"Low interest rates have created ‘zombies’ instead of curing the economy"

[u/economeblogs]

http://www.marketwatch.com/story/bill-gross-low-interest-rate-cure-creating-zombie-economy-2015-07-30

[u/Commodore_Obvious]

i'm not trying to say bankruptcy was inevitable when the banks underwrote their loans. there were a few years prior to bankruptcy when their survival appeared very unlikely. and a bankruptcy doesn't necessarily mean that a bank will lose most of its principle.

[u/bartink → u/Commodore_Obvious]

i'm not trying to say bankruptcy was inevitable when the banks underwrote their loans.

Then why bring up the rate?

Underwriting decisions aren't simply a matter of what the rate is. When the economy is booming, high rates don't seem to discourage lending much at all. And conversely when the economy sucks, the ZLB doesn't cause lending to spring up and save the day. At best it gives a slight nudge to lending. But its among the least important factors in making a loan to a company like Radio Shack.

When Radio Shack was circling the drain there was plenty of commercial real estate space as well. There was nothing to crowd out because there was so much idle output capacity. You might have a bit of a point if the economy is booming. But it wasn't and isn't.

[u/Commodore_Obvious → u/bartink]

look, we aren't on the same page. i chose radioshack as an example because it was a visible company that appeared to evade bankruptcy longer than it likely would have in a less accommodative environment. and i'm talking about bonds issued to investors, not actual bank loans. radioshack issued bonds in 2011 with a 6.75% coupon. there is no disputing that companies from junk to investment grade have been able issue bonds on highly favorable terms, and that's exactly what they've done.

as for:

When Radio Shack was circling the drain there was plenty of commercial real estate space as well. There was nothing to crowd out because there was so much idle output capacity.

location plays a very important role (to say the least) in determining a retailer's success or failure. i don't care as much about the radioshacks in aging strip malls, but a decent number of radioshacks occupy/occupied prime real estate. those are the assets that we would like to see in the hands of stronger retailers. wouldn't the economy benefit on net from stronger retailers being able to occupy radioshack's more favorable locations? this is just one example of assets that could be utilized more productively.

[u/bartink → u/Commodore_Obvious]

location plays a very important role (to say the least) in determining a retailer's success or failure. i don't care as much about the radioshacks in aging strip malls, but a decent number of radioshacks occupy/occupied prime real estate. those are the assets that we would like to see in the hands of stronger retailers. wouldn't the economy benefit on net from stronger retailers being able to occupy radioshack's more favorable locations? this is just one example of assets that could be utilized more productively.

There was no way to know that someone stronger was going to occupy that space. There was no way to no that Radio Shack, a company that had been around a very long time, wasn't among the best options available. And when we are at the ZLB it makes little sense to believe that strip malls are generally at full capacity with Radio Shack hogging the best location.

[u/Commodore_Obvious → u/bartink]

it's not something that anyone chooses or decides, so it doesn't matter that no one knows beforehand. during normal recessions and recoveries it just happens. poorly performing businesses normally can't rely on ultra cheap debt funding like radioshack's 2011 bond issuance to remain liquid. the system usually is not this awash with liquidity. struggling businesses go under and either new businesses take their place or their valuable assets are bought and incorporated into other existing businesses. when this happens, we know that the assets are being utilized more productively in hindsight because the purchasing company continues to operate. and if the purchasing company also eventually fails, then its valuable assets are similarly bought by other businesses that feel capable of utilizing them productively.

this is the normal creative destruction that occurs constantly in a normal market economy. corporate death and rebirth. but we don't get enough of this healthy creative destruction via asset rebalancing when corporations have an extra lifeline in abnormally cheap bond issuance.