A couple of days ago, I wrote about the collective mouth-foaming among the American Catholic right pertaining to the new Vatican document on financial reform. They basically came up with all sorts of excuses to ignore, mock, or insult the document because it didn’t fit with their cozy American way of looking at the world. The call for a world authority with regulatory powers does not sit well with an American exceptionalist nationalism. The call for more actions to reduce inequality and rein in the financial sector doesn’t sit well with American laissez-faire individualism. But there is another point I missed: the document’s economic analysis does not sit well with the closed bubble inhabited by the American right.
When we get down to details, this document is far closer to the global economic consensus than anything I’ve read from the right-wing Catholic armchair spinners, whose arguments give off a strong whiff of Fox News sloganeering. For sure, nobody in the global policy debate is talking about a world central bank. And yes, some of the writing in the document is not as coherent as I would like, and there are valid arguments against some of the proposals. But you do not seen these arguments being made by the Catholic right.
To understand why, we need to understand the huge gulf between the causes of the crisis as understood by most of the world (including the vast majority of the economics profession) and the causes of the crisis as understood by the American right-wing bubble. The truth is rather simple. The crisis was caused by too much private sector debt and leverage, mainly by the financial sector. It was caused by years of weakening regulation and poor supervision, which was caused in part by the increasing political dominance of the financial sector. It was caused by complicated financial engineering that pushed risk through the rooftops, making the fall much greater than it should have been. It was not so much caused by bad household lending as the way the financial sector dramatically magnified the risk in that lending. And rising inequality the years before the crisis was most likely one of the drivers of the crisis.
But the American right cannot possibly accept that private sector corporations are at fault. So the crisis was caused by poor people borrowing too much, because Fannie and Freddie gave them dodgy loans on orders from top Democrats (does it need repeating that Fannie and Freddie were very marginal players in the subprime game?). And the crisis is also somehow due to government spending, although they can never really explain how that works.
Let me take a couple of specific points made by the Vatican-bashers. Of course, Thomas Peters never fails to deliver, bringing together a veritable circus of silly arguments!
First, the call for a financial transactions tax (FTT). Peters links to somebody who claims that the person who advised the Vatican on this: “formed a lobby to request the EU to levy crazy taxes on financial transactions which will destroy whatever is left of available capitals, especially for small businesses and small investors, with a trickle-down effect that will further damage an economy brought to collapse by socialist greed for power, money and control”.
If you have never heard of the FTT, this might sound like a lousy idea. But in fact, it is being pushed heavily by countries like France and Germany. It is heavily supported by the International Trade Union Confederation and civil society. The idea is to throw some sand in the wheels of the financial sector, to make it less risky and less dangerous. Reining in the financial sector is a goal shared by global policymakers. There are many ways to do this. You can have bigger capital ratios. You can have capital surcharges on the big banks. You can break up the big banks. You can restore divisions between retail and investment banks. You can banning proprietary trading. You can bring shadow banking into the open. You can financial activities (wages and profits). And you can tax financial transactions (the FTT). Or you can do some or all of the above. There are plenty of good debates on the pros and cons of each proposal.
So the FTT is well within the mainstream. It has a lot of support. Of course, there are also good arguments against the FTT. It has opponents, and they make some good points. For example, it is quite possible that the tax gets borne by the customers of the institutions rather than the owners of the institutions. But you will not see these arguments coming from the American right. It’s like when Obama talks about the nitty-gritties of healthcare reform and the Republicans respond by screaming “socialism! death panels”.Second, the fetish with public debt. I’ve seen this over and over. A guy called Phil Lawlor boldly claims that “perhaps the Vatican might learn a few lessons from economic analysts”. And one thing it should learn? “That the world’s financial system is currently endangered because of the soaring level of government debt”. Or as Sean Dailey of Crisis puts it: “the Note makes no mention of ruinous deficit spending by government”.
Sorry, but this dangerous nonsense. The soaring public debt is a consequence, not a cause, of the crisis. Debt shot up everywhere because revenue collapsed, and because spending on social safety nets increased. The discretionary spending component was actually quite small in most countries.
In other words, the crisis arose from private debt, not public debt. In only one country did public debt itself provoke a crisis – Greece. That’s it. In other countries like Ireland, it was the government taking on private sector debt that finally broke the governnment bank.
And the overwhelming consensus is that governments did the right thing by not fighting this increase in public debt. Why? Because when private demand fell, the increase in public demand (i.e the deficit) protected us from a severe recession. You often hear people talking about not raising taxes in a recession. But the real point is that you don’t cut deficits in a recession. That applies even more to cutting spending than raising taxes, as spending has a bigger effect on the economy than taxes. You won’t hear this from our friends on the right.
What is the risk of rising deficits? Quite simple. The fear is that people will stop lending to you, or demand really high interest rates to do so. This is not pretty. Look at Greece. But for most of the world, we are nowhere close to this. In fact, US interests rates are at an all-time low!
So what you mainstream economists say? They say that if you have the space, you should put in plans to cut your debt, but not to rush for the exit today, because you will kill the recovery. The American idea of slashing spending dramatically while the recovery is still feeble is a dangerous position.
Third, recapitalizing banks. Sean Dailey again mocks the Vatican’s call for using public finds to recapitalize the banks, including it in what he calls “more taxes, and more spending, including bank bailouts”. But yet again, this is just the Fox Newsification of economic analysis! In fact, bank recapitalization was a key part of the recent European agreement to overcome the crisis. Why? Because banks are exposed to Greek debt. And so they can lend less. And so they need more capital. Everybody understands this, except the sloganeers.
Fourth, regulatory agencies are useless/ corrupt etc. Again, this is Phil Lawlor. This is the silliest and most self-serving argument of all. Yes, with tougher regulation and supervision, we could have avoided the problems in the financial sector that led to the crisis. On that we all agree. But because they did a bad job, we should give up and let the market take care of it? Huh? Let’s look at history. One of the most stable and prosperous periods in modern times was precisely that period when banks were most heavily regulated (and when taxes were much higher, for that matter). Things started to go awry in the early 1980s with the zeal for deregulation, with the cultural shift toward greater individualism, with the increasing belief that maximizing shareholder value is all that business should worry about. And one of the reasons regulators and supervisors did so poorly was because politicians leaned heavily on them, took away their funding, or stripped them of their powers. Surely the answer is much tougher and tighter regulation.
In sum, I find it infuriating that people who know next to nothing about economics lecture the Vatican for knowing next to nothing about economics, when in fact, many of the specific proposals that come from the Vatican (as opposed to the broad calls for a world authority) are far more aligned with mainstream thinking.