Japan’s “lost decade” of the 1990s gave the world “zombie banks.” A zombie bank is, in effect, bankrupt. It’s made loans to companies that aren’t going to be able to pay them back, and the total value of those bad loans exceeds its equity. Normally, a bank in that position has gone bust. Sometimes, when the government doesn’t want to let the bank fail but also doesn’t want to pay to bail it out, it simply agrees to pretend that the bank is still sound. A bank in that situation faces unusual incentives. The smart strategy is to just double down on bad bets and hope for the best. Writing about the European Central Bank, Berkeley economist Brad DeLong recently extended the concept to political elites with zombie reputations who double down on past bad calls because to implement smart policy now would require embarrassing admissions of error.
It’s a cute idea with broad applicability. For example, Brookings Institution fellow and noted hawk Michael O’Hanlon published an op-ed Monday critiquing the joint agreement between the American and Iraqi governments to end the U.S. troop deployment there. He wants to extend our presence there, and argues that an additional “$30–40 billion” in Iraq War spending would be “a small price to solidify the gains of what has already been a trillion dollar investment in one of the Middle East’s most pivotal states.”
When I was working on the column, I hadn’t yet seen that the PNAC Redux crowd known as “The Foreign Policy Initiative” even got the band back together to write a letter in favor of endless war.