Untangling the web of confusion – the Justice and Peace Commission and financial reform


Perhaps the wisest words in the wake of the financial crash by a religious person were written by Cardinal Pell when he said: “The only thing we can say is to repeat the central teachings of Christ. When men and women over-reach themselves…trouble often follows…The financial crisis is enormously complicated, and I would hope that we won’t attempt to say too much.”

Pope Benedict has heeded those words, and generally avoided comment on complex technical economic issues such as how we should reform banking regulation. At the same time, he has made important contributions to the debate on ethics in the world of finance, such as in Caritas in veritate.

It is rumoured that the Pope rejected a number of drafts of Caritas in veritate from the Justice and Peace Commission before putting his own stamp on it. Perhaps that was because original drafts did offer such technical economic and political solutions to the financial crisis which the Pope regarded as outside his competence. If that is the case, the Justice and Peace Commission was not silenced for good. Last month, it published a document on the financial crisis: “Towards reforming the international financial and monetary systems in the context of a global public authority”.

This report confused rather than clarified the debate as is shown by its misrepresentation by the Archbishop of Canterbury. The report’s description of the causes of the 2008 crisis showed some very strange understanding of the realities. The document states that “liberalist” tendencies encouraged the authorities to allow the failure of an institution – Lehman Brothers. In fact, not only were a number of financial institutions bailed out before Lehmans was allowed to go, but the underwriting of credit risk by the US government in almost every part of the financial system was surely a major contributory factor to the crash. In particular, the US government was backing two agencies, Fannie Mae and Freddie Mac, as it guaranteed mortgages sold on to financial institutions. It was the losses on these mortgages that led to the collapse of the financial system. This came on top of the successive bailing out of financial institutions in the US over a number of decades which led people to think that banks were, indeed, too big to fail. The financial system offered a licence for recklessness to the people involved and this is by no means “liberalist”. Allowing Lehmans to go was the exception and not the rule.

As ever, the Justice and Peace Commission document referred to inequalities growing ever wider. In doing so, it sketched over the most important developments in the world economy. Living standards have more or less stagnated in the prosperous West in the last two decades. At the same time, poorer countries in Asia have galloped forward at five to ten per cent a year. In India, it is the poorest states that are growing most quickly and self-reported hunger has fallen by 90 per cent since 1991. That is not to diminish the great scar of hunger and poverty, but, as countries free their economies, a wider gap between the very richest in a country and the poorest is inevitable. However, if we think about the problem on a world scale, huge numbers of poor people are entering the global middle classes. If economic development takes place in North Korea, some entrepreneurs will become very rich, but the great mass of poor people will find their living standards become closer to those in South Korea.

But, what of the document’s specific policy proposals? It has been widely suggested, including by Archbishop Williams, that the document – or even the Pope – strongly back a financial transactions tax. In fact, the document merely suggested that we should reflect on the possibility of such a tax. Having reflected on it, I reject it.

Even the European Commission estimates that such a tax would reduce national income. This means that it will probably raise no net new money for all the projects that Cafod and others would like to spend a “Robin Hood” tax on. A financial transactions tax is an opaque tax which would be paid by some unknown combination of savers, bank account holders and mortgage holders. There is no reason at all to assume that it would be paid by fat-cat bankers.

The most surprising proposal in the document, however, was the suggestion for a taxpayer-financed fund for bailing out banks – possibly on an international basis. Surely that is the opposite of what we want. Both justice and good economics demand that we find safe ways to wind up banks that have failed. It is partly the continual bailing out of financial institutions – especially in the US – that leads to reckless and imprudent behaviour and the growth of ever-larger financial institutions. Do we want a world bailout fund that would enable JP Morgan and Goldman Sachs to compete unfairly with the smaller players?

Along with many others, I instantly dismissed the call for an international financial regulatory authority when the document was released. A careful reading of the document, however, reveals this section to be barely comprehensible, so perhaps we should not have been so quick to dismiss it.

There could be a role for such an authority in co-ordinating legal systems to ensure that banks operating on a transnational basis could be wound up when they get into trouble. This might have helped deal, for example, with the Icelandic banking crisis. The problem is that international regulatory bodies very easily become captured by the very organisations that they are trying to regulate – or by their own bureaucracies – and they struggle to promote the common good. Furthermore, a body that co-ordinated exchange rates, as the Justice and Peace Commission suggested, would promote exactly the sort of speculative financial flows it sees as problematic. Some of us remember the £10billion that speculators gained at the expense of the British government as a result of the exchange rate co-ordination within the European Monetary System.

Unlike the statements of so many Anglican clergy who speak with so much certainty on technical economic matters, this document’s main purpose was to suggest issues for discussion. Personally, I think that most of its proposals were misguided or poorly articulated or both. Those who welcomed it cannot possibly be aware of the implications of a world-wide taxpayer-funded bailout fund for the world’s most powerful financial institutions run by the world’s richest people. All-in-all, the main result of the document has been to sow seeds of confusion. That is most obvious from the fact that it appears that almost everybody from the BBC to the Archbishop of Canterbury now seems to think that the Pope supports a financial transactions tax. Indeed, if you google “robin hood tax pope”, you get 333,000 responses. I cannot claim to have checked them all but, as far as I can see, not a single one of them refers to anything that the pope has actually said.

This article originally appeared in the Catholic Times on Dec 15.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.