Financial Zombieland

The hit movie “Zombieland” could very well be a metaphor for the current state of our banking system. The fundamental purpose of the banking system is to lubricate the economy by intermediating credit between savers and borrowers, enabling both parties to obtain greater benefit than they would without a banking system. Unfortunately, our current system of “zombie banks” benefits neither savers nor borrowers. Zombieland has no winners, except the zombies themselves, who drain resources from the broader economy for their survival.

To start, the savers in our economy are being sucked dry. Yields on treasury bills and CDs are at or near record lows. Though they inject money into the system, savers get very little in return. Similarly, borrowers are getting bludgeoned. Credit for individuals and businesses is either unavailable or obscenely expensive due to sky-high rates and onerous fees. Circumstances would be acceptable if rates where high for savers and borrowers, or low for both. In today’s Zombieland, however, you get the worst of both worlds, as banks hoard cheap capital to protect themselves against the deterioration of toxic assets. Of course, the government has generously allowed them to value these assets at pre-crash prices.

Worse yet, the banks are not just hoarding their cash, they are funneling a portion of it into "proprietary trading operations", a.k.a. in-house hedge funds. The capital for these trading operations has been provided at near 0% from the Fed, depositors, and government backed loans. So what do we have now? Strong returns for the zombie banks, at the expense of the living.

Bondholders for big banks also thrive in Zombieland. With the exception of Lehman bondholders, all other bondholders for the big banks have emerged unscathed, as the government backs their securities 100%. Rest assured, if something were to happen to one of those in-house hedge funds, the government would continue to provide blanket protection to bank bondholders, essentially offering up the life-blood of our economy as a zombie sacrifice.

One would expect a society-wide rebellion given the stakeholder casualties in Zombieland. From Ron Paul supporters to Michael Moore supporters to anti-capitalist leftists to anti-socialist tea-partiers to small business owners, or just plain folks who need to borrow or save, everyone is horrified by the ongoing destruction. Why can’t these potential victims see that a strong, united coalition could slay the zombies? Unfortunately, Zombieland also suffers from a bankruptcy of imagination....