What’s Wrong with the Economy?

Quantitative Easing is a Bust
by MIKE WHITNEY


The reason the US economy is still sluggish 4 years after Lehman Brothers defaulted, is of lack of demand. Demand dropped off after the housing bubble burst and has never really recovered. Economist Dean Baker calculates that hit to demand is somewhere in the neighborhood of $1 trillion per year, a sum that’s been impossible to replace. Here’s how Baker breaks down the costs in terms of GDP and weak consumption:

“We saw a sharp falloff of residential construction as we went from a near record boom, with construction exceeding more than 6.0 percent of GDP at the 2005 peak, to a bust where it fell below 2.0 percent of GDP. This meant a loss in annual demand of more than $600 billion a year.

We also saw a large falloff in consumption due to the loss of $8 trillion in housing wealth. The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand.

There is no mechanism that would allow the economy to easily replace the combined loss of between $1 trillion and 1.2 trillion in demand that would be predicted from the collapse of the housing bubble.” (“Underwater Homeowners Cannot Explain the Weak Recovery, Dean Baker, CEPR)

So, while household indebtedness, off-shoring of jobs and so called “onerous” regulations may have dampened overall activity, the proximate cause of the slowdown is the housing bubble which blasted a trillion dollar hole in demand.

The Obama administration tried to address the situation in 2009 by implementing the American Recovery and Reinvestment Act (ARRA). The $800 billion fiscal stimulus package narrowed the output gap, reduced unemployment and raised GDP, but it failed to produce the strong and sustainable recovery that was promised. That said, the ARRA did lift the economy out of recession and put 3 million people back to work, which is certainly a step in the right direction. The administration used the budget deficits exactly as British economist John Maynard Keynes suggested they be used, to sustain activity when the private sector had dramatically cut-back on spending and investment. When the businesses and consumers cannot sustain demand, then government must increase its spending or the economy will slip into a long-term slump. (Compare the recovery in the US to developments in the eurozone where discredited contractionary “austerity” policies have pushed the 17 member monetary union deeper into recession and social malaise.)

Of course there are other factors that have weighed heavily on demand, too, like high unemployment (7.7 percent) and wage stagnation.. According to economist Jared Bernstein, the real “pretax” earnings of middle wage workers have never grown more slowly than they have in 2012. (See chart here.) Also, the Commerce Department reports that employee pay is a smaller share of the economy today than it has been since the government started collecting wage and salary data. (which dates back to 1929.) Naturally, if wages are shrinking and unemployment is high, then demand is going to be weak and the economy is going to underperform. And that’s exactly what’s happening.

And then, there is growing inequality. Check this out from Pam Martens at Wall Street on Parade:

“A study conducted by Edward N. Wolff for the Levy Economics Institute of Bard College in March 2010 made the following findings:

‘The richest 1 percent received over one-third of the total gain in marketable wealth over the period from 1983 to 2007. The next 4 percent also received about a third of the total gain and the next 15 percent about a fifth, so that the top quintile collectively accounted for 89 percent of the total growth in wealth, while the bottom 80 percent accounted for 11 percent.

Debt was the most evenly distributed component of household wealth, with the bottom 90 percent of households responsible for 73 percent of total indebtedness.

Wealth concentration in too few hands while the general populace is saddled with too much debt to buy the goods and services produced by the corporations, is a replay of the conditions leading to the crash of 1929 and the ensuing Great Depression.” (“Consumers Have Powerful Weapons Against Wall Street’s Bad Practices”, Pam Martens, Wall Street on Parade)

While the upward distribution of wealth speaks to the implicit unfairness of the system, its impact on demand can be offset by increases to government spending vis a vis fiscal stimulus. Unfortunately, policymakers have abandoned fiscal policy altogether and transferred de facto control of the economy to the Central Bank. The Fed is not just calling all the shots, it’s doing so in a way that reflects its bias towards big finance. This is why the recovery has been so abysmal, because the policy has focused on boosting profits for Wall Street instead of revitalizing the broader economy. Even so, Fed chairman Ben Bernanke has acknowledged that the real reason unemployment is still so high, is not “structural”, (as conservatives argue) but lack of demand. Here’s what he said in a recent appearance before Congress:

“Is the current high level of long-term unemployment primarily the result of cyclical factors, such as insufficient aggregate demand, or of structural changes, such as a worsening mismatch between workers’ skills and employers’ requirements? … I will argue today that, while both cyclical and structural forces have doubtless contributed to the increase in long-term unemployment, the continued weakness in aggregate demand is likely the predominant factor.”

Bernanke’s admission is further underscored by a McKinsey survey of corporate managers from around the world which found that “the single greatest fear among executives everywhere is weak consumer demand for their companies’ products and services.” (CBS News)

So the question we should be asking ourselves is this: Why is so hard to get a second round of fiscal stimulus when Keynesian remedies have been used for more than 60 with great success? What’s changed?

What changed is the orientation of the people in power, most of whom are either closely-aligned to or former employees of Wall Street. Today’s political class is a subsidiary of the financial oligarchy. And that goes double for the Fed who invariably puts the interests of the big investment banks and brokerages above those of ordinary working people. Proof of “regulatory capture” is evident in the manner that the recovery has been managed. (or mismanaged!) Trillions of dollars in loans and bailouts have been showered on the banks and financial institutions while homeowners, consumers and working stiffs have been asked to cut back on vital social programs for the sick, elderly, and unemployed. These policies are largely responsible for today’s anemic, sputtering recovery, a condition that’s ideal for restructuring the economy in a way that better serves the interests of the big corporations and Wall Street.

Why, for example, would the Fed want to reduce unemployment if high unemployment pushes down labor costs and boosts profits for its corporate constituents? And why would Bernanke want to rev-up the economy when the ongoing crisis creates the rationale for gutting social programs and slashing public spending? And why would the Fed want to normalise interest rates, when the low rates force savers and retirees on fixed income back into the stock market, while–at the same time– provide unlimited sums of money to the banks at zilch cost to themselves?

The wretched state of the economy is no accident. It is by design. And it’s easy to figure out who’s benefiting from the present arrangement by tracing the torrent of capital that flows upwards to the corporate boardrooms and off-shore hideaways where the 1% stash their loot. Check this out: “Corporate profits as a share of GDP is at an all-time high while wages and salaries are at all-time lows“, The Big Picture)

The fact is, that the ongoing slump helps some while it hurts others. Regrettably, it’s the sick, the elderly, and working people who are hurt most by Central Bank policy.

So how effect has quantitative easing (QE) had on demand?

Not much, really. In fact, housing sales and refinancings have actually dropped since Bernanke launched QE3 in September. At the same time, private sector borrowing is still in the doldrums, which means that Bernanke’s zero rates and bond buying programs haven’t sparked another credit expansion. Even worse, QE might be doing some real harm as Bloomberg analyst Michael Mckee points out in a recent interview. Here’s what he said:

“Look at the corporate bond market, we’re seeing a rush of corporate bond sales at the end of the year, but not to invest in the economy, but in order to pay special dividends before tax rates go up at the end of the year.” (Bloomberg)

So, QE hasn’t boosted investment after all, in fact, it’s triggered a selloff in bonds as corporations take-the-money-and-run instead of trying to find productive outlets for future investment. What does that tell you? It tells you that Bernanke’s wacky theory is weakening demand by discouraging investment. The whole thing has backfired. This point is further confirmed by economist Frances Coppola who summed it up like this in a recent post:

“QE is effective in bringing down real interest rates – but not for borrowers at commercial banks. They are paying as much or more than two years ago. The effective interest rate is depressed because of lower rates paid to savers, not lower rates charged to borrowers. Credit spreads are widening.

This suggests that QE, far from being a stimulus, is actually contractionary for the real economy. If rates to both savers AND borrowers were falling, and bank lending volumes were normal, then QE could be said to be a stimulus, because it would encourage more borrowing, and falling returns to savers might encourage them to spend rather than save. But that’s not the case. Lending volumes are reduced and interest rates to borrowers remain high, while interest rates to savers are depressed: people on fixed incomes are spending less, not more, because their income is reduced, and borrowers faced with high interest rates are choosing to cut spending in order to maintain debt repayments. The overall effect is to take money from the real economy and transfer it to banks, who use it to shore up their damaged balance sheets. This raises questions about exactly what QE is supposed to stimulate and who it is supposed to help.” (“QE: The problem, not the solution”, The Coppola Comment)

So, QE is actually contractionary?

It sure looks that way. If the banks are not passing along the savings from the Fed’s low rates to consumers, but skimming heftier profits for themselves on the widening spreads, then the net-impact of the low rates is zero. In other words, QE will not lead to another credit expansion because the transmission mechanism (“the banks”) is not functioning as Bernanke had hoped. The banks have sabotaged the policy in order to make more money for themselves. What a surprise!

On Wednesday, the Mortgage Bankers Association produced more proof that QE is not working. The MBA announced that mortgage applications had decreased by 12.3 percent in the last week. Even though mortgage rates are lower now than anytime in history, people are still turning up their noses at housing. QE is not working.

So how do you shore up demand when monetary policy is ineffective? How do you shore up demand when small-business optimism has plunged to levels not seen since the middle of the financial crisis? (“NFIB small-business optimism index plunges“, Marketwatch)

How do you shore up demand when workers’ wages are shrinking? (“Modest Job Growth, Less Take-Home Pay Is Recipe for Depressed Consumer“, Wall Street Journal)

How do you shore up demand when the consumer is under pressure and disposable income is dwindling? (“Consumer Spending Wobbles“, Wall Street Journal) Here’s an excerpt from the article:

“U.S. consumer spending, a rare pillar of economic strength in recent months, is showing signs of weakening….In recent weeks government data have shown spending was slower over the summer than previously believed, and it has started off the final three months of the year on an even weaker footing.” (WSJ)

How do you shore up demand when businesses are hoarding cash and handing out dividends instead of reinvesting in the economy? (“$8.4 trillion: Number of the Week: As Companies Borrow More, Where Is Money Going?“, Wall Street Journal)

How do you shore up demand when unemployment is stuck at 7.7 percent, when the labor force is shrinking, when consumer spending is falling (“Consumer Spending Declines 0.2%”, Wall Street Journal) when manufacturing is contracting, when consumer sentiment is slipping, and when the “the median net worth of U.S. households has dropped by 47 percent in the last 4 years? (“The Recession’s Toll: How Middle Class Wealth Collapsed to a 40-Year Low“, The Atlantic)

Finally, how do you shore up demand when business investment has fallen off a cliff? Check this out from the Wall Street Journal:

“U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation’s 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined. At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms’ expansion plans. (“Investment Falls Off a Cliff,” Wall Street Journal)

Keyenes provides a straightforward antidote for weak demand, that is, increase government investment via fiscal stimulus. That means using the budget deficits to reduce unemployment, boost growth, and put the economy back on solid footing. Monetary policy alone will not produce a strong, self sustaining recovery, which is a point that Keynes makes in Chapter 12 of “The General Theory of Employment, Interest and Money”. Here’s what he says:

“For my own part I am now somewhat sceptical of the success of a merely monetary policy directed towards influencing the rate of interest. I expect to see the State, which is in a position to calculate the marginal efficiency of capital-goods on long views and on the basis of the general social advantage, taking an ever greater responsibility for directly organising investment; since it seems likely that the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles I have described above, will be too great to be offset by any practicable changes in the rate of interest.” (John Maynard Keynes, “The General Theory of Employment, Interest and Money”, marxists.org, 2002)

So there you have it; governments have a role to play in maintaining demand. By “directly organising investment” the state can ease the business cycle, reduce unemployment, and mitigate the impact of financial crises and recessions.

In that same vein, economist James K. Galbraith thinks we should be pursuing a long-term strategy that includes “government jobs programs”, “an infrastructure bank, a four-day work week, and expansion of Social Security, an early retirement option, a systematic program of general revenue sharing to support state and local governments.” Here’s how Galbraith summed it up in an article in The Washington Monthly:

“Today the largest problems we face are energy security and climate change—massive issues because energy underpins everything we do, and because climate change threatens the survival of civilization. And here, obviously, we need a comprehensive national effort. Such a thing, if done right, combining planning and markets, could add 5 or even 10 percent of GDP to net investment…

What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to “normal,” no going back to a world run by bankers—and no alternative to taking the long view.” (“No Return to Normal”, James K Galbraith, Washington Monthly)

Progressive economists like Galbraith have figured out how to sustain demand and address our most pressing ecological and energy problems at the same time. This is the best way forward, not Quantitative Easing which has largely been a bust.

Time Running Out for Sustainable Future

Tuesday, April 3, 2012 by Common Dreams 
Worldwatch maps sustainable 'good life', warns great changes must be made before it's too late

The planet will not be able to sustain levels of consumption typical of today's 'consumer class' without irreparable consequences to the globe, according to the just released Worldwatch Institute in State of the World 2012: Moving Toward Sustainable Prosperity. They have proposed a redefinition of 'the good life' as one that aligns with sustainable practices and have mapped out a hopeful plan leading up to this year's Rio+20; however, the plan's window of opportunity is quickly closing.

"The aspirations of the original 1992 meeting in Rio collided with a set of painfully sobering developments, including unfriendly politics, orthodox economics, and a dominant culture of consumerism. The 20 years since then have made it clear that necessary change is not merely technical, but encompasses changes in lifestyle, culture, and politics," states Worldwatch.

"There won't be much point in revisiting the Rio+20 conference in another 20 years to try to figure out what went wrong," says Worldwatch President Robert Engelman. "We know enough right now about the state of the world to see clearly that we have to change the way we live and the way we do business. Working out new paths towards true sustainability will take much more than a conference of governments, though such a gathering can help. The task begins with the recognition that perpetual economic and demographic growth aren't possible on a finite planet. We can work with the hope that ecological stability is possible, along with a good life based on health, literacy, strong communities, and access to 'enough' rather than ever more."

* * *

Time Running Out to Ensure Sustainable Prosperity for All (Worldwatch Institute):

"The Industrial Revolution gave birth to an economic growth model rooted in structures, behaviors, and activities that are patently unsustainable," says Worldwatch Senior Researcher Michael Renner, co-director of State of the World 2012. "Mounting ecosystem stress and resource pressures are accompanied by increased economic volatility, growing inequality, and social vulnerability. It is difficult to avoid the conclusion that the economy no longer works for either people or the planet."

Instead, we need to reprioritize basic needs and pursue true sustainable prosperity: development that allows all human beings to live with their fundamental needs met, with their dignity acknowledged, and with abundant opportunity to pursue lives of satisfaction and happiness, all without risk of denying others in the present and the future the ability to do the same. This, in turn, means not just preventing further degradation of Earth's systems, but actively restoring them to full health. [...]

The report's 35 contributors describe many of the currently untenable social and economic patterns and explore opportunities for creative alternatives on sustainability topics ranging from agriculture, communication technologies, and biodiversity to "green" construction, local politics, and global governance. Specific topics include:

• A Green Economy that Works for Everyone: For industrial, emerging, and developing countries, a green economy will mean different things. But they have in common the need to create green jobs that offer a decent living, and they all can benefit from policy innovations such as a network of cooperative green innovation centers, a standard-setting global "top runner" program, green financing and skills training, and greater economic democracy. 

• Degrowth in Overdeveloped Countries: Humanity uses 1.5 Earths' worth of ecological capacity, with much of that consumed by overdeveloped industrial countries. Sustainable prosperity will require economic degrowth in these countries. This can be achieved by a mix of tax shifting, shortening work weeks, denormalizing certain types of consumption, and de-marketizing certain sectors of the economy, such as food production and child care. 

• Inclusive and Sustainable Urban Development: Urban poverty is pervasive, and absolute numbers are expanding in both the developed and developing worlds: some 828 million people live in slums worldwide. Urban planning needs to include strategies such as explicit and transparent spatial plans, democratic engagement of the poor and community-based organizations, and coordination across sectors, especially affordable housing, transportation, and economic development. 

• Sustainable Transportation: Today there are nearly 800 million cars on the world's roads, and in the developing world transportation is the source of up to 80 percent of harmful air pollutants. A sustainable and socially progressive alternative requires a shift toward denser cities that generally require less motorized travel, invest in high-quality transit, and support vibrant, healthy communities by enabling walking and cycling. 

• Information and Communications Technologies (ICTs): More than half of the world's population lives in cities, and 90 percent of urbanization is occurring in the developing world. ICTs can help cities become safer, cleaner, and more sustainable places to live, but they are currently underutilized in both the developed and developing worlds. Reversing this trend must go beyond the current public-private partnerships and "smart cities" projects by providing broad public access to data and boosting public involvement. 

• Measuring Sustainable Urban Development: Since the 1992 Earth Summit in Rio, there has been limited progress in developing a universal sustainability indicator system that is scientifically valid and credible. This has been true in the United States as well, but efforts are under way to develop a database of indicators that will inform discussions at Rio+20 about how to measure urban sustainability. 

• Reinventing the Corporation: Transnational corporations (TNCs) have evolved over the past five centuries into globally influential entities. They often go unchecked, with no limits placed on their impacts on society, the environment, or the economy. TNCs must adapt if sustainability is to become a reality, including shifts in their purpose, ownership, capital investment, and governance. 

• The Global Architecture of Sustainable Governance: Sustainability efforts worldwide will be shaped by the reforms being discussed for the United Nations Environment Programme (UNEP). If UNEP is going to play a valuable and productive role in these efforts, it must enjoy increased authority and financial resources, but above all it must be better connected to other international agencies so it can play the coordinating and visionary role its founders had in mind. 

• Population Growth Strategies: In 2011, global population passed the 7 billion mark, and confronting population growth is critical to the future sustainability of the planet. Over time, population growth will end and reverse with no need for "population control" through assuring reproductive health and rights for all, adequate education for girls and boys, and equal economic activity for both sexes with internalization of the environmental costs of economic activity. 

• Sustainable Buildings: The construction and operation of buildings use 25-40 percent of all produced energy, accounting for a comparable share of global carbon dioxide emissions. We must aim for the goals of net zero energy use, zero emissions, and zero waste if new construction and existing buildings are going to be sustainable. 

• Public Policy and Sustainable Consumption: Combating the rise of consumerism will require government involvement, including advertisement management, tax modification to include the true cost of a product or service, and the establishment of sustainability certification programs. 

• Mobilizing the Business Community: Our current economic model does not consider planetary limits, is socially exclusive, and places private interests above public ones. A recipe for a successful 21st-century economy needs to be green, inclusive, and responsible, which will take a combination of business-led voluntary initiatives reinforced by new corporate structures and strong government policy and public oversight. 

• Sustainable Agriculture: Almost 2 billion people are fed by produce from the 500 million small farms in developing countries. Yet these small-scale producers are some of the most food-insecure people: 80 percent of the world's hungry live in rural areas. To optimize the productivity and environmental sustainability of small farms, future agricultural policy must combine a rights-based approach with legislation that is localized and culturally specific. 

• Food Security and Equity: In recent decades, factory farming has increased meat, egg, and dairy consumption worldwide, particularly in the developing world. But this industrial meat production system has been harmful to human health and the environment. The internalization of costs, restoration of ecosystems, and education of the public----among other strategies----can help create a new food system that is more efficient, equitable, and climate-compatible. 

• Biodiversity: The rate at which species are becoming extinct is estimated to be up to 1,000 times higher today than in pre-industrial times. Efforts such as the Intergovernmental Platform on Biodiversity and Ecosystem Services are needed to better understand and reverse the erosion of nature's resiliency. 

• Valuation of Ecosystem Services: The human ecological footprint has grown so large that progress is now constrained more by limits on natural resources and ecosystem services than by limits on infrastructure or technology. Ecosystem services help evaluate the benefits derived from ecosystems by assigning a monetary or physical unit to those benefits, which can in turn help to better facilitate natural resource management. 

• Local Governance: Decisions at the local level can be the greatest catalysts for progress because they contribute directly to poverty reduction, job growth, gender equity, and environmental protection. As a result, the development of local democratic procedures that are transparent and reliable is critical to global sustainable development.

What Greenspan Should Have Done

The Housing Bubble and the Economic Crisis

by DEAN BAKER 

 

In Washington policy circles, money and influence can be used to make even the most simple and obvious things complicated and confusing. This is certainly the case with the housing bubble and its aftermath. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame.

First, what happened is very straightforward. We had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation beginning in the late 90s. By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 percentage points in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 percentage points above the rate of inflation.

This was a huge problem because this bubble was driving the economy. It drove it directly by creating a boom in residential housing construction. We were building housing at a near-record pace in the years 2002-2006. This was in spite of the fact that we had an aging population and record levels of vacancies at the start of the period.

The other way in which the bubble was driving the economy was through its effect on consumption. The bubble created more than $8 trillion in ephemeral wealth in housing. Homeowners thought this wealth was real and spent accordingly. The result was a massive consumption boom that sent the saving rate down to zero in the years from 2004-2006.

When the bubble burst, the building boom went bust. Construction fell to its lowest levels since the 50s as the country waits to gradually work off a glut of housing.

Consumption fell back to more normal levels as people came to grips with the fact that they had lost tens of thousands or even hundreds of thousands of dollars of equity in their home.

The combined impact of the plunge in construction and consumption spending together with the collapse of a bubble in non-residential real estate is to lower annual demand in the economy by more than $1.2 trillion. This is the reason for the prolonged downturn. There is nothing in the economists’ bag of tricks that will allow the economy to quickly and easily replace $1.2 trillion in lost demand. That is the reason we are still more than 10 million jobs below full employment four years after the onset of the recession.

The “why” in this story is simple: Businesses were making money. Many people acted poorly in this story — almost everywhere the motivation was money and profit. Countrywide and Merrill Lynch were issuing and packaging fraudulent mortgages because they were making tons of money on them, not because they wanted to make moderate-income people and minorities homeowners.

Fannie Mae and Freddie Mac deserve plenty of blame in this story. Housing is all they do. They should have seen the bubble and tried to stop it. Instead they jumped on the bandwagon. But they were followers, not leaders. The worst loans were securitized by the Wall Street boys. Fannie and Freddie got into junk mortgages late in the game and they did so to regain market share as a profit-making business, not out of a concern to extend homeownership.

The government agency devoted to extending homeownership to moderate-income people, the Federal Housing Authority, became almost irrelevant. Its market share shrank to less than 2.0 percent at the peak of the bubble (compared with around 10 percent in more normal times), as it lending standards were far stricter than those of the subprime mortgage pushers.

Finally, some quick points on what could have been done. First, the Fed has responsibility for maintaining the stability of the U.S. economy. Alan Greenspan should have recognized the bubble and done everything in his power to burst it before it grew to such dangerous levels.

Step one in this process should have been to document its existence and show the harm that its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise. Greenspan should have used his Congressional testimony and other public appearances to call attention to the bubble.

This would have put the bubble clearly on everyone’s radar screen. And, the reality was that there were no serious counterarguments. It is difficult to believe that this action by itself would not have slowed the home buying frenzy and curbed the issuance of junk loans, or at least their repurchase for securitization.

Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.

Finally, the Fed could have used interest rate increases as a mechanism to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.

To maximize the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.

This surely would have gotten the attention of the mortgage industry and potential homebuyers. Would it have been an extraordinary action from a Fed chair? Sure, but so what. It might have prevented the economic devastation that is ruining tens of millions of lives. If this required Alan Greenspan to deviate from the standard script for Fed chairs, that would have been a very small price.

Heavy Drinkers Outlive Nondrinkers, Study Finds

(Live longer, eh? They left out "but with many long-term debilitating illnesses". And where is the "paid for by the alcoholic beverage industry" tagline?--jef)

***

Heavy Drinkers Outlive Nondrinkers, Study Finds

By JOHN CLOUD
Tue Aug 31, 4:15 am ET

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don't drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that - for reasons that aren't entirely clear - abstaining from alcohol does actually tend to increase one's risk of dying even when you exclude former drinkers. The most shocking part? Abstainers' mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don't have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It's true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors - job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don't get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables - socioeconomic status, level of physical activity, number of close friends, quality of social support and so on - the researchers (a six-member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There's also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

The Story of Stuff

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