By Edward Hadas
LONDON (Reuters Breakingviews) – The Roman Catholic Church rarely responds speedily to anything. By its standards, the decade that passed between the 2008 financial crisis and last week’s publication of an official study of finance is the mere blink of an eye. Unfortunately, so little has changed in the interim that the Vatican’s advice, approved by Pope Francis, is as pertinent as ever.
Little about “Oeconomicae et pecuniariae quaestiones” (“Economic and Financial Issues”) is explicitly Christian. That approach is intentional. The Church’s Dicastery for Promoting Integral Human Development wants to help “all men and women of goodwill” create “a new economy, more attentive to ethical principles, and a new regulation of financial activities that would neutralise predatory and speculative tendencies and acknowledge the value of the actual economy”.
That hard-to-digest mouthful is sadly typical of the style of this often awkward and poorly translated document. Much of the initial attention focused on the Vatican’s criticism of trading in derivatives. However, the ethical agenda is both clear and helpful. There are three major themes – society, reality and history.
First, society. Something crucial is missing in the financial world when every investor thinks only about maximising their own returns and bankers strive solely to capture the highest possible income for themselves. Even if all these individuals forswear instant gratification in favour of long-term greed, a collection of selfish agendas cannot sustain a healthy society.
On the contrary, shared flourishing requires a conscious commitment to the “common good”. That little phrase appears 20 times in the 18-page document. That dedication is often lacking, as the Catholic Church’s own record makes clear. The Vatican’s banks could have avoided a series of scandals if its bankers were less rapacious. However, advice can still be good even if the giver does not always take it.
The document dismisses the argument, much loved by some economists, that amoral market mechanisms will somehow do the necessary ethical work automatically. To start, markets cannot exist without a great deal of mutual trust from everyone involved.
In finance, there is another problem. Even when participants are “animated by good and right intentions”, they too often end up in “forms of oligarchy” or “asymmetrical situations”. In other words, the strong end up taking unjust advantage of the weak.
Such exploitative arrangements do not promote a “world that is more equitable and united”. On the contrary, the finance business is diverted from its virtuous vocation of helping investment into what economists call rent-seeking. In the Catholic vocabulary, greed is allowed to flourish.
The moral problem of an inadequate commitment to the common good often takes the form of products and practices which are detached from economic reality. The Vatican sets a high standard: financial arrangements should always be based on “a real value, not one which is imputed or difficult to verify”.
Without such an anchor to the real world and without moral guidance, immorality inevitably creeps in. Take complex derivatives. “Questiones” presents them as instruments which exist at an inherently dangerous distance from anything that can be evaluated ethically.
Speculative transactions both distract business people from their true work and subtract money from the “virtuous cycle of the real economy”. It is a “bad financialisation”, which often takes the form of financial instruments that amount to unfair gambling. The document singles out credit default swaps, for enabling investors to bet on bankruptcy regardless of their exposure to the underlying borrower. The ultimate loser is the common good.
Financial workers themselves may struggle to understand what they are doing to the economy and society. Outsiders – regulators – are better placed. However, the authorities can only succeed with the whole financial system’s active and full cooperation. “Quaestiones” plausibly claims that offshore arrangements, tax minimisation and regulatory arbitrage tend to undermine the needed commitments.
Finally, there is history. Christians believe that forgiveness is the only way to get over past sins. That moral insight is relevant to the discussion of the “untenable financial burdens” created by years of unjust and corrupt sovereign borrowing. “From an ethical point of view”, the right policy for these debts is often a “politically mediated … reasonable and agreed reduction”.
In other words, the morally best way forward can be a rewriting of the faulty financial past. That thought is as relevant in Rome as in its Vatican City enclave. At 132 percent of gross domestic product, the Italian government’s debt burden is the second-highest in the euro zone. Forgiveness, though, is not on offer. The two political parties trying to form a new government had to abandon their proposal to eliminate some of the nation’s debt.
The hard-hearted creditors are certainly in the right legally, and in accord with current European politics. The moral and practical case may be more doubtful, especially when there is widespread resentment against entrenched elites. A thorough examination of financial consciences might help restrain the destructive forces of political populism. Even a decade after the financial crisis, the Catholic Church’s guide is a good place to start.