Conspiracies, Subsidiarity, and Zombie Economics

Conspiracies, Subsidiarity, and Zombie Economics November 4, 2011

Well, this is strange. A person called Teresa, proprietor of a blog called Catholibertarian, is going after me for not approving a comment of hers in a timely manner.

Let’s get this out of the way first. I don’t always look at comments, especially if the post is an old one, and the thread has faded. When I saw this one, I approved it. I had not seen her “calling me out” beforehand – I was only alerted to this through back channels by my fellow Vox Novans.

I’ll get to the substance in a moment. But before that: this blog has the annoying habit of reference to “heresy” in Vox Nova. Nothing substantiated. Now here’s the irony. Libertarianism is itself a good candidate for a heretical belief, or at best a “quasi-heretical” belief. There is no such thing as a “Catholibertarian”. This has been the clear and unchanged position of the Church since the 19th century. Pius XI said it forcefully when he condemned both individualism and collectivism as the “twin rocks of shipwreck”.

In other words, while there is a vast area where Catholics can reasonably differ on economics, they are prohibited from embracing either full-scale collectivism or full-scale individualism, which denies or minimizes the social and public character of the right of property. And modern American libertarianism – by attacking the role of the state in regulation or distribution and attacking the idea that property has a public character- falls outside the pale. To use the words of John Paul II said, it is represents the idolatry of the market.

Church teaching is crystal clear on this. As Pius XI said “the right ordering of economic life cannot be left to a free competition of forces” and cannot “be considered and treated as altogether free from and independent of public authority”. Rather, economic life should be “subjected to and governed by a true and effective directing principle”. This is fundamental. We can have legitimate debates over the reach of this directing principle, but we cannot challenge its existence.

Now, to this comment. Here is what Teresa wrote:

“Do you believe in the Catholic social teaching of subsidiarity? As a “right-winger” as you label me and others who believe in less government intrusion into peoples’ lives I believe in the long standing Catholic social teaching of subsidiarity.

Do you think that it would have been a good thing if the U.S. could have avoided attaining a large amount of debt due to Fannie and Freddie having a large part in causing the financial crisis? Do you think that it is good to prop up government entities such as GSE’s, have them compete in the private sector, and keep on bailing them out when they had failed over and over again?”

I will take the two points in turn.

First: subsidiarity.

Here, Teresa seems to miss the whole point of my argument, which is based on subsidiarity. There is no teaching more misunderstood and distorted among American right-wing Catholics than subsidiarity. See posts here and here. Or even better, see the masterful post by Professor Stephen Schneck here. If you look at the world from a libertarian perspective – a bunch of autonomous individuals bound together only by a voluntarist social contract – then you will never understand subsidiarity. Subsidiarity presupposes a harmonious social order as a body-like whole, where everybody has moral obligations to everyone else. The common good of the whole is solidarity; the relationship between the parts is subsidiarity. The higher levels must offer a “subsidy” to the lower levels, but this “subsidy” is to allow them to flourish, so it cannot be too much or too little.

It certainly is possible that a public authority to provide “too much subsidy” (and think of subsidy as “help”, not just in monetary terms). It can create dependency. But it can also provide too little, ignoring a key requirement of justice – what Pope Benedict calls the institutional path of charity, no less important than the private path. But because they don’t understand the theory, the Catholic right does not understand that subsidiarity can also be violated in the private sector, and that it is the role of the government to create the conditions for each part of the social body to flourish. This is Pius XI’s  “true and effective directing principle”, whereby governments must always be “directing, watching, urging, restraining”, to make sure that subsidiary institutions can flourish. Or as John Paul II put it – while the principle of solidarity justifies a direct state role in economic affairs, the principle of subsidiarity justifies an indirect – but no less important – role, to  create “favorable conditions for the free exercise of economic activity”.

So the public authority has a watchdog role that protects small groups from being dominated and swallowed up by larger and more powerful ones. This was indeed the theme of the recent Vatican document on financial regulation, calling for a supranational authority to reduce the “excess subsidy” given toward large and powerful financial institutions in our insufficiently regulated globalized world. In other words, the call for proper regulation springs directly from the principle of subsidiarity.

Second, the zombie economics.

Now this is frustrating. Teresa repeats the lie – so often debunked by so many people – that Fannie and Freddie were somehow behind the financial crisis. See here for a pretty thorough refutation.

Let’s sum it up (again!). The loans that fed the subprime crisis originated overwhelming in private financial institutions. Mortgage originators made the loans, and them sold them to the investment banks to be packaged and repackaged into mortgage-backed securities and CDOs. Mortgage originators had no incentive to make sure people could repay, as they sold off the loans. Neither did the investment banks, as they sold them to final investors, taking huge fees. In fact, it was in everybody’s interest to make sure the interest rates were as high as possible, so the originators often conned homeowners into really bad deals, stuff they knew would blow up somewhere down the road. (This is the whole point of the consumer protection agency). And often, the investment banks deliberately put together the biggest pile of crap, so they could simultaneously lie to their investors that it was a good investment, while privately betting against it (and so making  money from selling it to investors and from it failing later on). Oh, and the investment banks dramatically magnified the risk by not being content with the CDOs themselves. They created synthetic CDOs out of funky derivatives called credit default swaps – since this pumped up risk and leverage way beyond the housing market, it meant that the collapse would be even greater.

This is the crisis. A private sector crisis. Want some statistics? By 2006, private firms were making 84 percent of the subprime loans. From 2002-o5, the Fannie/ Freddie market share fell from 50% to just under 30% of all mortgage originations. This was a huge shift, and reflected the move toward greater toxicity and mendacity. Oh, and subprime losses only accounted for 5 percent of GSE (Fannie/ Freddie) losses – that’s all. It is true that, in the last days of the bubble, the GSEs tried to get in on the action – because the very same “conservative” politicians that are now lambasting them for taking too much risk were back then lambasting them for not being profitable enough, next to the “market”! How history gets rewritten!

In the face of such clear evidence, it really is a shame that these zombie lies get such traction. It’s clear why. The financial industry is more powerful than ever, and goes to great lengths to present a false version of history, to distract attention from their own behavior. It’s funny, Pius XI saw this coming, when he said that, in the financial sector, “an immense power and despotic economic dictatorship is consolidated in the hands of a few”, which seeks to “gain supremacy over the State in order to use in economic struggles its resources and authority”.

Of course, the bulwark against this abuse of power is called subsidiarity. But since the Catholic right doesn’t understand subsidiarity, we are back to square one, and the zombies live on…

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