benefits of all those new loans.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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