Return of the Living Dead Economy

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Paramedic No. 1: You have no pulse, your blood pressure's zero-over-zero, you have no pupillary response, no reflexes and your temperature is 70 degrees.
Freddy: Well, what does that mean?
Paramedic No. 1: Well, it's a puzzle because, technically, you're not alive. Except you're conscious, so we don't know what it means.
Freddy: Are you saying we're dead?
Paramedic No. 2: Well, let's not jump to conclusions.
Freddy: Are you saying we're dead?
Paramedic No. 2: No conclusions.
Paramedic No. 1: Obviously I didn't mean you were really dead. Dead people don't move around and talk.

-- Return of the Living Dead

Dead people don't move around and talk -- OK, that assumption can be a big mistake in zombie movie lore. "Dead-ish" companies shouldn't move around with stocks that get so actively traded, either, but they do in our current climate. I talked about the possibility of a zombie apocalypse in January, and the situation seems to be worsening.

"Bill, just because your father tried to eat you, does that mean we all have to be unhappy ... forever?"
Many investors are full of blind optimism right now, judging by the way bank stocks like Wells Fargo (NYSE: WFC  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) have all rallied on earnings "beats" -- even though there are plenty of questions as to whether they're really out of the woods. It's kind of like the movie Zombie Honeymoon, where the protagonist realizes her new hubby has become a zombie and tries to "work through" that relationship. That may sound ridiculous, but clearly investors -- speculators, rather -- are going through a similar faulty rationalization.

As many have pointed out around Fooldom, the fact that the big banks are basically borrowing money at 0% and lending it at 5% is a pretty good deal, while woefully artificial in any normal market sense. But come on, these banks' convoluted balance sheets still include the toxic garbage that hasn't been written down to realistic levels, and the recent relaxation of mark-to-market accounting rules allows what many dub mark-to-fantasy. I'm sorry, but that's a joke and certainly not a sign of health.

Meanwhile, Capital One Financial (NYSE: COF  ) recently reported an increase in credit card losses, and Discover Financial Services (NYSE: DFS  ) announced plans to lay off workers, citing consumers with too much debt, much of which was taken on via MasterCard (NYSE: MA  ) and Visa (NYSE: V  ) cards. Hello: Many people can't pay their credit card bills in the current climate, and that's another problem that seems bound to worsen.

And in case you missed it, mall operator General Growth Properties filed the largest real estate bankruptcy in the U.S. ever, which seems like a good sign that the commercial real estate market is having its own Dawn of the Dead moment, as many of these concerns basically took on a ton of debt to embark on aggressive overexpansion that was fed by, yes, our nation's debt-laden spending and unreal economic growth.

What's not fantasy is that unemployment is still extremely high at the official 8.5% number; layoffs are still taking place, so the rate is destined to increase; foreclosures continue to increase; and home prices have further to fall. There are few signs of real recovery, as far as I can tell.

"Zombies, man. They creep me out."
Meanwhile, our government's -- and the Federal Reserve's -- zeal to prop up our sick, overleveraged economy keeps revealing major conflicts and problems. For example, some are concerned that TARPed companies that want to repay the money may not be allowed to because then that might cause the public to think banks that can't are unhealthy. Um, never mind that this would mean they are unhealthy.

And of course, there are plenty of rumblings that the bank "stress tests" aren't really meant to be particularly stressful.

Meanwhile, they're all too big to fail, all right. The Fed is considering regearing the TALF to try to support commercial real estate for a longer period of time. Life insurance companies were recently added to the companies that qualify for TARP assistance (although MetLife and Genworth Financial came out and said they don't need the help).

Granted, the economic powers that be are trying to forestall a massive, ugly correction as the ripple effects spread, but where does the zombiefication end? Many of us have argued that a massive correction is exactly what we need to get things back on track.

Economists are questioning, too. In a recent speech, former St. Louis Fed president William Poole pointed out the faultiness of the bailouts, calling them a huge transfer of wealth to banks and bank executives, and arguing that sick banks should be allowed to fail. Nobel-winning economist Joseph Stiglitz pointed out another bothersome idea that has probably occurred to many of us: that the designers of the bailouts are "either in the pocket of the banks or they're incompetent" (although he recommends receivership). Whatever your opinion for a fix, it's clear we're headed straight for zombie malaise.

This bailout is a disaster. We can't recover until the massive, spreading unhealthiness works its way out of the economy, and we certainly can't recover when capital is continuously diverted from healthy enterprise to unhealthy companies. We're on the path to fail like Japan.

We're on a path where the zombies always have the upper hand -- and that's not a sustainable recipe for long-term economic health.

Discover Financial Services is a Motley Fool Inside Value recommendation.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (16)

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  • Report this Comment On April 17, 2009, at 4:40 PM, XMFSinchiruna wrote:

    Yet another Alyce Lomax CLASSIC!

    ***** - 5 Stars!

    That evidence of economists questioning the bailout strategy must be a misprint, though, since (as CAPS blogger kdakota630 quoted from Peter Schiff today) President Obama indicated that economists are in agreement that the government must continue down this path of unprecedented spending. :)

    As I mentioned in my last crisis tally:

    "With a collective response that crams trillions of eggs into one hastily woven basket, the largest bets in history are being placed upon the roulette wheel of global financial markets. The adopted strategy of spending our way out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, I fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar.

    Sustaining a rally even in the face of quantitative easing and new fiscal interventions to battle the toxic asset menace, investors seem comfortable with the bets even as the stakes rise sharply. Come on, lucky seven! Although I continue to hope for the best, I am increasingly skeptical that the odds are in our favor."

    I guess what I'm asking is... what kind of odds are you offering for a zombie victory in this epic battle for survival?

  • Report this Comment On April 17, 2009, at 5:10 PM, outoffocus wrote:

    I think we are going to see a three-quel of the movie "28 Days Later" called "28 Months Later - The US Economy". It will be interesting to see what this Zombie economy looks like in 2011.

  • Report this Comment On April 17, 2009, at 5:16 PM, InvestorAtSea wrote:

    I’m really very thankful to those that supported the rally that allowed me to recover during the last 5 weeks all the money I lost in my IRA during the last year. I took a big risk putting almost all my eggs in the B of A basket and the gamble paid off.

    Having said that, I fully agree with the author of the article and during the last four days I have happily sold 80% of my shares and left the remaining 20% to go Monday just in case better than expected results give additional force to the rally. After that I’ll seat and wait for the huge correction that I believe is around the corner. In the current situation it would be insane not to realize a 120% profit in 5 weeks because is impossible to find a solid reason to justify this rally. I guess I have been very lucky but good luck doesn’t last forever and, if I’m wrong and there is no correction, I’ll be sitting in an amount of cash equivalent to my IRA position in August 2008 what is not bad at all.

    I wish the best of luck to all that want to stay seated at the gambling table during the next few weeks.

  • Report this Comment On April 17, 2009, at 5:17 PM, bigpeach wrote:

    Correction: Genworth wanted TARP money but their thrift acquisition didn't get approved in time to qualify for the program.

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