There has been much discussion in Japan about Zombie banks and corporations which still exist because they are propped up by the government and financial institutions. The loans are not called and the cost of funding is low. These firms will not go out of business. The move across the land and use resources feeding off of other market participants. There can be sovereign zombies eating off of taxpayers but that is another story.
These corporate zombies continue to exist because the cost of borrowing is so low. There is no discipline from the markets if you are not penalized for your mistakes. Of course, risky institutions are not able to get the lowest funding costs, but rates which reflect credit as a scarce resource would be higher and firms would go under. The problem that existed in Japan now exists in the US especially in the housing markets and it is unlikely to go away as long as the Fed continues to hold rates close to zero.
Maybe we do not want to change the industrial structure. The pain will be too great, but is there ever a right time?
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