Recently, the Pontifical Council for Peace and Justice released a note on the current financial crisis, which has caused quite a stir in the Catholic community. Father Reese, a Jesuit from Georgetown University states that the document (he says the Pope) supports strong global regulation of the economy and redistribution of wealth, while Tom Hoopes over at CatholicVote points to the documents strong emphasis on subsidiarity as evidence that the Church is actually being very careful to limit the possible power of the institution they are describing. Part of the reason for this confusion is doubtless the desire of Catholics of various political stripes to read their particular ideology into the document, but the document’s own internal confusion and contradiction contribute must also effect the wide spectrum of interpretation.
Before beginning any economic analysis of the Note on Financial Reform, a few words on the authority and significance of the note may be in order. As Kathryn Lopez points out, this is neither a papal encyclical nor the proceedings of an ecumenical council. This is a note emanating from the Pontifical Council for Peace and Justice, which, according to the Pontifical Council for Internet Truth (or wikipedia, I can never remember which) concerns itself largely with studies, information gathering, and networking with other groups who also promote peace and justice. Doctrinal statements would be coming down from the Congregation for the Doctrine of the Faith, so it would be dishonest to claim that this is a teaching of the Church which requires the assent of all Catholics. That said, the mere fact that the Vatican felt the need to issue a note on the subject should probably indicate that this is no issue we can dismiss.
Possibly the most fascinating aspect of the document is that it begins with an understanding of the origins of the financial crisis that looks vaguely Austrian and proceeds to recommend solutions that feel rather Keynesian. The first section, on economic development and inequalities, places the blame for the financial collapse on “expansion of credit” that lead to an “inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept.” Later, in section four, the document again references “decrease in the quality of credit” as a culprit in the financial collapse. “Pockets of excess liquidity” are associated with speculative bubbles. This was a very promising start – but the PCJP didn’t delve deeply enough, and was thus lead to faulty conclusions.
What caused the expansions of credit? According to this Vatican whitepaper, “economic liberalism” is to blame for the cause of our woes. The authors explain that economic liberalism is the idea that markets can be largely left alone. I suppose it would be reasonable to blame ‘liberalist’ economic policies for our current malaise if we, you know, implemented them. Unfortunately, our economy is anything but free. We have a fiat monetary system – which means that the currency only has value because of government regulation – and a central bank. That central bank, the Federal Reserve System, has among its duties that of lender of last resort and regulation of monetary policy. In theory, an elastic currency means that the money supply can be expanded and contracted by the actions of the Federal Reserve. In practice, the only way to contract the money supply is to confiscate or purchase money, and then destroy it – something I don’t think has ever been tried. A far more common tactic is the expansion of the money supply by either lowering interest rates or buying financial assets with newly-created fiat money. The only-mildly-inebriated reader will at this point observe that the expansions to the supply of money are not the result of a free and unregulated market trading various goods, but the heavy hand of government regulation. Thus, the expansion of cheap credit – correctly identified by the white paper as the source of the problem – is not a result of too much economic liberalism, but of too little!
Having determined that unused economic policies are to blame for our mess, the curial note goes on to recommend the expansion of the current economic policies that are to blame for our mess. A “supranational Authority” is called for which will ” be favourable to the existence of efficient and effective monetary and financial systems; that is, free and stable markets overseen by a suitable legal framework.” Emphasis is placed on the requirement that such an authority not use coercion or force, which is an interesting and contradictory requirement. The document makes no mention of any move from fiat money back to commodity-backed currencies, so the establishment of a more centralized bank would be propagation of the current system of fiat money – which is by its very nature coercive.
Additionally, the document proposes further offences against morality- namely the proposal to tax financial transactions and use those funds to bail out economies affected by financial crises and to benefit banks which “behave virtuously.” This is not true charity – charity is when one gives what is one’s own to help another. The coercive extraction of funds from one party to benefit another party – however virtuous that second party is – is not charity but theft. When James exhorts us to help our brothers in need, he tells us to use our own private property to assist. Giving a man in need my coat is charity – confiscating your coat and giving it to him is theft.
The analysis of the Mises institute says it best – this Congregation has discovered disease, and has recommended more disease as the cure. While showing hints of economic enlightenment, the note’s recommendations are disastrous – even without elaborating on the assumption that the United Nations, a body including such offenders against human dignity and liberty as China and Saudi Arabia.
Perhaps we should pray that our German Pontiff gets some Austrian advice in economics matters.