A couple of additional thoughts on Oeconomicae et pecuniariae quaestiones

Yesterday I posted on the Holy See's new document on the financial system and the 2007 financial crisis, Oeconomicae et pecuniariae quaestiones.  In this separate post I'd like to make a few additional observations  that have been spurred by the document.



1.  As I noted in the previous post, those who thirst for a radical departure from the status quo probably will be disappointed by the document.  Not that the document doesn't call for significant changes in the financial system; but I don't think the changes it calls for can be characterized as radical ("radical" comes from radix = "root").  As a matter of fact, what the Holy See seems to wish for is, at least at a high and superficial level, not a great deal different than what prevails today.  The wish seems to be for a regulated and ethical free market, and in some sense, that is what exists today.  To be sure - "regulated" and "ethical" cover vast swaths of territory, and I wouldn't argue that all is for the best in this best of all possible financial worlds. 
In fact I'm basically in agreement with many of the document's critiques.  For example, the document is right, in my opinion, to express concern about those derivatives and other financial instruments that aren't appropriately regulated.  But there is some financial regulation today, and regulation continues to be a subject of policy-making and political disagreement.  As Tom noted in the comments of my previous post, the GOP-controlled Congress passed a bank regulation reform bill this week that President Trump is nearly certain to sign.  At least in the US, and election rhetoric aside, the range of policy disagreement seems to constitute, not whether or not there should be any regulation, but whether we have too much nor not enough regulation.  

To use this week's banking reform as an example: it was widely thought, in the wake of first onset of the financial crisis, that banking regulation was insufficient, so Dodd Frank was passed to address that problem.  Some stakeholders believe that Dodd Frank went too far in certain areas or was overly broad.  But note that what passed this week wasn't a total repeal of Dodd Frank; instead it probably can be characterized as adjusting some of the dials on the Dodd Frank control board.  You may or may not think that the specific adjustments in this week's bill are prudent; but I could argue that what is happening here is that our policy makers are inching toward a consensus on which regulations are prudent.  It is taking a long time (years) to get to this point, and nobody knows whether or not the status quo will protect us from future crises, and it hasn't been amicable.  But we do seem to be settling in a range of possibilities that all the sides and stakeholders can live with.

2.  One of the document's most important calls to action is to integrate marketplace activity with an ethics whose end is the common good and the flourishing of the human person.  I would make a similar point here as I did about regulations: it would be a mistake to believe that the financial markets today are ethics-free.  So, for example, I am sure that all of the large investment banks have compliance departments that monitor, as best as they are able, the trading activity of the firm's employees.  Now, "compliance" is not exactly the same as "ethics", but it's not wholly dissimilar, either.  Typically, compliance departments seek to ensure that the firm's activities are legal.  "Legal" is not always the same as "ethical", but we presume that our laws and regulations are undergirded by a shared sense of ethics.  

Also, and perhaps somewhat contrary to what the document states, there are forces in the marketplace that incentivize these investment banks to maintain compliance departments and follow compliance best practices.  For example: adherence to exchange compliance rules is a requirement for those who own seats on the exchanges.  And beyond these formal rules, any trading firm that becomes known as a firm that is lax in compliance issues will be cultivating a reputation that it is not trustworthy.  Customers won't entrust their investments to it and trading partners won't trade with it.

Now - I am sure that what the Holy See is calling for, in calling for an integrated ethics, is an ethics that is a good deal wider and deeper than mere compliance with legal requirements.  I am sure the Holy See would like to see an ethics that includes a genuine commitment to mutual flourishing, to the common good, and to a preferential option for the poor, to name three likely components of a desirable ethics.  Furthermore, the document makes at least passing mention that developing such an ethics would be an enormous undertaking that would require the contributions of business schools, the church itself, the government and perhaps other contributors.  I agree with that lofty vision of what ethics can encompass.  I'm simply pointing out that, in building toward that ethics, we're not starting from scratch.

3.  During my adult lifetime - I'm a Baby Boom tail-ender - it may be said that there have been two seminal economic events, and curiously enough, the Republican Party can be said to be responsible for both of them.  One of of them is the long boom that began during Ronald Reagan's first term and extended through the high tech boom and bubble of the Clinton years, and then slowed during George W Bush's presidency before ending dramatically with the second seminal event: the Great Recession.  As a conservative, I would observe that the GOP still hasn't come to terms with its role both in fostering, and failing to contain, the Great Recession.  It may well be that one of the reasons that Donald Trump became president is that the GOP's own core constituency no longer accepts the bromide that Republicans are smarter about economic affairs than Democrats are.  I think a lot of Republican establishment figures still haven't gotten the memo, because they continue to advocate for policies, like globalization and deregulation, that arguably were discredited by the experience of the Great Recession.  Who knows - perhaps this new document from the Holy See will spur some influential Republicans to fresh thinking.