From the Economist….

The cut also means that Japan is once again approaching a point where it has a de facto zero-interest-rate policy (ZIRP). With nowhere else for rates to go once ZIRP is achieved, there is a higher probability that the BOJ might have to return to its unorthodox policy of “quantitative easing”—introduced in 2001 and abandoned in 2006—under which the bank attempted to control monetary policy not through interest rates but by targeting current-account balances held with it by banks. Under quantitative easing the BOJ flooded the banking system with liquidity, raising its target for banks’ current-account balances far above the statutory minimum. The policy reflected recognition that zero or near-zero interest rates were insufficient on their own to stimulate Japan’s economy.

Insanity is doing the same thing over and over again and expecting different results. Zero interest rate policy did not help Japan the first time around, and it will not help things the second time around.

I explained some of the reasons why this is so here.

From Reuters…

Fifteen U.S. business groups have asked legislators to provide relief on a pension plan funding law to help companies avoid having to freeze or end pension plans that may be inadequately funded because of the financial crisis.

They want Congress to lower levels at which pension plans must be funded and to clarify whether they could smooth out the market values of pension plan assets over several years in financial reports.

The right answer is no. Markets have fallen by a lot, but they are still not under priced by most historical measures. The idea that the current market drops will soon reverse and bring the pension funds back full funding is a pipe dream. But who has the courage to face the costs of the right answer? The article quotes a letter from the business groups….

At a time when companies need cash to keep their businesses afloat, they are also required to make unexpectedly large contributions to their plans in order to meet funding requirements. Consequently, many companies will have to consider whether to freeze or terminate their pension plans or reduce retirement benefit accruals in order to survive.

I don’t think these companies are just fear mongering to try to get their way. They honestly cannot afford to put away what they need to put away to fund their pensions in the current market. The truth of the matter is that America as a nation has not saved enough for the retirement of the baby boomers. There is no magic cure for this problem.

One thing that is going to be forced on companies is a reduction in the golden parachutes that they hand out to executives. But even if we paid all the executives in American minimums wage, we would hardly make a dent in the hundreds of billions of dollars that pensions funds are lacking.

From a long article in the Wall Street Journal on FDIC’s attempts to stave off foreclosures…..

When the Federal Deposit Insurance Corp. seized control of IndyMac Bancorp — the nation’s 10th-largest mortgage lender by loan volume — the agency vowed to ease terms for many of its troubled borrowers. In doing so, the FDIC wanted to show the mortgage industry how it could slash home foreclosures by making decisions both sensible and humane.

That is the goal. Keep that in mind. Now from latter on in the article….

Nanci Puerto, a 40-year-old house cleaner in Antioch, ran into such a problem. She refinanced her house for $637,288 from IndyMac in 2006, taking out cash for a down payment on another property. She and her husband, who works in a machine shop, take home a combined $70,000 a year. Each month, she makes the minimum payment on her loan, $2,416. At the same time, she watches the outstanding principal swell since that payment doesn’t fully cover the interest costs. Now she owes IndyMac $707,000, on a house that the county tax assessor says is only worth $410,000.

When she called the bank, however, she says the agent told her IndyMac is just a “collector” for the investors who own her mortgage. The bank could only consider altering her mortgage terms if she were delinquent.

“I’m going to stop paying so they’ll modify the loan,” Ms. Puerto said this week. “Otherwise they won’t help me.”

There are two things to note. One is that while brining down Ms. Puerto loan down to something that she can afford might make sense, it is still going to involve major losses for the banks that loaned her the money. She is in overhead to such a degree that you are not going to make her house affordable for her with just minor cuts in the monthly payment. You are going to have to offer her a major deal.

But there in lies the rub. If you offer her a major deal, you are going to give everyone else major incentives to game the system so that they qualify for the same deal. Why should should a guy who is just barely making payments get a different deal than Ms. Puerto? Banks can try as hard as they want to try to make sure that those deals only go to people who can’t make their payments otherwise, but human ingenuity will defeat them every time. Nobody is going to pay what they owe once they figure out that banks are terrified of trying to foreclose in this environment.

In short, I understand why people think it is foolish for banks to try to foreclose when they can’t sell the house for anything near what it is worth. But anyone who thinks that loan modifications are going to cut the losses that banks are going to suffer is dreaming. It is not going to work that way.

From the Wall Street Journal…..

The U.S. Department of Energy is working to release $5 billion in loans to General Motors Corp., according to a person familiar with the matter, a move that could help ease the way for the auto maker’s discussed merger with Chrysler LLC.

This is a surprise only because I have not been paying attention. Apparently the auto makers bail out was always supposed to be coming through the Department of Energy. The next thing I know, I will be finding out that the State Department will be handing out cash to international companies.

And doesn’t the part about helping a stupid merger go through make you sick? I mean, what is the point of using government money to tie two sinking ships together?

It is absurd to blame the current economic crisis on America when most of the other rich and powerful countries in the world were running trade surpluses. A trade surplus is sign that a country thinks it would make more money investing in other countries then it would make investing in itself. So China, Japan, Germany, Russia, and others had more faith in American and few other countries than they had in their own economies. It was the fact that so many countries had no faith in their own economic future that led to the crisis.

Felix Salmon explains how that worked out for Germany…..

Maybe it’s just that Germany was running a massive current-account surplus, and needed to lend lots of money abroad, and that German banks as a consequence would lend to just about anyone. After all, the $21 billion in exposure to Iceland might be multiples of Iceland’s GDP, but it’s still a mere fraction of German banks’ $311 billion exposure to Spain, or their $241 billion exposure to Ireland.

Germany is likely to lose serious amounts of money on all of those investments. But why did they ever place themselves in a position of loaning more money to Iceland then its GDP was worth? Why were Germans so eager to loan money to Iceland instead of their fellow Germans?

We can restate that same question with America as the subject.

The problem with America is that it was growing its net indebtedness faster then it was growing GDP. In other words, it was destroying capital. This is not sustainable over the long haul. If US GDP growth had kept up with the trade deficit, then the trade deficit would have been a good thing.

But why were the world markets willing to throw vast amounts of money at a country that was clearly a net destroyer of capital? The short answer is obvious. Many large and powerful countries thought they could make more money investing in America then in their own countries. But why?

I don’t know that I can prove the answer to that question. But I can’t help noting that most of the big exporters of capital have one thing in common. They are all facing serious demographic problems that make America’s demographic problems seem like a cake walk in comparison. When you add up China, Japan, Germany, and Russia you have most of the world’s trade surplus by dollar value. You also have a list countries that are at the top of the list as far as having unbalanced demographic.

Of course, there are many countries that have serious demographic problems and yet they are not running trade surpluses. Almost all of Eastern Europe would fall into this category. So one could have a good argument over just how relevant the demographic problems are.

But regardless of the outcomes of such arguments, the fact remains that the root of the crisis stems from the fact that the world depended on America, Ireland, Spain, and a few other such countries to create a decent return on investment. Anyone seeking to solve the crisis must first understand why so many rich and powerful countries had so little faith in their own countries that they preferred to invest huge sums elsewhere.