Originally posted at Talk to Action.
In a recent blog post Paul Krugman piqued my interest in Ettore Gotti-Tedeschi, the Director of the Vatican Bank, or as it is officially called, the Institute for Religious Works. How does my Church's banker-in-chief view the current economic situation?
What I learned left me nervous.
Krugman cites an article in which Gotti-Tedeschi claims that Keynesian economics opposes an "attitude of saving."
I know that Keynes viewed savings differently, so I looked more deeply into Gotti-Tedeschi's views and learned that what first appeared to be the off-the-cuff ramblings of a conservative banker may be part of an effort by the Catholic Right to thwart a Keynesian comeback.
The director of the Vatican Bank suggested that Keynesian economics is responsible for much of the world's current economic woes. This struck me as odd, considering that for more than the last thirty years the financial world emphasized a free market "Washington Consensus" view. He was quoted by the Catholic News Agency as saying:
He said Keynes' crisis-averting tactics can be seen in the U.S., where government economic policy has focused on increasing public expenditures - and public debt - in order to stimulate private economic activity, including consumer demand and employment.
In addition, also following Keynesian wisdom, the U.S. is printing more money and has looked at increasing taxes in an effort to generate more public revenues.
Tedeschi warned that these policies are leading to a "nationalization" of private debt in the U.S. He also criticized the government bailouts of private banks that offered too much credit without adequate guarantees. This too is leading to increased government control of the economy in the U.S. - a "nationalization" that is being paid for with newly printed currency.
But he continued on:
He [Gotti-Tedeschi] said artificially low interest rates are another key to the strategy of increasing spending and discouraging saving. With no incentive to keep money in the bank, those who would have otherwise been savers are pushed to spend.
"Zero interest rates factually equal a de facto transfer of wealth from he who was a virtuous saver (although not for Keynes) to he who has become virtuously (for Keynes) indebted," he said. "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."
Although the alternative to zero interest in such a situation is economic collapse and eventual default, the zero-rates "are not sustainable and are dangerous," Tedeschi warned.
"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."
Let's fact check this.
First, Keynes never opposed savings per se. What concerned the British economist was something quite different: during economically slow times (such as in the current day) when savings exceeded investment.. This is what Keynes called the paradox of thrift -- when savings becomes hoarding and thus actually impedes economic prosperity.
Secondly, unlike Gotti-Tesdeschi who blurs the difference between savings and investment, Keynes took great pains to clarify the difference -- and then illustrated why the distinction is necessary:
For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment.
But there is more. It should be immediately obvious why Gotti-Tedeschi opposes even the most judicious use of inflation: it cuts into his profit margin. Banks provide credit. In this continued era of deregulation many high-powered bankers do not want to go back to the pre-Washington Consensus days when banking was safe and boring; a time when financial institutions were rewarded with more modest, yet healthy profits.
Gotti-Tedeschi, a former professor of financial ethics at the Catholic University of Milan, attributes the world recession to declining birth rates and opposes unions. He is also rumored to be a member of the elitist and secretive sect, Opus Dei. This would certainly by consistent with his well established desire for a more authoritarian, pre-Vatican II Church.
(Interestingly, the former professor of financial ethics is currently under investigation for engaging in money laundering while head of the Vatican Bank.)
Gotti-Tedeschi is not alone in his assault on Keynes. Jeffrey Tucker, a convert to Catholicism and a faculty member at Acton University and webmaster for the Ludwig Von Mises Institute), joins Gotti-Tedeschi in misrepresenting Keynes, but first gets some history wrong:
Keynes is a great target, and an important one. He was born in 1883 and died in 1946, long after governments began citing his material as a cover for power grabs but before his theories came to dominate economics departments. His collected works are vast, but he is mostly known for his 1946 book, The General Theory of Employment, Interest, and Money.
Tucker is off by ten years; The General Theory was published in 1936. But Tucker's problem with facts is not limited to dates. He goes on to use Gotti-Tedeschi to misconstrue Keynes's theories:
Keynes would have none of it. He wanted action, busyness, production, labor, spending - these were the key. If the public wouldn't do it, his prescription for prosperity involved a vast increase in government control over economic life using fiscal and monetary planning to "stimulate demand" and discourage saving, while believing that prosperity could be generated out of a printing press if necessary. In other words, Keynes wanted a vast coercive apparatus to goad markets into doing what he believed they should be doing, and never mind the cost.
Tedeschi, as a banker with long experience, knows that these teachings are the road to disaster. They have not only been proven wrong time and again; they actually make no sense from the point of view of economic logic. The whole raison d'être of markets is to enable the most rational use of scarce resources, and there are good reasons for a pull-back in a recession, if only to wash away the errors made during an artificial boom. In making these comments, Tedeschi stands with a great tradition of anti-Keynesian including Hutt, F. A. Hayek, Wilhelm Ropke, Ludwig von Mises, Orvall Watts, Murray Rothbard, Lionel Robbins, Henry Hazlitt, and many others.
The myth about Keynes supposedly "discouraging saving" has been addressed above. But the claim about monetary planning "generated out of a printing press" would be more relevant if it had been addressed to its real avatar, fellow free market advocate Milton Friedman. Keynes -- unlike Friedman -- cited the use of taxation in economic boom times in order to pay back monies borrowed during leaner times.
More to the point, however, the "pump-priming" caused by government spending during the Second World War not only finished the New Deal's task of ending the Great Depression, it gave an immensely greater number of Americans a true sense of upward mobility. The post Second World War economy in both the United States and Western Europe was anything but a "road to disaster."
I suspect that what these two economists are doing is further proof of an increasing number of Religious Right giving religious cover for a very secular economic agenda. This is beyond convergence, as we have seen by the actions of Religious Right activists such as Robert P. George and Opus Dei convert CNBC cable host Larry Kudlow it is being deliberately pursued. They are increasingly converging to destroy the very tools of wealth creation for the poor and working class: Keynesian economics andlabor unions.
In the New Testament book of Mark, Chapter 10 a wealthy young man asked Jesus what he must do to achieve the Kingdom of Heaven. "Go thy way," Jesus replied. "Sell whatsoever thou hast, and give to the poor, and thou shalt have treasure in heaven: and come, take up the cross, and follow me." When the young man could not bring himself to follow this command, Jesus then famously commented, "It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God."
I never believed that Jesus was condemning wealth, per se. Instead, the real issue is what a rich man would do if forced to choose between following Jesus or his earthly wealth.
Ettore Gotti-Tedeschi, Tucker, and their ilk have made their choice clear.