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Friday, June 28, 2013

Financial Ethics in the Institute of Religious Works

In probing corruption leads in the Vatican Bank, Italian financial police stumbled on to a plot back in July 2012 to smuggle €20 million into Italy.[i] The alleged culprits include a monsignor, a financial broker, and a former member of Italy’s secret service. For his part, the cleric is said to have had people pretend to have given him donations of €560,000 so he could furtively pay the financial broker for his role. Crime, Italian politics, and the Vatican Bank—hardly a novel discordant tune. That not just any bank, but that of a Church, could stray so far from what would reasonably be expected from a bank whose formal name is the Institute of Religious Works boggles the mind. Even so, the intersection of ethics, religion and business is fraught with complexity.  A religious verdict from ethical premises is possible nevertheless.

Generally speaking, religion does not boil down to ethics. John D. Rockefeller was unethical in restraining trade when he ran Standard Oil. Yet pressing the railroads for excessive rebates and drawbacks (compensation from the railroads serving other customers) does not de-legitimate the titan’s claim to have been a Christ-figure in saving “drowning” competitors. Theological inconsistency, rather than unethical conduct, would be needed to expunge Rockefeller’s industrial-religious identity. Such inconsistency can be found in Rockefeller having forced competitors unwilling to be bought out into bankruptcy; Jesus did not inflict harm on people who refused to follow him. Human ethical systems cannot limit God, which is omnipotent.

Divine-sourced ethical principles, such as those in the Ten Commandments, are regarded as religious in nature, rather than merely soured in a human ethical system. Accordingly, were Rockefeller to have broken one of the Ten Commandments in running Standard Oil, his commercial-religious identity could be assailed. In the case of Msgr. Scarano at the Vatican Bank, his clerical, not to mention Christian, identities are vulnerable to the allegations that he bore false witness and stole money from the Vatican. That Kant concluded from his ethical system that lying can never be ethical is irrelevant. However, that Kant’s categorical imperative can be re-stated as, Treat other rational beings not just as means, but also as ends in themselves, suggests that Kant’s theory can be understood as the Golden Rule, which is binding in religious terms. Hume’s theory that determining something as unethical “just is” the psychological sentiment of disapproval finds no such corresponding theological ethic and is thus invalid in assessing the commercial-religious identities of either Rockefeller or Scarano.

As with Rockefeller, the case of Scarano begs the question, how can a person so religiously inclined so delude oneself in such matters?  If driving a car well were important to me, I would be double sure that my driving is as flawless as possible. I would ask friends to ride along or follow me from behind to assess my driving. Were one of them to tell me that my passing skills leave much to be desired, I would work on them—maybe even take a driving lesson. Of course, no one can be a perfect driver. So too, Scarano cannot be sin-free. Even so, were I to be a really bad driver and yet represent myself as highly skilled, people would naturally wonder about my state of mind. At the very least, the sustained cognitive dissidence (i.e., allowing for or ignoring hypocrisy in one’s conduct) likely in Scarano’s mind raises the question of the clerical screening process for mental health.

Moreover, that the Institute for Religious Works has been embroiled in charges of corruption time and again suggests that cognitive dissidence has come to characterize the Vatican’s culture. Considering the questionable prioritizing of avoiding a scandal over defrocking and turning in rapist priests, a pattern of cognitive dissidence can be suspected. The question is perhaps what religious works would look like. From this answer, the question would pertain to how finance could be put into service without undercutting the religious nature of the works.

In conclusion, ethical conduct, religion and finance are a tricky business not easily disentangled. A preliminary point can nevertheless be made with some certainty. Specifically, unethical conduct does not necessarily invalidate a religious identity in a person’s commercial or financial role. The ethical principle would have to be part of a divine decree, such as in the Decalogue, to contradict the assumed commercial religiousity.  A human-constructed ethical theory or principle cannot by definition limit God’s omnipotence (i.e., all-powerful), whereas God’s making of a moral divine decree cannot contradict God’s nature, or essence. Both Rockefeller and Scarano can be found culpable in religious-ethical terms bearing on Christianity even though it is possible to be both unethical and religious without contradiction.

[i] Gilles Castonguay and Liam Moloney, “Vatican Bank Probe Leads to Three Arrests,” The Wall Street Journal, June 28, 2013.

Thursday, June 27, 2013

European Populism?

In reaching agreement on a proposal to deal with state banks in trouble, the E.U. finance ministers sent two messages: taxpayers would be protected from any open-ended obligation to bail out failed banks and those banks would not be allowed to capitalize on being bailed out. Given the furor that had been unleashed when the E.U. went after depositors in the two largest Cypriot banks, the E.U. ministers were careful to point out “that depositors with less than €100,000 ($130,820) in their accounts would always be safe, while small and midsize companies and bigger savers would only be hit during the most severe bank failures.”[1] Systemically important banks whose failure could be expected to cause the E.U. financial system to collapse would be handled on a case by case basis.
                                      Will the euro be fortified by a federal bank-bailout program?   Source: Estonia Free Press.
In the E.U. finance ministers’ proposal, states would build resolution funds by charging banks levies. In activating its fund, a state would have to impose losses on at least 8% of a bank’s total liabilities. Bank bond-holders and stockholders would take most of the hit, and in this regard the E.U.’s route would differ appreciably from that of the U.S. in 2008 wherein the banks and their executives were protected. The state resolution funds would only be allowed to protect a maximum of 5% of a bank’s total liabilities. Poorer states could borrow from the E.U.’s rescue fund, the European Stability Mechanism. It could be used to recapitalize failing banks directly, “but only to protect depositors—not shareholders or bondholders.”[2] In this prioritizing of taxpayers and depositors, the E.U. seems populist in nature—in contradistinction to the more plutocratic American model. That is to say, we can glimpse a subtle albeit important cultural difference between the E.U. and U.S. in terms of how much financial elites are made to suffer in bank bailouts.

1. Gabriele Steinhauser and Tom Fairless, “EU Pact Reached on Failing Banks,” The Wall Street Journal, June 27, 2013.
2. Ibid.

Federalism and Solving the Democratic Deficit: Causing Bad E.U. Legislation?

One major criticism of the E.U. has concerned its “democratic deficit.” The European Commission, the E.U.’s executive branch, has taken most of the criticism because the bureaucrats are not elected. Even though the European Council consists of elected state executives, the state legislatures are viewed as “closer to the people” and therefore more democratic. At the E.U. level, the European Parliament is the most directly democratic, as the EP’s representatives are directly elected by E.U. citizens. Therefore, one means of reducing the “democratic deficit” has been to increase the Parliament’s authority relative to those of the Commission and the Council. Lest it be thought that this solution has no drawbacks, the case of whether E.U. ships should be permitted to be beached for recycling in South Asia illustrates a problem.

From: "Federalism and the Democratic Deficit: The E.U. as Suboptimal?"

Sunday, June 23, 2013

Consolidation From 1913: The Federal Reserve, Megabanks, and the U.S. Government

In 1911, the U.S. Supreme Court ruled that federal anti-trust law required the break-up of Rockefeller’s mammoth Standard Oil Company, which had replaced ruinous competition with coordination in the American refining industry. The ruling’s impact was truncated because each of the resulting companies had the same ownership; the existing trust certificates were simply exchanged for shares in each company. The respective managements even remained in the same office building in New York City. In effect, the court had mandated oligopolistic collusion and still more restraint of trade. Undaunted, the elderly Rockefeller worked on his golf game.
One hundred years later, the U.S. Treasury and the Federal Reserve were still striving to salvage the economy from a near direct-hit in September 2008. The Fed’s massive bond-buying program of some $7 trillion would dwarf the $750 billion in the democratically-enacted TARP (Troubled Assets Relief Program) funds. In 2010, Congress had passed the Dodd-Frank Act, which was designed to solve the problem of banks and other companies being too big to fail without actually breaking any up. Not surprisingly, by 2013 it had become apparent that systemic risk was still much too high. The government that had broken up Rockefeller’s mighty managerial machine had apparently lost its spunk for breaking up enterprises, at least those whose very existence involves an intolerable amount of systemic risk to the economy as a whole.  
A century earlier, in 1913 to be exact, the sixteenth amendment to the U.S. Constitution was ratified, making a federal income tax constitutional. Congress promptly passed the Revenue Act of 1913, which reinstituted the federal income tax and lowered tariffs. The assumption was that the revenue from the income tax would make up for the decrease from the lower tariffs. As the graph below indicates, the income taxes would do more than compensate for reduced tariff revenue. The ratification of the amendment and the passage of the Revenue Act laid the groundwork for an expansion in the fiscal role of the federal government. In the constitutional convention, some delegates had been concerned that a federal income tax would “crowd out” the states as they seek to raise more revenue for domestic purposes.
Also in 1913, exactly a century before the Federal Reserve’s board wrestled with whether to reduce the central bank’s bond-buying program, a fiscal stimulus to reduce unemployment, the bill establishing the central bank became law. Charles Lindberg, the father of the famous flyer, predicted from his seat in the U.S. House of Representatives that the Act would establish “the most gigantic trust on earth” that would be an “invisible government by the money power.”[1] At the time, it was assumed that the gold standard would provide sufficient constraint. This assumption would go flat in 1973 with Nixon’s termination of the Bretton Woods agreement. By 2013, the premise of the Act, which specifies three purposes for the Fed: “to furnish ‘an elastic currency,’ to provide a market for commercial paper so that banks would have more liquidity, and to improve supervision of banks,” had been superseded to a degree that would have stunned even the advocates of the original bill.[2]
Speaking before Congress on June 23, 1913, President Wilson said banks should be “the instruments, not the masters, of business.”[3] William Jennings Bryan, the U.S. Secretary of State, went one step further in insisting that banks answer to the public rather than to themselves or business.[4] A century later, was the Fed buying trillions in dollars of bonds to help the banks, whose executives had gone largely unscathed in terms of bonuses, or the public? If the latter, shouldn’t the Congress and the elected U.S. president have played more of a decisive role by legislating the program?
The democracy deficit in the Fed’s increasing “job description” is not the only danger, however. Not even democracy can be relied on to safeguard the checks and balances afforded by federalism or even federalism itself. Simply in being such a consolidated power at the U.S. level, the Federal Reserve further consolidates power as it expands its fiscal power. Federalism pays the price not only directly, but also in that the Fed is prohibited by federal law from buying the bonds of heavily-indebted state governments. That is to say, the Federal Reserve can come to the aid of the U.S. Treasury as well as large consolidated banks, while the state governments are on their own. The bias here favors further consolidation at the expense of federalism.
Europeans have been much more sensitive to the impact of the European Central Bank’s expansive bond-buying program on the E.U.’s federal system. Even though the ECB would be purchasing the bonds of indebted state governments, the centralization in the purchasing and the associated fiscal redistribution delayed agreement on the program. In 1913 as the Federal Reserve legislation was going through Congress, federalism was not sufficiently considered, and thus protected. Paul Warburg, a financier who had immigrated from Germany to New York, thought the banking system was too decentralized in the United States. Oblivious to the American federal mindset that still treated the federal level of government as properly assuming empire-level powers such as defense and regulating commerce between the republics, he wanted to replicate the Reichsbank of his native state for the United States as a whole.[5]
Avoiding that political category mistake, Rep. Carter Glass, the chief sponsor of the Federal Reserve Act, “wanted to restrain federal authority” even in banking and yet he “wanted a more elastic currency to avert money panics and moderate depressions” through banking reform.[6] He proposed privately-owned regional reserve banks and referred to Wilson’s proposal “that a Reserve Board sit atop” those banks as a federalist design at odds with the rights of the states.[7] That the resulting Act was more along Wilson’s lines suggests that the federalism was not sufficiently consulted in the legislative process, which was not coincidentally entirely at the U.S. level. That is to say, federal-level officials established a central bank that would operate to the advantage of that level. Also in 1913, the seventeenth amendment, by which U.S. senators would no longer be elected by their respective state legislatures, was ratified; the state governments would henceforth had even less wherewithal at the federal level to thwart encroachments by the U.S. Government.
In conclusion, a consolidating trend favoring both big business and the U.S. Government at the expense of the states can be discerned from legislation passed in 1913. The consolidation of banking power in a few megabanks like Citigroup and JPMorgan and of political power in the U.S. Government evident in 2013 can thus be viewed as having historical underpinnings.  

1. Robert Lowenstein, “The Federal Reserve’s Framers Would be Shocked,” The New York Times, June 22, 2013.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.
7. Ibid.