New Global Crisis looming: Vatican Experts raise the Alarm

By Elisabeth Hellenbroich

A groundbreaking document was published on May 11th 2018 by Vatican experts under the title “Ethical discernment to aspects of the present financial economic system.” Unlike previous documents, this one directly makes reference to the 2007 global financial crisis which, as result of major banks collapsing, within days annihilated trillions of dollars in values, ruining families and wiping out millions of work places. At that time a passionate debate was unleashed about the question: what were the causes that had prompted the collapse of the global financial markets, which originated in the US with the subprime mortgage rate crisis, followed by the collapse of the banking house Lehman Brothers. The document contains a sharp criticism against all present forms of predatory capitalism and the speculative exuberances of the financial markets which today again for a second time risks leading to another global financial crisis.

The document was compiled by Luis F.Ladaria S.J. (Prefect of the Congregation for the Doctrine of faith) and by Peter Card. Turkson (Prefect of the Dicastery for the Promotion of Integral Human Development of the Curia). It’s main source material consists of all relevant encyclical letters such as “Caritas in Veritate” (2009); “Evangelii gaudium” (2013); “Laborem Exercens (1981), Sollecitudo rei socialis (1987), Centesimus annus” (1991) issued by John Paul II; Pope Paul VI encyclical letter “Populorum progressio”(1968); as well as Pope Francis’ encyclical letter “Laudato Si” (2016); and the Pontifical Council for Justice and Peace “Compendium of the social doctrine of the Church.”

This alarming paper puts forward the demand for a clear “ethical discernment” in respect to aspects of the present financial economic system and demands that ethical criteria as well as regulation of the financial markets are established: “Given the growing influence of the financial market on the material well- being of most human mankind (…) what is needed, on the one hand, is an appropriate regulation of the dynamics of the markets and on the other hand, a clear ethical foundation that assures a well being realized through the quality of human relationships rather than merely through economic mechanisms that by themselves cannot attain it.” The key conception, upon which the document is centered, is the defense of the “Common Good”: “In every culture, there are multiple areas of ethical agreement that express a common moral wisdom and form the objective order upon which the dignity of the person is founded. From the solid and indispensable basis of such an order arise the clear and common principles that establish the fundamental rights and duties of the human person without which the control and the abuse of the most powerful would come to dominate the entire human scene.” (3) Human activity and human labor should have the aim to increase the common good and nourish “the seeds of goodness implanted in the whole of creation as a promise of abundance.”

After 2007: Return to myopic egoism-predatory capitalism and speculation

The authors examine critically that despite an unprecedented speed with which global economic well- being has developed, at the same time inequalities proliferate between various countries and within them. Moreover, the number of people who live in conditions of extreme poverty continues to be enormous. Even if the recent financial crisis might have provided the occasion to develop a new economy and more attention to ethical principle and a new regulation of finances that would neutralize predatory and speculative tendencies and acknowledge the value of the actual economy, the authors complain that, “there does not seem to be any inclination to rethink the obsolete criteria that continue to govern the world.” There is rather a return to myopic egoism, no desire to eliminate inequality. The financial crisis of 2007 and the period after that has led according to the authors, to a situation where “the authentic well- being of a majority of the men and women of our planet who are at the risk of being ‘excluded and marginalized’ from development and true well- being while a minority, indifferent to the condition of the majority exploits and reserves for itself substantial resources and wealth.”(6) Selfishness in the end will not pay and if we want really the well- being of humanity. “Money must serve, not rule” (Cf. Apostolic Exhortation Evangelii gaudium), is the imperative for the future of a healthy economy.

The document is addressed to responsible politicians, as well as financial and economic experts, calling for the development of new forms of economy and of finance, with rules and regulations directed towards the enlargement of the common good and respect for human dignity along the lines indicated by the social teachings of the Church. The document notes that “work itself together with its dignity, is today increasingly at risk of losing its value as a ‘good’ for the human person and becoming merely a means of exchange with asymmetrical social relations”, and it points to the “reckless culture of waste and the fact that masses of the world’s population get marginalized. The excluded are not the ‘exploited but the outcast’, the ‘leftovers.’”(15). Similarly excessive “high interest rates and usury” is something that makes financial activity a thing whose primary vocation is not at the service of the real economy.

In a healthy economy credit should have a “social function which contributes to disperse capital for the purpose of producing a principled circulation of wealth and what should be encouraged are arrangements of cooperative credit, microcredit, as well as the public credit, in the service of the families, businesses, the local economies, as well as credit to assist developing countries,” (16) the authors state. Yet the problem is that often credit is only given for speculative purposes. The document makes an allusion to the pervasive economic thinking in the US which is the country in which the 2007 global financial crisis after all originated. It states that “what is morally unacceptable is not simply to profit, but rather to avail oneself of an inequality for one’s own advantage, in order to create enormous profits that are damaging to others; or to exploit one’s dominant position in order to profit by unjustly disadvantaging others, or to make oneself rich through harming an disrupting the collective common good.”(17)

The danger of speculative exuberance and “complex financial instruments” (CDS)

The authors plead for a more intense regulation of the market along ethical lines, especially since the major reasons for the most recent economic crisis was the “immoral behavior of agents in the financial world, where the supranational dimension of the economic system makes it easy to bypass the regulations established by individual countries.”

The social doctrine of the Church, since the first encyclical of Leo XIII, and its critical examination of capitalism serves as guideline, since it is based on the key concept of “Solidarity”. “When human beings recognize the fundamental solidarity that unites them with all of humanity, they realize that they cannot keep only for themselves the goods that they possess. When one habitually lives in solidarity, the goods that he or she possesses are used for one’s own needs, but they multiply themselves, also producing unexpected fruits for others.

The fact that today influential bankers and politicians use the financial system for the sake of their own greed and profit making is one of the great challenges which we are facing today. The document states that there is a “limited vision of the human person, as the person is understood individualistically and predominantly as consumer, whose profit consists above all in the optimization of his or her monetary income.”(9) Yet progress within an economic system cannot be measured only by quantitative and profit driven standards, but also on the basis of the well- being that extends a good that is not simply material. The authors suggest that institutions such as universities ad business schools have as part of their curricula studies a formational dimension that educates the students to understand economics and finance in light of a vision of the “totality of the human person and avoids a reductionism that sees only some dimensions of the person.” An ethics is needed to design such formation. “The social doctrine of the Church would be a considerable help in this connection.”(10)

In a sound economic system the “well- being” of society cannot just be measured by criteria of the Gross Domestic Product of Nation (GDP) according to the authors. It “must take into account instead other standards, such as safety and security, the growth of ‘human capital’ and the quality of human relationships and of work. Profit is not something that should be pursued at any cost or become a totalizing perspective for economic action.” In a fully human perspective, there is actualized an interchange between profit and solidarity that, thanks to the freedom of the human person, unleashes a great potential for the markets. The document warns of the danger of an oligarchy that originates when the freedom enjoyed by economic stakeholders is understood as an “absolute in itself” thus undermining the efficiency of the economic” system. Given the huge control which is exerted by powerful financial circles over political parties, political “authorities find it difficult to fulfill their original vocation as servants of the common good, and are even transformed into ancillary instruments of interests extraneous to the good.”

Because of the pervasiveness of the financial markets and its players, the real economy is today where selfishness and the abuse of power have an enormous potential to harm the community. The document lists the bad financial practices such as speculative transactions of virtual wealth, as well as negotiations of high frequency trading. One of the predatory instruments used in the financial markets is the so called “derivatives” which as the authors state, are created for the purpose of guaranteeing an insurance on the inherent risks of certain operations often containing a gamble made on the basis of the presumed value attributed to those risks.”

The document refers to some types of derivatives and very complex structures (securitizations of securitizations) which have encouraged the rising of “speculative bubbles, which have been the important contributive cause of the recent financial crisis.” In the wake of the economic crisis of 2007 for example, “the market of the CDS” (Credit default swaps, used since beginning 2000, at the height of the 2007 crisis outstanding CDS were at 62 trillion dollars. E.H.) “was imposing enough to represent almost the equivalent of the GDP of the entire world. The spread of such a kind of contract without proper limits has encouraged the growth of a finance of chance, and of gambling on the failures of others, which is unacceptable from the ethical point of view.”(26)

Aside the manipulation of interest rates (LIBOR- Interbank Offered Rate) which the authors identify as “networks of connivance” which are like “criminal association harmful for the common good”, the authors judge as similarly devastating the totally unregulated “shadow banking system” which “has led to the loss of control over the system on the part of various authorities of national securities. … The primary aim of the investment of the financial resources is above all speculative in character.” It’s purely predatory, and not a service to the actual economy. “For instance many agree that the existence of such ‘shadow’ systems may be one of the contributing causes that advanced the development, and the global diffusion, of the recent economic- financial crisis which started in the USA with subprime mortgages in the summer of 2007,” the document states. (27) Similarly they speak about the world of “offshore finance” which operates on the basis of channels of tax avoidance, if not directly of evasion and the recycling of money deriving from crimes. It contributes to an additional impoverishment of the normal system of production and of the distribution of goods and services. (29)

Tax evasion, offshore havens and the major problem of debt for the economies

“Today more than half of the commercial world is orchestrated by noteworthy persons that cut down their tax burden by moving the revenues from one site to another according to their convenience, transferring the profits into fiscal havens and the costs into the countries of higher taxation. It appears clear that all these have removed decisive resources from the actual economy and contributed to the creation of economic systems founded on equality. Furthermore, it is not possible to ignore the fact that those offshore sites, on more occasions, have become usual places of recycling dirty money, which is the fruit of illicit income (thefts, frauds, corruption, criminal associations, mafia, war booties, etc.)” the document states (30) – pointing the attention to something which the Church considers one of the major problems that block human development in many nations.

The spiral of debts

As the authors note, that “the offshore system has ended up aggravating the public debt of the countries whose economies are less developed. It was in fact observed how the accumulated private wealth of some elite in the fiscal havens is almost equal to the public debt of the respective countries. This highlights how, in fact, at the origin of that debt, there are often economic losses created by private persons and unloaded on the shoulders of the public system.” These debts, these financial losses that burden the various nations, pose today one of the major obstacles to good functioning and growth of the various national economies. Numerous national economies are in fact burdened by having to cope with the payment of interest, which derives from that debt and must therefore dutifully undertake structural adjustments to suit the need which derives from that debt, and must therefore dutifully undertake structural adjustments to suit the need.” (…) On the other hand, it is necessary at the international level to put every country in front of its unavoidable responsibility to allow and favor the reasonable exit routes from the spirals of debt, not placing it on the shoulders of the States, and therefore on that of their citizens, meaning upon millions of families, carrying untenable financial burdens. (…) similar solutions are required both for the health of the international economic system in view of avoiding the contagion of a potentially systematic crisis, as well as for the pursuit of the common good of all people mutually.”(32)

Politically responsible people as well as economic and financial experts should carefully study the new Vatican document; draw the lessons from the mistakes that led to the 2007 financial crisis, the “immoral behavior of agents in the financial world, where the supranational dimension of the economic system makes it easy to bypass the regulations established by individual countries.” The key conclusion: man must be again put at the center of the economy.