Posts tagged with: central banking

When the Pontifical Council for Justice and Peace needed an expert economist to assist in articulating the “Note” titled Towards Reforming the International Financial and Monetary Systems in the Context of Global Public Authority to feisty journalists at an Oct. 24 Vatican press conference, it called on the University of Rome “Tor Vergata” economics professor, Leonardo Becchetti.

For an English translation of the professor’s remarks at the Vatican press conference, go to the end of this post.

Prof. Becchetti is a local celebrity of sorts, whose TV time has increased since the outbreak of the global financial crisis and growing cynicism on the future of the European Union. He has provided his expert assessments and criticism to Italian news channels and late night talk show programs, and has become a “go-to guy” when speaking on the relationship of economics to human happiness, central banking and monetary policy. See his interview of the monetary policy and inflation:

[youtube http://www.youtube.com/watch?v=woOyekGo89g]

No doubt, Prof. Becchetti was charged with the very difficult task of articulating and defending some the Note’s bold economic and political prescriptions – usually a “no-fly zone” for Vatican officials. Moreover, in all fairness, Becchetti removed his professor’s hat to his best ability, while speaking in relatively plain language to the journalists, most of whom, like myself, do not hold PhDs in international finance and monetary policy.

What follows is the unofficial English translation (actually my own) of the transcript of Prof. Leonardo Becchetti’s presentation. Becchetti’s technical debriefing on the Note last Monday raised a few eyebrows and provoked some critical thinking on what the Vatican document said (and didn’t say) regarding international financial and monetary reform.

For example the following finer points jumped out when translating Becchetti’s remarks:

1. The logic that a global economy requires global governance seems not quite right. What about the Church’s traditional support of subsidiarity, that is, crises should be resolved at the local level of problem. The financial crisis is a pandemic and will require massive effort to resolve it, but local symptoms and outbreaks of this financial disease are manifest in unique ways from nation to nation. A single global monetary and financial authority might simply enforce a “one-size-fits-all” policy that is not practical in most countries. This logic smacks of the 20th century centralized economic planning that has proven destructive in Eastern Europe.

2. Becchetti’s analogy of the “long spoons” is not sensitive to the fact that, through human innovation, those same klutzy over-sized spoons can be creatively re-invented through human innovation to allow for self-feeding. For me, Becchetti’s long spoon analogy inspires ideas of spoon-feeding each other (i.e. receiving easy hand-outs) and not creative cooperation to resolve our financial crisis. If left to fend for ourselves, it might be a clumsy experience at first, but we will then be forced to find ingenious and independent ways of self-preservation.

3. It is true that our world is increasingly interdependent and this provides great opportunity for international solidarity and cooperation, but why use the term “formidable threat” when addressing the fact that first world job holders are feeling the heat of equally qualified laborers from developing countries? I like the thought that the first world feels the need to compete and intelligently find more efficient ways of production, but Becchetti’s subtle semantics seem to infer that Marxist class struggles are at play in devising a global financial peace plan .

4. Lastly, what evidence is there that a financial transaction tax on stock exchange activity will ease the pain and suffering of today’s struggling businesses and unemployed? How many ways have we tried to tax and redistribute our way to human fulfillment? Is this the missing link in international economic planning? Cannot someone speaking on behalf of the Church and who is an expert in economics and happiness, at least make some sort of plea for greater spiritual wealth and its redistribution (i.e. by becoming fulfilled in Christ evangelizing His Word)?

I am sure you will have more questions yourself. Please feel free to share your own opinions.

Translation of Prof. Leonardo Becchetti’s remarks (original Italian version)

The bright side of the [financial] crisis is that it represents a time of great opportunity.

The global financial crisis is an opportunity to reform the very architecture of the global financial system, strengthen the European Union in terms of harmonizing its fiscal policies, while progressing more swiftly toward a goal of political unity and increasing discipline over national fiscal policies.

The Vatican document focuses on two key issues:

i) Building a set of rules for global governance which, if possible, will be used as a framework [to guide] the actions of global institutions;

ii) Reforming the international financial system with a series of specific proposals.

Concerning point i), global governance is urgently needed to overcome the asymmetry caused by the globalization of markets, institutions and rules that remain predominantly national.

Globalization makes us increasingly interdependent and makes it practically impossible to ignore other countries whose problems once seemed so distant: Simul stabunt simul cadent [Latin for similar things fall together].

To give you a few examples, there are at least six fundamental elements of interdependence between economic and financial systems:

i) the American debt crisis is a problem that concerns not only [the U.S.] itself but savers around the world who have invested in it and in the largest economies, like China, that [in turn] have invested a substantial portion of their own reserves in [U.S.] treasury bonds;

ii) the Greek debt crisis and the likely reduction in the facevalue of this country’s bonds (between 20% and 60%) will result in serious losses on the balance sheets of the French and German banks that had invested in them;

iii) the presence of a huge mass of poor and underprivileged in the world, willing to work at wages much lower than those of our own employees (bearing equal credentials and who are also protected and unionized) is a formidable threat to the maintaining levels of wealth of high-income countries;

iv) exiting from the euro would have damaging effects not only on developing countries but also on Germany itself, which for years has enjoyed the advantage of exporting its goods to markets within the Eurozone without additional costs linked to exchange rates;

v) the coordination of central banks is now increasingly important in a globally integrated world; recently, developing countries have often complained that the expansionary monetary policies of American and European central banks (quantitative easing) have exported inflation into their countries;

vi) for some time now G-20 meetings have tried coordinate the policies of countries with deficits with those with surpluses to encourage the latter to adopt more expansionary policies to boost demand throughout the world.

The [current situation is like] a large table full of guests, each of which is given a very long spoon to eat with. The difference between hell and heaven in this familiar story is that in some guests use their spoons to clumsily and unsuccessfully feed themselves while others use their long spoons to feed each other. It is in the former situation which nation states find themselves in globally integrated markets as they try to pursue their own short-sighted and short-term interests. This becomes counterproductive, because it is only by cooperating with each other that we will be able to put an end to this financial crisis.

On the second point (the rules of financial markets), the document adopts some proposals already launched by the Dodd-Frank legislation in the United States and by the Vickers Commission in the United Kingdom, but which have not yet been implemented and are not in force due to a number of obstacles.

It is fundamental that the world of finance returns to its role of serving the real economy. To do so it is necessary to:

i) reduce the leverage of banks that are “too big to fail” (the disproportionate 30:1 leverageratio between short-term liabilities and long-term assets is among the main causes spreading the subprime crisis throughout the world).

ii) adopt the so-called Volcker Rule which prevents banks from doing proprietary trading with customer deposits.

iii) more severely regulate the trading of derivatives born from insurance instruments. In the real economy insurance policies are purchased when someone owns an actual asset to be insured, while in financial markets this occurs in no more than 5 percent of cases. For this purpose, there is an EU proposal to achieve this objective regarding the credit default swaps of government bonds.

A fourth proposal concerns the instituting of a tax on financial transactions for reasons explained in the following paragraph.

It is important to ask why the position on taxing financial transactions of economists and civil society (a majority EU citizens in fact are in favor) has changed radically in recent years.

Last year, 130 Italian economists signed an appeal in support [of the proposition], which garnered further support with a similar appeal put forth by 1000 economists from 53 countries and delivered to the Finance Ministers of G20 countries attending the 2011 Summit held in Washington, D.C. last April 14-15 (among the prominent signees were highly respected leaders such as Dani Rodrik, Tony Atkinson, Joseph Stiglitz and Jeffrey Sachs) See: http://www.guardian.co.uk/business/2011/apr/13/robin-hood-tax-economists-letter
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There are two reasons for this change of opinion: the events of the global financial crisis and further evidence that has helped to alter some [former] prejudices.

Upon the advent of the global financial crisis, the public finances of some major Western countries have been severely weakened while bailing out banks and, consequently becoming new targets themselves of speculative attacks.

A part of the financial world has thus privatized profits, socialized losses, and then utilized public funds used to bailout those who had come to the rescue in the first place.

It is, therefore, understandable why the majority of public opinion believes that those working in the financial markets should, therefore, help pay for the costs of this crisis, the burden of which has been currently shared by the most vulnerable [taxpayers in society].

From this point of view the FTT responds to the simple demands of justice, which seems urgent, given the most recent current events, in order to maintain social cohesion within the Community.

The second reason for increased favor for such a tax stems from the shedding of prejudice.

Until recently the tax was considered inappropriate and not globally applicable should it involve capital from the country in which it was enforced.

This bias is unfounded, as documented in research conducted by the International Monetary Fund, because there are at least 23 countries today that unilaterally apply a transaction tax (which is none other than a stamp tax) without there ever having been any [from their respective countries]. (See. T. Matheson , Taxing Financial Transactions. Issues and Evidence, IMF WorkingPaper No 11/54, March 2011, 8).

The United Kingdom is the country with the highest tax transaction with the application of its Duty Stamp Tax on one single type of financial asset (0.005% duty on the value of shares owned and listed on the London Stock Exchange).

This tax raises about 5 billion pounds in revenues each year.

By way of this evidence [EU Commission President] Barroso’s proposal to establish such a tax in the EU correctly addresses a “harmonization” of taxes throughout Europe on financial transactions –and not of their first introduction.

The London [Stock Exchange] tax has provided an interesting example of tax avoidance, as some operators have exited the stock market to invest in new OTC derivatives (contracts for differences) which essentially consist of bets on variations in share prices.

It is interesting to note, therefore, that the transaction tax has now split the market into two: those really interested in investing in company shares and those who bet on short-term variations in prices.

Such [tax] avoidance is already implicitly considered in the Barroso proposal, which would extend taxation to derivatives (and thus also to contracts for differences). Such problems can also be countered by banning contracts for differences as is already the case in a major financial market, like the United States.

From a scientific perspective, there are numerous ways to measure the elasticity of volumes of transactions upon introducing such transaction taxes, demonstrating a conservative coefficient rather than supporting the capital hypothesis.

Another reason for why the cannot occur is that a very high frequency of financial operations benefit from being in close proximity to the Stock Exchange’s physical location, where the information is released firsthand electronically. (See: New York Times (2009): Stock Traders Find Speed Pays, in Milliseconds). Moving away from the live center of market operations would mean losing such a [critical time] advantage.

One seemingly unfounded objection is the impact the tax will have is on the overall cost of capital.

To set the rate proposed by the Barroso tax proposal, calculations based on the capitalization models of expected future asset values show that this cost is basically null (See again: Matheson 2011).

The other objection is based on reduced liquidity caused by the tax within markets. This is a matter of opinion. How much cash do we really need? Dean Baker, in his commentary on this issue, says that the tax would spell a return to transaction costs and to the state of liquidity of some ten years ago – that is to say, returning to a period that was far more flourishing than the times we are currently experiencing.

The truth is that there is no solid evidence on the effects of this tax on [total] liquidity, but only a series of different models with opposing results depending on the particular type of microstructure of financial markets and competition models hypothesized by intermediaries.

Summing up the four main objections to the institution of such a tax ([1] the tax cannot be imposed except on a global level, [2] there would be no control over the , [3] the tax significantly increases the overall costs of capital, and [4] the tax reduces market liquidity, they are either are false or unsubstantiated based on factual evidence (the first two) or lack of proof (the latter two).

Regarding the above arguments, the transaction tax (certainly not a panacea for all evil) may just represent an important step in recalibrating the relationship between financial institutions and other reforms that can help to prevent a new financial crises, as advocated by the Dodd Frank legislation [in the U.S.] and the Vickers Commission in the United Kingdom (cf. the Volcker Rule, the deleveraging of “too big to fail” intermediaries, and penalizing capital requirements for riskier investments as opposed to ordinary credit) and the restoration of civil society’s confidence in the financial institutions we so urgently now depend on.

Blog author: jcouretas
posted by on Wednesday, October 26, 2011

In the Wall Street Journal, Acton Institute President and Co-Founder Rev. Robert A. Sirico looks at the recent “note” on economics released this week by the Vatican. The document, titled “Toward Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was published with an eye toward the upcoming G-20 meeting in Cannes, France, on Nov. 3-4. This 18-page document has, Rev. Sirico observes, “been celebrated by advocates of bigger government the world over.”

But what’s missing from the popular analysis is that the Vatican document “embraces a sound economic theory concerning the cause of the world financial crisis: the breakdown of the postwar Bretton Woods monetary system and the unleashing of fiat currencies and central-bank printing presses.”

Rev. Sirico:

We went from a hard-money regime, in which there were restrictions on the power of central banks and financial institutions to create money and credit, to one where money became purely paper. There were no restrictions remaining on the power of governments to finance unlimited debt. Banks could create credit seemingly without limit. Central banks became the real power in the world economy.

None of this was true under a gold standard. That system limits the expansion of credit by an indelible physical fact. There was a limit, a check, a rule that went beyond the whim of financial masters and politicians. The Vatican seems to understand this.

But discerning the disease and finding the cure are very different undertakings, and here the document falls short. It imagines a new world central bank and political authority that will rule without “any partial vision or particular good” but rather seek “the common good.” Its decisions should “be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.”

Somehow, with an intelligence never before discovered in government bureaucracies, these proposed global authorities would create “socio-economic, political and legal conditions essential for the existence of markets that are efficient and efficacious.”

Read “The Vatican’s Monetary Wisdom” on the website of the Wall Street Journal (may require registration).

Blog author: jcouretas
posted by on Tuesday, May 25, 2010

Over at Public Discourse, a new article by Acton’s research director Samuel Gregg examines the deeper reasons behind the problems of the euro. In “Europe’s Monetary Sins,” Gregg points out that many of the euro’s present difficulties reflect a basic refusal of Europe’s political class to acknowledge some of the unpleasant economic realities associated with the EU’s social model, as well as a tendency to say one thing while really doing another. In short, Gregg argues that many of Europe’s economic predicaments flow from a crisis of truth, an unwillingness to recognize it, and the subsequent formulation of policy on the basis of untruths and half-truths. The most recent result of this process, Gregg says, is that the independence of the European Central Bank has been severely compromised:

Ever since its foundation in 1998, the ECB has been a whipping boy for European politicians from the left and right who argue that the ECB’s legally mandated priority of maintaining price stability has kept productivity and economic growth rates in the EU far below those of America. In reality, these problems have little to do with monetary policy and everything to do with low rates of entrepreneurship, unsustainable levels of welfare expenditure, an aversion to competition, high rates of public sector employment, and structural rigidities associated with some of the world’s most inflexible labor markets. Indeed, it is probable that the ECB’s avoidance of the low interest-rate policies adopted by the Federal Reserve in the 2000s may have made the 2008 recession in Europe more bearable than it might otherwise have been.

Against considerable political pressures, the ECB has hitherto doggedly defended its independence. All that, however, changed when the European Union decided to set up its 750-billion-euro bailout fund in early May 2010 to stabilize financial markets and rescue the holders of not only Greek government debt, but also, implicitly, the holders of any EU government debts that seemed shaky.

Blog author: jcouretas
posted by on Friday, March 5, 2010

Over at Public Discourse, Acton’s Samuel Gregg has just published a piece about the future of money. The issuance of money, he writes, is often associated with issues of national sovereignty, despite the fact that governments have long abused their monopoly of the money supply. Gregg argues, however, that the role played by mismanaged monetary policy in the 2008 financial crisis may well open up the opportunity to consider some truly radical options for how we supply money to the economy.

The scholar who most developed the concept of sovereignty in the modern era, Jean Bodin (1530-1596), identified the right to issue coinage as a key element of sovereignty. In our time, some of the most contentious debates surrounding the euro have concerned its diminution of the national sovereignty of EU member-states adopting this transnational currency.

But is a state monopoly of the money supply truly essential to sovereignty? When [Adam] Smith listed the “only three duties [which] according to the system of natural liberty, the sovereign has to attend to,” he did not include the supply of money. It was not until 1914 that the United States legislated to mandate that only one bank would be privileged by the government to issue legal tender.

Read “Beyond Sovereignty: Money and its Future” on Public Discourse

Today Sam Gregg’s article ‘Whither Central Banking?’ appeared in the blog of the Whitherspoon Institute, Public Discourse.  In light of Germany Chancellor Angela Merkel’s criticism of central banking Gregg takes a thoughtful analysis on improving central banking to help aid our recovery from the financial crisis we currently face.

Gregg addresses an important political question that must be addressed when determining the roles of central banks:

The bigger political question, however, is the place of central banks in democratic political orders. Insulating central banks from excessive political influence reflects recognition of the truth that even in a democracy there are many public-policy decisions that should not be made by legislative or popular votes. Most democracies, for example, embody constitutional limits on the ability of governments and legislatures to interfere with the judiciary’s operations. This is usually derived from awareness that the common good normally requires some separation of powers in order to prevent excessive centralization of power.

Another problem of central banks, argued by Gregg is:

The problem is that when it comes to the economy, governments have legitimate reasons for being concerned about and involved in the development of economic policy. This inevitably raises questions about how to maintain the autonomy of central banks and what ought to constitute the content of that autonomy. Governments committed to pursuing populist and socialist policies have no qualms about dramatically limiting or even abolishing such autonomy.

Gregg does not only address the problems, but he also suggests a solution.  Read more of Gregg’s essay at Public Discourse.