Sunday, December 25, 2011

Pontifical Council Calls for Global Financial Authority on Bretton Woods Level

As the G-20 and national policymakers and regulators wrestle with the specter of financial regulatory arbitrage, the Pontifical Council for Justice and Peace has set forth a vision for reforming the international financial and monetary systems in the context of a global public authority. Essentially, the Council is calling for a Bretton Woods type agreement on sustained and coordinated and consistent global financial regulation in order to avoid a race to the bottom. Regulations, imperfect though they may be, already often exist at the national and regional levels, noted the Council, but on the international level it is hard to apply and consolidate such regulations.

The purpose of the public authority, as John XXIII recalled in Pacem in Terris, is first and foremost to serve the common good. Therefore, it should be endowed with effective mechanisms equal to its mission and the expectations placed on it. This is especially true in a global financial system that makes individuals and peoples increasingly interconnected and interdependent, reasoned the Council, but which also reveals the existence of speculative monetary and financial markets that are harmful to the real economy

A supranational Authority should be set up gradually. It should be favorable to the existence of efficient and effective financial systems and promote free and stable markets overseen by a suitable legal framework, well-functioning in support of sustainable development and social progress of all, and inspired by the values of charity and truth. A person is not made to serve authority unconditionally, instructed the Council, rather it is the task of authority to be at the service of the person, consistent with the pre-eminent value of human dignity.

According to the Council, the underlying logic of coordination and common vision which led to the Bretton Woods Agreements needs to be dusted off in order to provide adequate answers to the current questions. The process could begin by strengthening existing institutions, such as the European Central Bank. However, this would require not only a reflection on the economic and financial level, but also and first of all on the political level, so as to create the set of public institutions that will guarantee the unity and consistency of the common decisions. These measures ought to be conceived of as some of the first steps in view of a public Authority with universal jurisdiction.

More specifically, the Council urged consideration of a coordinated financial transactions tax through fair but modulated rates with charges proportionate to the complexity of the operations, especially those made on the secondary market. Such taxation would be very useful in promoting global development and sustainability according to the principles of social justice and solidarity. It could also contribute to the creation of a world reserve fund to support the economies of the countries hit by crisis as well as the recovery of their monetary and financial system. The Council also called for the recapitalization of banks with public funds, making the support conditional on virtuous behavior aimed at developing the real economy. Moreover, the Council recommended defining distinct domains of ordinary credit and investment banking in a way allowing for a more effective management of the shadow markets which have no controls and limits.

Finally, and more broadly, the Council states that the economic and financial crisis which the world is going through calls everyone, individuals and peoples, to examine in depth the principles and the cultural and moral values at the basis of social coexistence. In his social encyclical, Benedict XVI precisely identified the roots of a crisis that is not only economic and financial but above all moral in nature. In fact, as the Pontiff notes, to function correctly the economy needs ethics; and not just of any kind but one that is people-centered.