www.byzcath.org Forums News & Events Church News Vatican calls for world authority to govern finance

There are a lot of underemployed monsignori at the Vatican, and idle hands are the devil's playground. This will simply be ignored, and quietly forgotten. I doubt if Benedict XVI even saw a draft of the document. The bureaucracy is out of control.

Stuart's right about the source of the paper and its probable lifespan, I think. The Church's peas-n-justice teachings tend to be ignored.

But it's not necessarily a violation of subsidiarity. That's often understood as requiring that an action be taken by the lowest or smallest level of government that can take it, but it also holds that the action should be taken by the most appropriate level, depending on the ends to be achieved and a whole host of prudential decisions, and the most appropriate level may not be the lowest that can in theory do whatever it is that needs to be done. There's nothing necessarily wrong with an international authority, as there's nothing wrong — it is not necessarily a violation of belief in subsidiarity — in holding that the state should do something rather than the town, or the nation rather than the state.

Whether there is anything of that sort is another question. Personally, I have my doubts.

The Vatican certainly has every right to recommend how the world's economy should be run, just like every other politician, economist, and journalist on the planet.

Catholics, Finance, and the Perils of Conventional Wisdom

October 24, 2011 12:22 P.M.
By Samuel Gregg

Despite the Catholic Left’s excited hyperventilating that the document released today by the Pontifical Council for Justice and Peace (PCJP) would put the Church “to the left of Nancy Pelosi” on economic issues, more careful reading of “Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority” soon indicates that it reflects rather conventional contemporary economic thinking. Unfortunately, given the uselessness of much present-day economics, that’s not likely to make it especially helpful in thinking through some of our present financial challenges.

Doctrinally speaking, there’s nothing new to be found in this text. As PCJP officials will themselves tell you, it’s not within this curial body’s competence to make doctrinal statements that bind Catholic consciences. Moreover, the notion that an increasingly integrated world economy requires some type of authority able to make decisions about what the Church calls “the universal common good” has long been a staple of Catholic social teaching. Such references to a global world authority have always been accompanied by an emphasis on the idea of subsidiarity, and the present document is no exception to that rule. This principle maintains that any higher level of government should assist lower forms of political authority and civil-society associations “only when” (as this PCJP text states) “individual, social or financial actors are intrinsically deficient in capacity, or cannot manage by themselves to do what is required of them.”

But putting aside doctrinal questions, this text also makes claims of a more strictly economic nature. Given that these generally fall squarely into the area of prudential judgment for Catholics, it’s quite legitimate for Catholics to discuss and debate some of this document’s claims. So here are just a few questions worth asking.

First, the text makes a legitimate point about the effects of a disjunction between the financial sector and the rest of the economy. It fails, however, to note that one major reason for this disjunction has been the dissolution of any tie between money and an external object of value that regulates the quantity of money and credit in circulation in the “real” economy.

Between the late 1870s and 1914, such a linkage existed in the form of the classic gold standard. This gave the world remarkable monetary stability and low inflation without any centralized authority. You needn’t be a Ron Paul disciple to recognize that fiat money’s rise is at least partly responsible for the monetary crises this document correctly laments.

Second, this document displays no recognition of the role played by moral hazard in generating the 2008 crisis or the need to prevent similar situations from arising in the future. Moral hazard describes those situations when people are effectively insulated from the possible negative consequences of their choices. This makes them more likely to take risks they wouldn’t otherwise take — especially with other people’s money. The higher the extent of the guarantee, the greater is the risk of moral hazard. It creates, as the financial journalist Martin Wolf writes, “an overwhelming incentive to privatize gains and socialize losses.”

If PCJP were cognizant of this fact, it might have hesitated before recommending we consider “forms of recapitalization of banks with public funds, making the support conditional on ‘virtuous’ behaviours aimed at developing the ‘real economy.’” Such a recapitalization would simply reinforce the message that Wall Street can always turn to taxpayers to bail them out when their latest impossible-to-understand financial scheme goes south. In terms of orthodox Catholic theology, it’s worth reminding ourselves that the one who creates an occasion of sin bears some indirect responsibility for the choices of the person tempted by this situation to do something very imprudent or simply wrong.

Third, given this text’s subject matter, it reflects one very strange omission. Nowhere does it contain a detailed discussion of the high levels of public debt and deficits in many developed economies, the clear-and-present danger they represent to the global financial system, and their negative impact upon the prospects for economic growth (i.e., what gets people out of poverty).

Given these facts, how could governments provide the aforementioned public funds when they are already so heavily in debt and already tottering under the weight of existing fiscal obligations? By raising taxes? Even Bill Clinton thinks that’s not a great idea in an economic slowdown. Indeed, the basic demands of commutative justice indicate that governments need to meet their current obligations to existing creditors before they can even consider contributing to further bailouts.

Fourth, the document calls for the creation of some type of world central bank. Yet its authors seem unaware that much of the blame for our present economic mess is squarely attributable to central banks. Here one need only note that the Federal Reserve’s easy-money policies from 2000 onwards played an indispensible role in creating America’s housing-market bubble, the development of questionable securities products, and the subsequent 2008 meltdown.

Calls for a global central bank aren’t new. Keynes argued for such an organization 75 years ago. But why, given national central banks’ evident failures, should anyone suppose that a global central bank wouldn’t fall prey to the same errors? The folly of a centralized supranational body like the European Central Bank setting a one-size-fits-all interest-rate for economies as different as Greece and Germany should now be evident to everyone who doesn’t live in the fantasy world inhabited by EU bureaucrats. Indeed, it is simply impossible for any one individual or organization to know what is the optimal interest-rate for every country in the EU, let alone the world.

Plenty of other critiques could — and no doubt will — be made of some of the economic claims advanced in this PCJP document. As if in anticipation of this criticism, the document states, “We should not be afraid to propose new ideas.” That is most certainly true. Unfortunately, many of its authors’ ideas reflect an uncritical assimilation of the views of many of the very same individuals and institutions that helped generate the world’s most serious economic crisis since the Great Depression. For a church with a long tradition of thinking seriously about finance centuries before anyone had ever heard of John Maynard Keynes or Friedrich Hayek, we can surely do better.

— Samuel Gregg is research director at the Acton Institute. He has authored several books including On Ordered Liberty, his prize-winning The Commercial Society, Wilhelm Röpke’s Political Economy, and his 2012 forthcoming Becoming Europe: Economic Decline, Culture, and America’s Future.

To prove that point, look no further than the current problem of the Euro and the European bank. Here, a single currency and a single financial market was created to cover a range of diverse countries at different levels of economic development, and with very different sets of political and cultural priorities. What the European debt crisis proves, more than anything, is centralized banking works only for homogenized political entities.

The Federal Reserve and other national central banks work because they operate within constrained boundaries defined either by a common politico-economic system, or by a broad consensus about political and economic policies. But a transnational system, such as the EuroBank, and even the World Bank, do not work because, by their nature, they must implement uniform policies that may not be appropriate to the sovereign entities to whom they provide services. Before the Euro, the PIGS would have resolved their debt crisis very simply by devaluing their currency, paying off their present debts with it, and accepting the need to pay higher interest rates in the future. The devalued currency would make their products more competitive internationally, and would stimulate economic growth, which would partially offset the effects of the devaluation.

One reason the PIGS did so very well off the Euro in the beginning was its very low initial valuation--at one point, down to something like $0.67/Euro (the Germans were having fits), which meant they could develop competitive export economies while building up infrastructure on highly subsidized EU grants or loans, the best of both worlds. Now the bill has come due.

Second, this document displays no recognition of the role played by moral hazard in generating the 2008 crisis or the need to prevent similar situations from arising in the future. Moral hazard describes those situations when people are effectively insulated from the possible negative consequences of their choices. This makes them more likely to take risks they wouldn’t otherwise take — especially with other people’s money. The higher the extent of the guarantee, the greater is the risk of moral hazard. It creates, as the financial journalist Martin Wolf writes, “an overwhelming incentive to privatize gains and socialize losses.”

Actually, that's no longer true. We barely rank tenth on the index of economic freedom. See here. [heritage.org]

Father Loya's not correct, either. Greed, in the sense of free markets, has done more to alleviate material poverty in the world than any government or Church poverty relief program, and for one simple reason: individuals know what is right for themselves, but seldom know what is right for others. The market is the aggregation of billions of individual choices based on perceived self-interest (i.e., greed). This results in the allocation of resources in the most efficient manner; i.e., the way that maximizes output for the greatest number of people. In contrast, no individual or committee, no matter how brilliant, no matter how enlightened, is capable of taking into account all of the complex relationships that the market considers automatically. That's why self-consciously "do-good" programs so often lead to terrible unintended consequences. On the other hand, by then, the people who conceived the program are long gone and can evade responsibility...

In other words, most of our problems have come not from government under-regulating markets, but from government intervention in markets insulating the risk-takers from the consequences of failure. If the government will always bail you out, why worry about failure? And so it is.

...The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.

Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty... It is true that growth has taken place, and it continues to be a positive factor that has lifted billions of people out of misery — recently it has given many countries the possibility of becoming effective players in international politics. Yet it must be acknowledged that this same economic growth has been and continues to be weighed down by malfunctions and dramatic problems, highlighted even further by the current crisis. This presents us with choices that cannot be postponed concerning nothing less than the destiny of man, who, moreover, cannot prescind from his nature. The technical forces in play, the global interrelations, the damaging effects on the real economy of badly managed and largely speculative financial dealing, large-scale migration of peoples, often provoked by some particular circumstance and then given insufficient attention, the unregulated exploitation of the earth's resources: all this leads us today to reflect on the measures that would be necessary to provide a solution to problems that are not only new in comparison to those addressed by Pope Paul VI, but also, and above all, of decisive impact upon the present and future good of humanity.