On the afternoon of November 7th, 2013, the president of the Federal Reserve Bank of New York, William C. Dudley, addressed a meeting of the Global Economic Policy Forum.  The topic of his address was “Ending Too Big to Fail”.  The speech was completely technical in nature, but toward the end of it Dr. Dudley tossed in the following short comment:

Some argue that what I have proposed—higher capital requirements and better incentives that reduce the probability of failure combined with a resolution regime that makes the prospect of failure fully credible—are insufficient.  Perhaps, this is correct.  After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust.  There is evidence of deep-seated cultural and ethical failures at many large financial institutions.

Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.[1]

This tentative recognition that “ethical failures” may, in fact, be at the center of the financial difficulties that the world has experienced in the past few years is striking, coming as it does in an otherwise wonkish discourse.

On November 24th, the Bishop of Rome made similar but considerably less tentative remarks in his first Apostolic Exhortation, Evangelii Gaudium.  Speaking of a “new idolatry of money”, the Pope says the following:

Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because it makes money and power relative. It is felt to be a threat, since it condemns the manipulation and debasement of the person. In effect, ethics leads to a God who calls for a committed response which is outside the categories of the marketplace. When these latter are absolutized, God can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings to their full realization and to freedom from all forms of enslavement (para. 57).

The fact that, in the same month, The Vicar of Christ and the president of the New York Fed each expressed serious concern about a breakdown of ethics in the financial system means, I think, that we know we have a problem.

The question is what, exactly, is the problem?  Does it attach to the actions of individual human beings or is the system itself to blame?  The Holy Father states that he is neutral with regard to the latter, that is, to the question of economic organization.  He offers his words “quite apart from any personal interest or political ideology” (para. 208), and he calls for a “non-ideological ethics” that “would make it possible to bring about balance and a more humane social order” (para. 57).

That said, it seems clear to me that the Holy Father blames the system, that is, the free market economy.  For him, the villain is “the deified market, which becomes the only rule” (para. 56).  I would go so far as to say that the anti-market bias that the Pope displays in Evangelii Gaudium is breath-taking.  Consider the following quotes:

Today everything comes under the laws of competition and survival of the fittest, where the powerful feed upon the powerless (para. 53).

In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.  This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system (para. 54).

This imbalance [i.e., the growing income disparity] is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation.  Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control…The thirst for power and possessions knows no limits (para. 56).

We can no longer trust in the unseen forces and the invisible hand of the market (para. 204).

Admittedly, I am quoting selectively, but I do not believe I am doing violence to the Pope’s meaning in doing so.  A few apologists have made an effort to put a slightly different spin on the Holy Father’s statements[2], but it is very hard to see why he should not be taken at his word. In fact, Pope Francis is following an anti-market bias that has informed a particular strain of “Catholic social teaching” for decades, perhaps even centuries.[3]  In this spirit, he condemns the workings of the free market without qualification or analysis. He speaks of the “laws of competition” as if they were the law of the jungle.  Does this mean that innovation and efficiency, resulting in increased output and lower prices, are bad things?   And if they redound to the disadvantage of my competitors, does that make me the “powerful feeding upon the powerless”? When the Pope uses the term “financial speculation”, is he referring to something other than the normal way in which liquidity is provided to the markets and in which society’s scarce capital is rationed?  If not, is this really an unconditional evil?

And what about the so-called “trickle-down theories” which have “never been confirmed by the facts”.  Is it not a fact that free market reforms have brought Poland and the other former Soviet satellites of Central Europe into the “first world” and out of the economic degradation of communism?  Was it not the liberalizing hand of the so-called technocrats that finally pushed Spain out of poverty in the 1960s?[4]  Did not the ‘Reagan reforms’ of the 1980s promote twenty or more years of high employment and prosperity?   And have free market reforms brought more or less poverty to China, Russia and Vietnam?  Not to beat a dead horse, but if one compares the lives of families in capitalist South Korea to those of families in the centrally-planned economy of North Korea, it is hard to conclude that the free market is an unmitigated evil.

No sensible person could ever deny that the advantages of free enterprise are a decidedly mixed bag, that income disparity has increased to a level that is scandalous, and that the poor have been left out to a degree that is shameful.[5]  But does this really mean that a predilection for “market solutions”, based upon rational analysis, is the “selfish ideal” (para. 54) of those “who are in thrall to an individualistic, indifferent and self-centered mentality”, and who need “to be freed from those unworthy chains”? (para. 208)

One might object that I have misunderstood the Pope’s meaning, that he actually regards business as a “noble vocation” (para. 203), and that it is only some kind of “unbridled capitalism” that he finds offensive, which is generally the position taken by his defenders.[6]  But if this is so, then why does he not tell us who these unbridled capitalists are?  Who, aside from the most extreme libertarians (a group not especially known for either “power or possessions”), are the defenders of the “absolute autonomy of the marketplace and financial speculation”? Who are these people who place a blind faith in “the unseen forces and the invisible hand of the market”?  From what moated castle do they control the levers of the earth’s riches in order to satisfy their limitless “thirst for power and possessions”?  And precisely which states have they prevented from exercising “any form of control” over their financial markets? [7]

No, in his actual words Pope Francis leaves no middle ground between “sacralizing” the mechanisms of the market and rejecting the “prevailing economic system” as fundamentally unjust and the reason for the plight of the poor.  Nowhere does he leave room for the view that the workings of the marketplace might be a natural expression of human behavior; that they may be turned to good or exploited for evil, depending upon an individual and collective moral response.  As a result, he appears to want to take us in a direction that can be summed up in two words—“more politicians”.

I ask God to send us more politicians capable of sincere and effective dialogue aimed at healing the deepest roots—and not simply the appearance—of evils in our world! (para. 205) I beg the Lord to grant us more politicians who are genuinely disturbed by the state of society, the people, the lives of the poor!  (para. 205)

In this context, when the Holy Father calls for a “vigorous change of approach on the part of political leaders”, he seems to be asking us to exchange “a crude and naïve trust in the goodness of those wielding economic power” for a similarly crude and naïve trust in those wielding political power.

Let me now return to the question I asked at the outset of this article, and to which both William Dudley and, in stronger terms, Pope Francis, have called our attention.  What is the cause of the level of corruption, the “ethical failures” that have become increasingly pervasive in our financial system?   Let us begin to attempt an answer to this by considering some specific cases.  A recent one is the boldfaced collusion among banks in “fixing” LIBOR.  Worse, perhaps, was the blatant dishonesty in the origination and, perhaps, the packaging and distribution of the so-called “sub-prime” mortgage loans, wreaking havoc on the economy and on people’s lives.  The fraudulent sale of annuities to unsophisticated elderly clients by unscrupulous “retirement advisers’”, working for “living trust mills”, certainly constitutes, without a doubt of any kind, a crime that cries to heaven for justice.[8]  And finally, there are those financial institutions that lure unsuspecting and financially unsophisticated clients into burdensome credit card debt at usurious rates of interest.  (The reader will kindly note that this is by no means a comprehensive list).

But what can we conclude from these specific cases?  Is the exercise of subjective judgment in interest rate estimation (which means asset valuation as well) in and of itself a corrupt practice?  Clearly it is not.  Mortgage-backed securities, indeed asset-backed securities in general, have been around for decades and, by the efficient mobilization of capital, they have resulted in a great deal of good for a great many people.  Do we now condemn them?  Personally, I am not a fan of annuities, but I recognize that they may be a good financial solution for some people in some circumstances.  Finally, the credit card, in itself, is not the tool of the Devil but a wonderfully efficient payment mechanism.  The point is that, like the market itself, these things are all the result of spontaneous human ingenuity.  When financial professionals act with justice, they are good things (not perfect, but good).  When we use them to unjust ends, the result can be much evil.

William Dudley, as a regulator, is very right to worry.  Injustice can never be regulated away.  All the laws and rules and cops and lawyers and accountants in the world cannot solve the problem.  And we can turn the world upside-down again and replace the “prevailing economic system” with something else, only to find that we have replaced one set of villains with another who are just as bad or worse.  In short, there is no systemic cure for original sin.

The world of finance and the global market economy present powerful temptations to surrender to avarice and to act in ways that are selfish, callous, unjust, and deeply disordered.[9] Without an informed conscience, it is very easy to rationalize such acts; to convince oneself that one is simply bowing to some immutable, pseudo-scientific “law” of economics; to “let the chips fall” and “the cookie crumble” where they may, just as long as they do not fall or crumble on me.  This, I think, is the broader meaning that Pope Francis wishes to convey, and it is profoundly true. But it is people, individual human beings, who commit injustice, not systems or institutions.  The solution to the problem is not “a vigorous change of approach on the part of political leaders”.  It is rather a radical change of hearts and minds, one heart and one mind at a time.  This solution, if it is a solution, will never be whole or perfect, because human hearts and minds are not whole or perfect. It is in the failure adequately to express this truth that Evangelii Gaudium is wide of the mark.

[1] William C. Dudley, “Ending Too Big to Fail”, remarks made before the Global Economic Policy Forum at New York University, November 7th, 2013.

[2] See, for example, Andrew M. Haines, “Where is ‘Unfettered Capitalism’ and Other Questions in Evangelium Gaudii”, Ethika Politika, December 3, 2103; Patrick J. Deneen, “Would Someone Just Shut that Pope Up!”, The American Conservative, December 5, 2013; Andrew Abela, “The Economic Message of Pope Francis’ Evangelii Gaudium, National Catholic Register, December 9, 2103; Andrew M. Haines, “More on the ‘Ideology’ of Markets”, Ethika Politika, December 10, 2013.

[3] I refer the reader to the following sources: Murray Rothbard, Unpublished Memo to the Volker Fund Dated May 1960, “Reading is Ethics and Capitalism: Part I: Catholicism”; Thomas E. Woods “Catholic Social Teaching and Economic Law: An Unresolved Tension.’” Paper presented at the Austrian Scholars Conference 8, Ludwig von Mises Institute, Auburn, Alabama, March 15-16, 2002 and The Church and the Market: A Catholic Defense of the Free Economy (Lanham, Md.: Lexington Books, 2005); Francisco Gómez Camacho, S.J., “Yo no doy el mercado por supuesto; tampoco al gran inquisidor.” Lección inaugural del curso académico de la Universidad Pontifícia de Comillas, pronunicada el 4 octubre, 2000 (Madrid: Universidad Pontifícia de Comillas, 2000); Michael D’Emic, “Market Liberalism and Anti-liberalism in Spanish Late Scholastic Treatises (1541-1547)”,  Journal of Markets and Morality Volume 15, Number 1 (Spring: 2012) 161-177; Thomas Storck, “Catholic Memory Loss and the Response to Evangelii Gaudium”, Ethika Politika, December 6, 2013. Finally, there is the recent phenomenon of the “nuns on the bus”.

[4] See Jose Luis Comellas, Historia de España Moderna y Contemporánea (Madrid: Ediciones Rialp, 2007) 348-352.

[5]  See however the 2013 Report of the World Bank, which reports a sharp decline in the number of people living in ‘extreme poverty’ in 2010 compared with 1981.  Admittedly, this is cold comfort to the many millions who still do.

[6] See note 2, above.

[7] I am not the first observer to raise these questions.  See Samuel Gregg, “Pope Francis and Poverty”, National Review, November 26, 2013.

[8] Happily, the attorneys general of California, Minnesota, North Carolina and Pennsylvania were, in this instance, on the side of the angels.  Settlements in these states have entailed full restitution, severe civil penalties, and the cessation of business by the perpetrators, who, in a less equivocal age, might justly have been burnt at the stake.

[9] The same of course is true of the politics, academics and even the church, as Pope Francis has also, correctly, pointed out, elsewhere in the Evangelii Gaudium.