re: Can anyone defend ZIRP going into 2013?

Whether its borrowed or not (and in an economic sense, customer deposits count as borrowed capital), the larger principle in that there is little opportunity cost to parking capital. This is true throughout the private sector, affecting not only banks, but also the new project decisions of industrial corporations.

This is the big problem with ZIRP. Lower interest rates will tend to lower the cost of taking on more business projects, other things being equal, but when (A) you start getting close to zero, and (B) there are strong signals indicating that interest rates will remain near zero for an extended period of time, then you paradoxically get an effect whereby a low interest rate environment will actually depress economic activity. A huge portion of capital in the economy gets diverted to public activities with very low returns, and which moreover act as a net drag on the labor force. That's what we're experiencing now.

We're not anything as extreme as Japan yet, but we seem to be moving closer to that kind of a situation. Indeed, there has been a disturbingly fashionable trend over the past year for pundits to defend how well Japan has managed its last two decades.

I say that a little short term recessionary deflation over the next few months could be just the longer term inflationary stimulus that we need. At some point, a deliberate transition must be made to an environment of rising interest rates. This hasn't occurred since the days of William McChesney Martin.