Head of Vatican Bank Warns Against Keynesianism

[2046]

Vatican bank chief issues warning about US, European economic policies

http://www.catholicnewsagency.com/news/vatican-bank-chief-issues-warning-about-us-european-economic-policies/

Rome, Italy, Jan 21, 2011 / 03:05 pm (CNA/EWTN News).- Current fiscal and monetary policies in the United States and Europe risk increasing government control over national economies, resulting in weakened political strength throughout “the whole of the western world,” the Vatican’s top banking expert said.

Ettore Gotti Tedeschi has been head of the Vatican's bank, known as the Institute for Religious Works, since 2009. He has a long career in finance, having served as the head of Banco Santander, the largest private bank in Europe, as well as on the boards of some of the continent’s leading financial institutions.

He is known as a staunch capitalist with a deep concern for the Church’s social teaching. He is also a former professor of financial ethics at the Catholic University of Milan.

Writing in the Jan. 14 edition of the Vatican newspaper, L’Osservatore Romano, Tedeschi warned of the growing influence of “Keynesian” economic theory on both sides of the Atlantic.

[...]

Tedeschi cited a 2009 book, "Where Keynes Went Wrong: And Why World Governments keep creating Inflation, Bubbles and Busts," by the American economist and philosopher Hunter Lewis.

He said Lewis had spelled out the "doctrinal errors and practical disasters" of Keynes' theories.

[...]

"Practically, it's about a hidden tax on poor savers, a tax transferred to the wealthy, (that is), over-indebted states, business people and bankers.”

[...]

"They destroy savings, which is an essential resource to create the base for bank credit; they promote speculation on real estate and securities, create illusory artificial values rather than scaling them down; they push consumption to more risky debt; they alter the market with artificial values and thus lead to belief that the very markets do not know how to correct themselves."

The biggest danger, Tedeschi said, is that zero interest rates "permit, or impose governments into management of the economy, without correcting inefficiency and facilitating distortions in the competition."

[...]

"Someone," he said, "is hoping for new taxes to sustain a new statism that reinforces a rather weak political class in the whole western world."

[prescient]

While Mr. Tedeschi’s observations are right on the mark, I would propose “Keynesian” economic theory is not growing as an influence and rather the growth of this economic theology is already well established and now working to establish permanence where it has been well established on both sides of the Atlantic for decades. In the U.S. since at least the New deal programs of the Great Depression. In the context of recent developments in the U.S., as Keynesian economics are theoretical, they are treated as law. They are treated as unassailable fact where if the government is spending large amounts of money on something with no positive affects or measurable negative effects, Keynesians respond with increased implementation of the model rather than the recognition the theories are not working as, well, theorized. If a billion dollars did not fix the problem, then ten billion should fix it. It seems never seriously considered the act of NOT spending money is the answer to a perceived crisis.

A key distinction in the model is that in times of economic crisis consumer demand must be stimulated by government investment and saving must be discouraged. This distinction is, I think, at the very heart of the problem at least here in the U.S. The key term here being crisis. For a statist, his usefulness is tied to the populations’ needing him. If the statist is only needed in a crisis, then at the end of the crisis he can be dismissed. Therefore, these statists adherents to the Keynesian model have over the decades contrived to create states of emergency, conditions of crisis, where by only the participation of the state could help resolve the crisis. Many of the crises confronting society are either manufactured by the state for its own justification, or, persistent features in the human condition which no amount of money or government could resolve. By manufacturing a crisis or aggravating already manageable conditions to the point of crisis, the practitioners of Keynesian economics have built a system of self justification. These very programs invented to address a crisis have in the bargain succeeded in making worse that which it was supposed to fix.

Unemployment insurance was created to bridge that gap between the end of one job and the start of another. We now have people on the “temporary” compensation up to three years. Three years of essentially being paid not to work without any incentive to return to work. They make as much not working as they did when employed without any effort. Now, we have the charade of people being paid not work, angry at the prospect of not having access to the money of people who ARE working. Worse, people are collecting unemployment and working in the underground economy and off the books and tax rolls.

Social security was created to supplement a person’s pension or retirement savings. We now have a condition where in the absence of any incentive to save, many people wonder how they can live on social security as they seem oblivious to the fact they are supposed to live on social security. Through the taxation of savings interest and investment income, far too many people have been conditioned not to save and instead look to social security as their retirement income. At the same time, many of the same people scoff at the prospect of the system being operational in any useful state. As people have been discouraged from saving through government intrusion, they have been trained to rely now on short term credit to make purchases where in the past cash would have sufficed based on a savings level. This absence of discipline to save has resulted in undisciplined spending where now people have put themselves ignorantly into the roles of borrowers. As this short term credit spending accelerates, discretionary purchases take on the financial burden comparable to a house and its attendant costs.

Welfare was intended as a state (taxpayer) funded mechanism to help people and families get through hard times. It seems for families, hard times have lasted for several generations. These people have existed in a sustained state of crisis where the government (through confiscated income) has provided, money, housing, food, education, transportation and education. This persistent state of crisis shows no sign of abating given the inability of individuals to make sound choices or others propensity for continually make bad choices.

These are just a small sample of the crises which Keynesian economics have either made worse or just invented. In every case, there exists a taxpayer funded bureaucracy dedicated to not just addressing the conditions of the crisis, but, insuring the conditions of the crisis continue. Because, the meaningful resolution to these problems would mean there would be no further need for these bureaucrats, there is not a true incentive to resolve these issues.. Although many of these people are well intentioned, the outcome of their actions has not resulted in the meaningful positive outcome one would expect from decades of effort and trillions of dollars spent. And in the end, the Keynesian psychology seems to have become one that accepts that one’s good intentions are justification for one’s actions rather than the outcome.

The Keynesian theories of state action to address crisis have devolved into state charity to treat the human condition. The state of poverty, homelessness, addiction in its many forms and related maladies are ones which humanity has experienced for as long as one can find records of such. These conditions are more often better addressed by the charitable, philanthropic and benevolent endeavors of concerned citizens and organizations rather than the actions of certain disconnected elitists who feel some guilt for their good fortune or who are attempting to prove a point at someone else’s expense.

Edited January 23, 2011 by prescient