Zombie Firms Smirk With Fed’s Rate Decision

Now that the Fed has sent the message that nominal rates will stay at the ZLB for a considerable time after October, let’s revisit the concept of the Zombie firm. The ZLB Fed rate makes it more likely that zombie firms will continue to limp on…

Zombie firms are not good for society. The main reason is that they are very resistant to raising wages, since they must control costs in order to cover their interest expense. They also lack the strength to grow well. They should either die off or be re-structured.

Moreover (from Time to end life support for zombie firms)…

“… they depress economic activity by making it difficult for healthy firms to grow rapidly, increase profits and investment, and create jobs. They also block start-ups with new technologies from entering the market. In a word, they impede the process of creative destruction.”

“As a result, the presence of zombie firms harms the productivity of an industry. If there is a large presence of zombie companies across industrial sectors, the economy as a whole will suffer. So weeding out zombies is essential to make the economy run efficiently.”

“However, this is easier said than done. In the first place, banks have little incentive to kill zombies off. Banks are required to keep their capital ratios high. If they stop providing support to hopeless companies and let them go belly up, they have to set aside more reserves to cover the loans extended to them. This weighs on their balance sheets and lowers their capital ratios.”

When demand is weak in an economy, zombie firms struggle more. But banks are in somewhat of a self-interest trap to maintain accommodative monetary policy to keep zombies alive.

Why do I say that zombies smirk with the Fed’s accommodative policy? Sydney Finkelstein gives us a clue into the attitude of these companies in his article, How to Spot a Zombie Company.