TMS: Can Magnetic Stimulation Reduce Depression, Even Increase Intelligence?

•  

By Melinda Beck

You sit in what looks like a dentist’s chair and a psychiatrist places a metal coil against your head. Rapid magnetic pulses penetrate your scalp and skull and produce a mild electrical current in the left prefrontal cortex of your brain. You feel a tickling sensation and hear a loud tapping sound. The treatment, known as TMS, for transcranial magnetic stimulation, lasts about 40 minutes and is done daily for four to six weeks. If you’re suffering from major depression, you could start feeling better within a few weeks.

“We’ve seen improvement in mood, sleep, appetite, energy level and a restoration of hopefulness and self-esteem,” says psychiatrist Sarah Lisanby, chief of the brain stimulation division at Columbia University.

Earlier this month, the Food and Drug Administration approved the first TMS system, called NeuroStar, made by Neuronetics Inc. of Malvern, Pa., to treat patients who haven’t responded to at least one antidepressant. Roughly 5% of U.S. adults suffer from major depression in a given year, and as many as 40% of them don’t get adequate relief from psychotherapy or drugs.

For those who have failed other therapy, TMS is still no panacea. In a clinical trial of 325 patients at 23 sites in the U.S., Canada and Australia, only 24% improved on TMS, but that was twice the response to the placebo. Side effects were mild — mostly scalp irritation and headaches — and there was no weight gain or sexual side effects as with some antidepressants. And unlike electroconvulsive therapy (ECT), also used to treat severe depression, patients remain awake and don’t need anesthesia. There’s no confusion or memory loss as sometimes happens with ECT.

View Full Image

Neuronetics

Magnetic pulses stimulate the left prefrontal cortex, which is linked to depression.

TMS is part of a new era in understanding and treating psychiatric disorders. Using high-tech imaging, scientists can now see depression in the brain, and some theorize that it involves an imbalance between the thinking areas in the cortex and the emotional areas of the limbic system.

Imagine coming upon a snake, says psychiatrist Mark George at the Medical University of South Carolina: Your limbic system registers it as a threat. Then your cortex recognizes it as harmless and quiets down the response. “That balance disappears in depression,” says Dr. George, who was an early pioneer of TMS. “With TMS we can tickle the cortex and over time restore the balance.” Talk therapy can sometimes do that too, he notes.

But neither talk therapy — nor medication — is sufficient in some patients. “Joe,” who didn’t want his real name used, was a successful writer until he fell into a severe depression in the 1980s. He was suicidal for years and hospitalized repeatedly. He tried a gamut of antidepressants. “But they made me sleep 18 hours a day,” he says. “The only thing I wanted to do was die.”

Joe’s psychiatrist encouraged him to enroll in a TMS trial. “It’s the only thing that worked,” Joe says. “Within six weeks, I was officially no longer depressed.” Now he is off medication but returns for weekly TMS treatments.

TMS is still in its infancy. Even proponents say patients who don’t respond to one antidepressant should try another drug before using TMS. For now, only a few U.S. centers plan to offer it (see Neuronetics.com for sites). It isn’t yet covered by insurance, and prices are still being determined — one estimate is about $6,000 for a full course.

TMS has yet to be tested for milder depression, and experts aren’t sure how long the effects last. Dr. George is recruiting patients for another clinical trial, sponsored by the National Institutes of Health, that will study different doses and durations of treatment and which patients are most likely to benefit.

Meanwhile, scientists are studying whether TMS might be useful to combat schizophrenia, post-traumatic stress disorder and migraine headaches, and to fight depression in adolescents, who face a higher risk of suicide on antidepressants. Says Dr. Lisanby, who has received research support from Neuronetics, “We’re standing at the threshold of a new family of therapeutic interventions.”

LONGEVITY VILLAGES: New Niche For Medical Tourism

China’s ‘longevity villages’ want tourists to come and breathe the air

By Stan Sesser

 

China Span

A village in Guangxi’s Bama county

Poyue, China

Just being here adds years to your life — or at least that’s what elderly natives, eager government officials and hopeful visitors in this remote place contend. Poyue and several other villages near the Vietnam border in China’s Guangxi Autonomous Region comprise a “longevity cluster.” They claim an inordinate number of centenarians, including one said to be 113 years old. The surrounding Bama county, with a population of 250,000, has 74 centenarians, or about one for every 3,400 people, according to Luo Ronghui, a local tourism official. That’s a far higher incidence than in the U.S. or even in Japan, which has one of the longest average life expectancies in the world.

View Slideshow

Stan Sesser/The Wall Street Journal

Experts on aging are skeptical about the existence of longevity clusters, but that hasn’t blunted Bama’s ambitions to become a center for health tourism. Visitors who aren’t interested in the supposedly life-prolonging air or soil will still find much to admire in the region’s scenic limestone karsts, mud and stone dwellings and breathtaking caverns that are a natural sculpture gallery.

Bama’s plans include building upscale accommodations for foreign tourists who want a spa vacation without the costly treatments, massages and exercise regimens. The pitch: Visitors need only hang out — breathe the air, drink the water, eat the food — and they’ll benefit. “The treasure of longevity in Bama belongs to people all over the world,” says Mr. Luo, whose office is in Bama City, a half-hour drive from the longevity villages. His expansive vision for the area’s future includes a visitors’ complex somewhere nearby, with separate facilities for different nationalities so that everyone will feel at home, he says. Tourism, currently no more than a trickle, could be a huge growth industry for the region. “We can accommodate 10,000 tourists a day,” Mr. Luo says.

Trip Planner

Getting there: Bama City, near the longevity villages, is an eight-hour bus ride from Guilin, the big tourist spot in Guangxi Autonomous Region, or a four-hour ride from Nanning, the region’s capital. Air-conditioned intercity buses are comfortable, and the roads are excellent. There is a daily flight from Guilin to Tianyang Airport, about a 90-minute taxi ride outside Bama City. Fly to Guilin or Nanning from major cities in China and some cities in Southeast Asia, including Bangkok.

Where to Stay: One option is to stay in Bama City, and hire a car and driver for the half-hour drive to the longevity villages. Stay at the Longevity (Shouxiang) Hotel, a comfortable four-star facility with an excellent restaurant (488 Zhonglu Shouxiang, Tel.: 86-778-622-1818; about $40 a night). The other option is to stay in the village called Poyue. The 25-room Life Extension Hotel is clean but basic; it offers private bathrooms and good food (Tel.: 86-778-614-0311, $10 a day for a room and three meals). Neither hotel had English-speaking staff when I visited, so book through a travel agent who speaks Chinese. If you decide to stay in Nanning on the way to Bama county, try the five-star Yongjiang Hotel (1 Linjiang Rd., Tel.: 86-771-218-0888, around $65 a night). Around the corner, the colorful Zhongshan Road food vendors are reason enough to spend a night.

Joe LeMonnier

Frank Lin, a 61-year-old garment maker from Taiwan, is currently spending three months at Poyue’s clean but spartan Life Extension Hotel, where a room and three meals costs the equivalent of $10 a day ($150 for a month). He came here last year with a group on a whirlwind tour of mainland China and liked it so well that he returned for another month. After 30 years of smoking, Mr. Lin says he gave up cigarettes during that month without a second thought and hasn’t had one since. “When people try to quit smoking in the city, they become irritable and think about cigarettes all the time,” he says. “Here, I had no reaction. Bama is really blessed by God.”

Several other regions around the world are renowned for the unusually long life expectancies of their residents. No group investigates and certifies longevity-cluster claims, however, and no two lists of them are the same. The Caucasus Mountains in Russia, the Japanese island of Okinawa and the mountain town of Vilcabamba, Ecuador, are often mentioned. Dan Buettner, author of a book published by National Geographic earlier this year about diet and lifestyle in longevity clusters, even identifies a group of Seventh-day Adventists living in Loma Linda, Calif. Possible explanations range from eating yogurt (the Caucasus) to eating very little meat (Okinawa) to drinking water from melting glaciers (Vilcabamba).

Genetics is by far the most important factor, says Thomas Perls, associate professor of medicine and geriatrics at Boston University’s School of Medicine and head of the New England Centenarian Study. The notion that something in the air, water or soil can prolong life is “nonsense,” he says.

And longevity claims are only as credible as the birth records they’re based on. Many places can’t document the ages of the people in their purported cluster. “A lot of the literature is filled with testimonials and anecdotes, but never any scientific evidence,” Prof. Perls says. Longevity clusters are “mostly a marketing ploy.”

Don’t tell anyone in Bama county, though. Water from the local river comes from springs and is considered so pure that it is drunk without treatment or filtration. I had three glasses of it during lunch at the Life Extension Hotel; it tasted fine and produced no gastric distress. Residents freely bat around terms that translate as “low alkalinity” and “magnetic fields” when describing the soil and water. Because local animals drink the local water and eat local plants, “their meat is different,” says Mr. Lin, the Taiwanese visitor. “People eat fatty meat here, but they’re all thin. You never hear of a cancer case.”

Stan Sesser / The Wall Street Journal

Huang Malun, at left, says she is 107 and traveled with Red Army soldiers.

Another believer is Huang Malun, who says she is 107. She and a dozen family members span five generations and all live in the same tiny house in Poyue. A wrinkled, sweet-tempered woman who walks with the aid of a cane, Ms. Huang recalls traveling with revolutionary Red Army soldiers decades ago; she helped their cause by making their clothes. “We lived on wild vegetables,” she says. “All the hardships were very tough.” How does she explain her long life? “Organic food and the good air,” she says. “I ate all naturally grown food. Now they use chemicals, and of course it’s going to hurt.”

In Bama City, the four-star Longevity Hotel sells everything from Long Life bottled water to snakes coiled in a jar of alcohol (a staple of Chinese medicine). The hotel travel agency found a car and driver to take me, my translator and a guide to the villages for $30 a day. But we could find no one in the county who spoke even a few words of English. In the tourist center of Guilin, a one-day drive or a one-hour flight from Bama City, travel agencies have guides for hire that will set you back about $100 a day or more, plus expenses.

Fountains of Youth?

Here are four more places reputed to have large centenarian populations:

	The Caucasus Mountains of Eurasia The inhabitants are often said to live to an old age because their diet is rich in yogurt.
	Okinawa The Japanese island of Okinawa, where the local diet includes little meat, claims an extraordinary number of centenarians.
	Vilcabamba, Ecuador This mountain town’s residents thrive, legend has it, because they drink water from melted glaciers.
	Loma Linda, California A recent book has identified a longevity cluster among a community of Seventh-day Adventists here.

Photo credits: EFE/Zuma Press (Ecuador); Matt Korner (CA); Getty Images (2)

The road from Bama City to Poyue looks out at dramatic tree-lined rock outcroppings, the sort that inspired China’s famous brushstroke paintings. Some locals say a supposedly high concentration of negative ions in the atmosphere — remember the fad for home ion generators? — inspires a feeling of exhilaration and explains residents’ longevity tendencies. That may be — but the scenery is so exhilarating that it’s hard to believe that negatively charged particles could make much difference.

The longevity villages, with their stone or mud-brick houses and tile roofs, make for some scenic walking. Lunch at the Life Extension Hotel was delicious, although it’s hard to tell if it was life-prolonging. The big bonus, though, was the Hundred Demon Cave, a network of caverns with immense rock hangings, like a vast sculpture gallery. The local government has built 2.5 miles of illuminated concrete walkways, with railings on steep portions, making for what is surely one of the world’s most tourist-friendly caves — despite the almost complete lack of tourists. Our guide said she sees a foreign visitor about once every two weeks.

The cave is popular among locals, however; they gather each morning to talk and play mah-jongg. They come because the cave’s negative ion reading is supposedly off the charts. It was there that I met 84-year-old Guan Rongcang, a retired teacher who moved to Poyue four years ago. He is a walking commercial for Poyue’s negative ions, bicycling twice a week into Bama City to shop — a 36-mile round-trip. “I’m famous in this area for my bike rides,” he says. “Everyone knows me.”

Write to Stan Sesser at stan.sesser@awsj.com

Forced-Sterilization Making A Comeback in U.S.

The Judge Says: Don’t Get Pregnant. A Lapsed Law Now Sees New Life

By DAN SLATER

 

Some old laws never quite fade away.

In a dark corner of U.S. history, a number of states ran forced-sterilization projects, in which women deemed unfit for motherhood were surgically prevented from having a child. The country’s most esteemed legal minds blessed the programs. In 1927, the U.S. Supreme Court upheld a Virginia law that authorized sterilization for a woman who, along with her mother and child, was “feeble-minded.” In upholding the statute, Justice Oliver Wendell Holmes concluded: “Three generations of imbeciles are enough.” By 1935, nearly 20,000 forced eugenic sterilizations had been performed in the U.S.

Austin Chronicle

Judge Charlie Baird

Then, in 1942, the Supreme Court struck down Oklahoma’s Habitual Criminal Sterilization Act, declaring that “marriage and procreation are fundamental to the very existence and survival of the race.” Following the horrors of eugenics in Nazi Germany, the sterilization movement dwindled.

Yet in scattered cases, state regulation of reproductive rights remains a part of the legal culture — now amid very different circumstances. Just this month, for example, a judge in Texas ordered a woman, as a condition of her probation, to stop having children after her daughter was badly abused. The order, by Judge Charlie Baird, is difficult to enforce and possibly unconstitutional. It reflects the willingness of some judges to push the limits of punishment in ways that hark back to a time before a series of landmark Supreme Court decisions elevated individual rights.

In other areas, too, the impulse behind a law can linger, in society and in the courtroom, long after the law itself has fallen into disfavor or disuse. For a long time, the state asserted control over who could marry whom. It was only in 1967 that the Supreme Court struck down Virginia’s anti-miscegenation law, giving constitutional protection to interracial marriage — and creating a broader social assumption that marriage in general was a private matter. Three decades later, many states still resist same-sex marriage.

Similarly, the rationale behind forced sterilization is making its way back into the courts in the form of no-pregnancy orders, in small numbers and often overturned on appeal. In 1999, after finding a mentally retarded woman guilty of neglecting a dependent, in connection with the death of her infant son, a state court in Indiana ordered her not to become pregnant as a condition of her eight-year probation. A state appeals court struck down the no-pregnancy condition, ruling that it violated the woman’s “privacy right of procreation” and that the goal of preventing injury to a child could be served by less-restrictive means.

Yet a similar condition was upheld in 2001, this time as it applied to a man. David Oakley, a father of nine children, pleaded no contest to charges that he intentionally failed to pay child support. As a condition of probation, a state judge in Wisconsin ordered Mr. Oakley not to father any more children until he could show the court he was capable of supporting the ones he had. The Wisconsin Supreme Court, in a split decision, upheld the constitutionality of the order. The U.S. Supreme Court declined to take the case on appeal.

It’s hard to feel much sympathy for some of the people involved in these cases. Felicia Salazar, the 20-year-old Texas woman who found herself before Judge Baird, admitted to failing to provide protection and medical care to her then-19-month-old daughter, who suffered broken bones and other injuries when she was beaten by her father. Judge Baird sentenced the father, 25-year-old Roberto Alvarado, to 10 years in prison. Mr. Alvarado and Ms. Salazar relinquished their parental rights, and the child was placed in foster care. Judge Baird sentenced Ms. Salazar, who had no criminal history, to 10 years of probation and ordered her not to have children during that time.

“Under Texas law, judges can impose any condition on probation so long as it’s reasonable,” Judge Baird says. Ms. Salazar “has a fundamental right to reproduce, so I couldn’t order her to be sterilized. But she can be forced to forfeit certain fundamental rights.” He adds: “I’m not even preventing her from having intimate sexual relations. I’m only preventing her from becoming pregnant.”

Is the distinction tenable? Laurence Tribe, a professor at Harvard Law School who represented Mr. Oakley in the Wisconsin case, says Judge Baird’s order is “tantamount to sterilization” and abridges Ms. Salazar’s reproductive freedom as guaranteed by the Supreme Court’s 1973 Roe v. Wade decision affirming abortion rights.

There is also a question of enforceability. If Ms. Salazar becomes pregnant, must she choose among concealing the pregnancy, abortion or incarceration?

Allison Wetzel, the Travis County assistant district attorney who prosecuted Ms. Salazar, had agreed with the defense on probation — but not on the no-pregnancy order. “I think when the average person hears a story of a mom who failed to protect a child, their instinct is that she doesn’t deserve to have a child,” Ms. Wetzel says. “But we don’t get to decide that for her.”

Should We Adopt The Gold Standard?

In Uncategorized on October 8, 2008 at 2:11 am

Loose Money And the Roots Of the Crisis

No one can believe in the omniscience of central bankers anymore.

By JUDY SHELTON

 

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

– T.S. Eliot
“The Hollow Men” (1925)

The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain’t over. Not until people quit believing in themselves, not until people quit believing in a better future.

Corbis

But the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money — “artificial” because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions — More regulation! Less complex financial instruments! — let’s not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange — the measure, the standard, the store of value — which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken.

These days, we don’t often refer to the validity of the money itself but rather to “monetary policy” and how the Federal Reserve has managed to calibrate the money supply to economic activity over the last two decades. There are plenty of critiques; the most pointed ones blame former Fed chief Alan Greenspan for keeping interest rates too low, too long.

During his 19 years at the monetary helm — from 1987 to 2006 — Mr. Greenspan served under four different U.S. presidents. At least one of them, George H.W. Bush, blamed Mr. Greenspan for keeping interest rates too high. The stock market crash that occurred in October 1987, two months after Mr. Greenspan’s confirmation under Ronald Reagan, sent the Dow Jones Industrial Average down 508 points (23%). It required huge injections of liquidity, which subsequently needed to be mopped up with tighter monetary policy. “I reappointed him,” the elder President Bush said. “And he disappointed me.”

President Clinton likewise reappointed Mr. Greenspan — and soon learned the terms of the trade-off for reduced short-term interest rates: Bring down the fiscal budget deficit. Spurred on by a Republican Congress, it actually happened; the federal budget was balanced in 1998. All too briefly, the Fed’s biggest concern was how to carry out future monetary policy if we ran out of government debt securities for open-market operations. The fiscal deficit subsequently ballooned after 2001, due to spending in excess of revenue growth, while interest rates and unemployment — and inflation, counterintuitively — remained low. One thing for sure: We will have more than enough government debt securities.

There’s a reason for this short diversion into Mr. Greenspan’s long watch. While he is readily demonized today — Italy’s finance minister recently characterized him as the man who, after Osama bin Laden, “hurt America the most” — Mr. Greenspan is also the man who was awarded the Presidential Medal of Freedom and whose honorary titles include Knight Commander of the British Empire and Commander of the French Legion d’honneur.

So how does such an accomplished central banker turn out to be a monetary doofus?

Scapegoats are wonderfully convenient receptacles for our collective disappointment, but that’s all. When credit markets seize up, when financial instruments disintegrate, when the dollar fails — it’s not because Alan Greenspan was not sufficiently omniscient. He wasn’t, true. But no one ever was. No one ever could be.

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit — currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt — we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year’s crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

“There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan’s earlier days as an Ayn Rand acolyte; his article on “Gold and Economic Freedom” appears in her 1966 compendium “Capitalism: The Unknown Ideal.” But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer’s question: “Why do we need a central bank?”

Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve — to provide an elastic currency to soften the blow of economic contractions caused by “irrational exuberance” (and that will never be conquered, so long as humans have aspirations) — one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.

Moreover, the mission of the central bank has been greatly compromised. Can anyone have faith that Fed policy decisions going into the future will deliver more reliable money? Don’t we already know in our bones that the cost of this latest financial nightmare will be born by all of us who store the value of our labor and measure our purchasing power in the form of dollars? As John Maynard Keynes, the famous British economist, observed in his “Tract on Monetary Reform,” published in 1923:

“It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit.”

The entire world has been affected by the breakdown of the U.S. financial system, thanks to the globalization of investment capital. But the free flow of capital — along with free trade — is a good thing, the best path to global prosperity. The problem is that the role of the dollar as the world’s primary reserve currency has been called into serious question, both by allies and adversaries. Writing in the People’s Daily, Chinese economist Shi Jianxun laments: “The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States.”

Let’s do exactly that. It is time to take on the task of establishing a new foundation for international economic relations and financial relations — one dedicated to open markets and based on monetary integrity. Every country is responsible for anchoring its own currency to the universal reserve asset, and every citizen has the right to convert the national currency into the universal reserve asset.

That’s how a gold standard works. A bimetallic system, linked to silver and gold, works the same way. In either case the money is fixed to a common anchor — and thus automatically functions as a common currency to serve the needs of legitimate producers and consumers throughout the world.

How would such an approach cure financial market ills? Nothing can rescue humans from occasionally making bad choices or succumbing to herding instincts. But on the same principle as democracy and free elections, embedded in the aggregate judgment of individuals over time is a wisdom that outperforms the most ostensibly savvy administrator. Sound money would go a long way toward eliminating the distortions that pervert financial decisions and credit allocations. Price signals do matter; if they don’t, then free markets don’t matter, and capitalism doesn’t work. In which case, let government dictate demand and regulate supply.

No, we need to fix the money. Literally.

One of the candidates for president of the United States might issue the call for international monetary reform. Bad timing? The memo that resulted in the 1944 Bretton Woods international monetary agreement was written three weeks after Japan attacked Pearl Harbor. The next global conference need not take place in Bretton Woods, N.H., but rather Paris or Shanghai. Countries should participate on a voluntary basis, no coercion, in full recognition that the goal is to hammer out a new financial order where the validity of the monetary unit of account is not determined by hollow men roaming the marble halls of government central banks.

This is where the new world of sound money begins. This is where the unknown ideal of capitalism takes form.

Ms. Shelton, is an economist

New Consensus: Home Ownership Only For The Creditworthy

Not Everyone Should Own a Home

Even without Fan and Fred, American mortgage rules are unusually lax.

By JANET ALBRECHTSEN

•  

Maybe only a friendly foreigner could say this. But America needs to realize that not everyone can own a home. The American Dream of home ownership for all is a fraud. Politicians who pimped this dream created an unsustainable mortgage industry whose collapse is only surprising because it didn’t happen earlier. America’s mortgage industry will not recover, nor deserve to recover, unless it is prepared to challenge this politically unpalatable reality.

Why listen to an Australian like me? For starters, as our central banker, Glenn Stevens, said a few weeks back, Australian banks are “light years away from what’s happening in other banking systems around the world.” Australia’s four major banks sit amongst the 20 AA rated banks around the globe. And as the Sept. 23 International Monetary Fund Country Report on Australia concluded, Australia’s banking sector “is sound with stable profit, high capitalization and few non-performing loans.”

The reasons go directly to regulatory differences that should interest Americans. Take nonrecourse mortgage loans. When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.

In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability. So, naturally, an American in financial strife will pay off debts that carry personal liability — such as credit cards — before they pay off their mortgage.

Quite apart from ugly economic effects of such laws, they are objectionable in a moral sense. America is meant to be the land of sturdy individuality and personal responsibility. Instead, nonrecourse lending laws mean that mortgages, as an asset class, are of dubious value.

This is made worse by the fact that traditionally many American mortgages were typically set at a fixed rate for the 25- or 30-year life of the loan and the borrower often has the nifty ability to refinance without penalty. Most Australian mortgages are usually subject to a variable rate of interest. Fixed-rate loans are limited to around five years. So when Australian lenders offer a fixed-rate loan for five years, they fund it by borrowing five-year money. If borrowers want to repay a fixed-rate loan early, sensible economics require that they pay the lender a “break” fee, which compensates the lender for the lost interest the loan would have brought in had it been carried to term.

Prepayment penalties are either prohibited or severely restricted in the U.S. Thus, an American lender who makes a 30-year fixed rate loan that the borrower can prepay at any time without penalty is simply making a bet about the average life of a loan. And while it’s true that there are good quality statistics about how long American loans usually last, these are necessarily averages. Averages don’t reflect actual experience and are especially misleading when real outcomes are at the extreme. If market interest rates fall below the fixed interest rates, borrowers will simply refinance at lower rates. Another fine deal for borrowers. If market rates rise above the fixed interest rates, borrowers will stand pat. So loans are terminated by borrowers when they are profitable for lenders and loans last longer when they are unprofitable for the banks. Who would want to be an American lender?

America has a long and undistinguished history of populist politicians stacking the cards against lenders and in favor of risky homeownership. Proving that good intentions are no guarantee of good policy, President Jimmy Carter’s 1977 Community Reinvestment Act, which required banks to make loans to low-income people, was just another legislative leg-up for high-risk borrowers. If socially laudable but economically reckless laws cause entirely predictable problems for lenders, don’t be surprised if taxpayers have to bail them out.

The final proof that American social policies have made mortgage lending an unviable industry rests with Fannie Mae and Freddie Mac. If sensible business people don’t get into the mortgage industry because it is fundamentally a bad business, the American way has been to send in a couple of quasi-government agencies to fill the gap.

Fannie and Freddie dominated the mortgage industry because ultimately government was prepared to fund activities that prudent lenders would not. When their implicit government guarantee became explicit, America’s system of government-directed lending on socially desirable, but commercially imprudent, lending stood exposed.

Now, Australians — and others — place a high value on homeownership too. But they are aghast at the dumb things America has tolerated in pursuit of that goal. Even more dumbfounding is that nobody in Washington seems to be talking about fixing it.

Ms. Albrechtsen writes a weekly column for The Australian.

 

 

How America Lost Its Global Dominance

America and the New Financial World

Politicians can make the adjustment more or less painful.

By ZACHARY KARABELL

 

Soon enough, America’s financial crisis will wind down — maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.

Corbis

In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we’re headed down.

What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.

In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large — and there is considerable debate on that subject — the outflow of wealth is a fact.

You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.

That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.

Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.

It is at an end for two reasons. One is structural. There are now vibrant economies that don’t depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital.

There is no small irony in the fact that state-driven capitalism, which is the norm in the Persian Gulf and China, finds the U.S. too restrictive. Sovereign wealth funds, with enough cash on hand to bail out Wall Street and the U.S. housing market many times over, invested billions a year ago but are now saying no.

Uncertain growth for the United States is one reason. But the nature of the American regulatory regime is also to blame. Sarbanes-Oxley and the Patriot Act — whose anti-money-laundering provisions had the unintended consequence of repelling legitimate investors — combined with a tax code that places a heavy burden on corporations doing business in the U.S. has meant that, as the wealth transfer has happened, there is less and less inclination for global institutions to place that capital in the U.S.

This is a fact regardless of whether you believe that a high corporate tax rate is morally and fiscally correct. In truth, because of the differentials between high U.S. corporate taxes and the rates in Europe (lower) and Asia (in places nonexistent), even U.S.-listed companies that operate globally keep their profits outside the U.S., and thereby avoid those high taxes altogether.

In addition, the regulatory requirements of listing a company in the U.S. have led many companies to look to other markets and other exchanges for financing, hence the boom of financial centers such as Hong Kong, Dubai and even London.

This should not be a partisan argument. It is perfectly fair to argue that wealthy corporations should pay a greater share of the tax base than struggling middle-class Americans. Fair, but not realistic. The U.S. government can no longer dictate to global capital. Once, when the U.S. was the engine of global growth, when the world needed Wall Street for funding, capital could be taxed and controlled by the fiat of the U.S. government. No longer. The U.S. may have the will; it does not have the power.

The current debate in Washington gives no indication that this reality is understood. Both sides of the aisle are susceptible to a false sense of American economic sovereignty. Companies and countries flush with cash increasingly view U.S. laws, regulations and attitudes as undue burdens. As consumer activity accelerates outside the U.S. and Europe, and as financial centers spring up elsewhere, there is increasingly less inclination and less need for the world to go either to Wall Street or to Main Street.

For now, even with the breakdown of Wall Street, the U.S. remains vital to the global economy. It is the largest market, with a dynamic consumer culture, innovative companies, and is deeply enmeshed in the international system. But it is not the alpha and the omega; it is not the center; and the crisis hitting Wall Street is leading the rest of the world to form bonds that bypass the U.S.

Not all of this need be an absolute negative. In a truly interconnected world, more affluence and activity globally can be a universal benefit. U.S. companies operating outside the United States and Europe have already been reaping the rewards. But failure to accept the new reality will lead to the worst of all worlds.

As the U.S. government plunges into the markets, we must understand that this is the end of an era, and that attempts to unilaterally force capital to stay here will only lead to its continued flight. We are now one market among many, a huge and affluent one to be sure, but a wise nation recognizes both its strengths and its limitations. A more secure domestic capital base depends on the U.S. being seen as a desirable place for investment, and not as King Lear raging against the storm, alone, deluded and abandoned.

Mr. Karabell is president of River Twice Research. His latest book, “Chimerica: How the United States and China Became One,” will be published next year by Simon & Schuster.

 

Should We Adopt The Gold Standard?

Loose Money And the Roots Of the Crisis

No one can believe in the omniscience of central bankers anymore.

By JUDY SHELTON

 

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

– T.S. Eliot
“The Hollow Men” (1925)

The world is not ending. Despite the wrenching turmoil in global financial markets and morbid allusions to the death throes of capitalism, it ain’t over. Not until people quit believing in themselves, not until people quit believing in a better future.

Corbis

But the whimpering is real, and justified, because it hurts to have your world come crashing down. And global financial markets are definitely crashing, even when the impact is momentarily softened through massive injections of artificial money — “artificial” because the fiat money does not represent a store of genuine value but rather an airy government claim to future wealth yet to be created.

In the aftermath of this financial catastrophe, as we sort out causes and assign blame, with experts offering various solutions — More regulation! Less complex financial instruments! — let’s not lose sight of the most fundamental component of finance. No credit-default swap, no exotic derivative, can be structured without stipulating the monetary unit of account in which its value is calculated. Money is the medium of exchange — the measure, the standard, the store of value — which defines the very substance of the economic contract between buyer and seller. It is the basic element, the atom of financial matter.

It is the money that is broken.

These days, we don’t often refer to the validity of the money itself but rather to “monetary policy” and how the Federal Reserve has managed to calibrate the money supply to economic activity over the last two decades. There are plenty of critiques; the most pointed ones blame former Fed chief Alan Greenspan for keeping interest rates too low, too long.

During his 19 years at the monetary helm — from 1987 to 2006 — Mr. Greenspan served under four different U.S. presidents. At least one of them, George H.W. Bush, blamed Mr. Greenspan for keeping interest rates too high. The stock market crash that occurred in October 1987, two months after Mr. Greenspan’s confirmation under Ronald Reagan, sent the Dow Jones Industrial Average down 508 points (23%). It required huge injections of liquidity, which subsequently needed to be mopped up with tighter monetary policy. “I reappointed him,” the elder President Bush said. “And he disappointed me.”

President Clinton likewise reappointed Mr. Greenspan — and soon learned the terms of the trade-off for reduced short-term interest rates: Bring down the fiscal budget deficit. Spurred on by a Republican Congress, it actually happened; the federal budget was balanced in 1998. All too briefly, the Fed’s biggest concern was how to carry out future monetary policy if we ran out of government debt securities for open-market operations. The fiscal deficit subsequently ballooned after 2001, due to spending in excess of revenue growth, while interest rates and unemployment — and inflation, counterintuitively — remained low. One thing for sure: We will have more than enough government debt securities.

There’s a reason for this short diversion into Mr. Greenspan’s long watch. While he is readily demonized today — Italy’s finance minister recently characterized him as the man who, after Osama bin Laden, “hurt America the most” — Mr. Greenspan is also the man who was awarded the Presidential Medal of Freedom and whose honorary titles include Knight Commander of the British Empire and Commander of the French Legion d’honneur.

So how does such an accomplished central banker turn out to be a monetary doofus?

Scapegoats are wonderfully convenient receptacles for our collective disappointment, but that’s all. When credit markets seize up, when financial instruments disintegrate, when the dollar fails — it’s not because Alan Greenspan was not sufficiently omniscient. He wasn’t, true. But no one ever was. No one ever could be.

If capitalism depends on designating a person of godlike abilities to manage demand and supply for all forms of money and credit — currency, demand deposits, money-market funds, repurchase agreements, equities, mortgages, corporate debt — we are as doomed as those wretched citizens who relied on central planning for their economic salvation.

Think of it: Nothing is more vital to capitalism than capital, the financial seed corn dedicated to next year’s crop. Yet we, believers in free markets, allow the price of capital, i.e., the interest rate on loanable funds, to be fixed by a central committee in accordance with government objectives. We might as well resurrect Gosplan, the old Soviet State Planning Committee, and ask them to draw up the next five-year plan.

“There are numbers of us, myself included, who strongly believe that we did very well in the 1870 to 1914 period with an international gold standard.” It would be easy to dismiss this statement as a quaint relic from Mr. Greenspan’s earlier days as an Ayn Rand acolyte; his article on “Gold and Economic Freedom” appears in her 1966 compendium “Capitalism: The Unknown Ideal.” But Mr. Greenspan said it, rather emphatically, last October on the Fox Business Network. He was responding to the interviewer’s question: “Why do we need a central bank?”

Whatever well-intentioned reasons existed in 1913 for creating the Federal Reserve — to provide an elastic currency to soften the blow of economic contractions caused by “irrational exuberance” (and that will never be conquered, so long as humans have aspirations) — one would be hard-pressed to say that the financial fallout from this latest money meltdown will have less damaging consequences for the average person than would have been incurred under a gold standard.

Moreover, the mission of the central bank has been greatly compromised. Can anyone have faith that Fed policy decisions going into the future will deliver more reliable money? Don’t we already know in our bones that the cost of this latest financial nightmare will be born by all of us who store the value of our labor and measure our purchasing power in the form of dollars? As John Maynard Keynes, the famous British economist, observed in his “Tract on Monetary Reform,” published in 1923:

“It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit.”

The entire world has been affected by the breakdown of the U.S. financial system, thanks to the globalization of investment capital. But the free flow of capital — along with free trade — is a good thing, the best path to global prosperity. The problem is that the role of the dollar as the world’s primary reserve currency has been called into serious question, both by allies and adversaries. Writing in the People’s Daily, Chinese economist Shi Jianxun laments: “The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States.”

Let’s do exactly that. It is time to take on the task of establishing a new foundation for international economic relations and financial relations — one dedicated to open markets and based on monetary integrity. Every country is responsible for anchoring its own currency to the universal reserve asset, and every citizen has the right to convert the national currency into the universal reserve asset.

That’s how a gold standard works. A bimetallic system, linked to silver and gold, works the same way. In either case the money is fixed to a common anchor — and thus automatically functions as a common currency to serve the needs of legitimate producers and consumers throughout the world.

How would such an approach cure financial market ills? Nothing can rescue humans from occasionally making bad choices or succumbing to herding instincts. But on the same principle as democracy and free elections, embedded in the aggregate judgment of individuals over time is a wisdom that outperforms the most ostensibly savvy administrator. Sound money would go a long way toward eliminating the distortions that pervert financial decisions and credit allocations. Price signals do matter; if they don’t, then free markets don’t matter, and capitalism doesn’t work. In which case, let government dictate demand and regulate supply.

No, we need to fix the money. Literally.

One of the candidates for president of the United States might issue the call for international monetary reform. Bad timing? The memo that resulted in the 1944 Bretton Woods international monetary agreement was written three weeks after Japan attacked Pearl Harbor. The next global conference need not take place in Bretton Woods, N.H., but rather Paris or Shanghai. Countries should participate on a voluntary basis, no coercion, in full recognition that the goal is to hammer out a new financial order where the validity of the monetary unit of account is not determined by hollow men roaming the marble halls of government central banks.

This is where the new world of sound money begins. This is where the unknown ideal of capitalism takes form.

Ms. Shelton, an economist, is author of “Money Meltdown: Restoring Order to the Global Currency System” (Free Press, 1994).