Such a plan amounts to a serious economic miscalculation. As Stephen Roach points out, a major policy error in he US occurred when the government rescued banks and bankers rather than their victims during the subprime fiasco. With trillions for banks and relative pennies for borrowers, those bailouts rang up massive US government debt but left consumers hopelessly sidelined with debt hangovers leading to our current economic malaise. Another recession now looms.
So now Europe rumbles down that same road--leave zombie borrowers to their own defense but by all means save the precious banks. It feels like the global economy faces another credit crisis (did the first one really end?) and global financial leaders operate under the working assumption that banks must be saved above all else. Such reasoning amounts to an economic death sentence.
We need to let banks fail. Economist Paul Romer advocated this fundamental truth way back in 2009. He argued that the old banks with their toxic assets would not lend. Time has proven Romer correct. Instead of bailing-out zombie banks we should form new banks and focus on balance sheet repair for over-extended borrowers.