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Rome Looks at the Meltdown

The world financial system is in crisis. The entire financial architecture underlying “modernity” seems to be tottering on the edge of an abyss. What does the Vatican think about the situation? We asked Angelo Caloia, the man in charge of what is commonly called the “Vatican bank” (the Institute for Religious Works)

by Vladimiro Redzioch

Opening papal quotation about the control of credit:
“In the first place, then, it is patent that in our days, not wealth alone is accumulated, but immense power and despotic economic domination are concentrated in the hands of the few, who for the most part are not the owners but only the trustees and directors of invested funds, which they administer at their own good pleasure…This domination is most powerfully exercised by those who, because they hold and control money, also govern credit and determine its allotment, for that reason supplying, so to speak, the life blood of the entire economic body, and grasping in their hands, as it were, the very soul of production, so that no one can breath against their will...” —Pope Pius XI

Just inside St. Anne’s Gate, one of the main entrances through the walls into Vatican City, one notices a massive, round tower called the Tower of Nicholas V. Built in the 1400s, it was part of the Vatican walls which protected the tomb of the Apostle Peter and the residence of his successors, the Popes of Rome. A few decades later, the new Apostolic Palace, where the Pope lives today, was constructed just beyond it, even more massive and impressive — the Palace of Sixtus V.

Inside the round tower of Nicholas V is the headquarters of the Istituto per le Opere di Religione, or “Institute for the Works of Religion” (known for short as the IOR). The purpose of the IOR is to “provide for the care and administration of the funds and real estate transferred or entrusted to the Institute to carry out works of religion or of charity.”

The IOR is often erroneously called the “Vatican Bank.” It is more like a philanthropic foundation than a bank, investing its assets and using its funds to support religious works around the world. It should be distinguished from another major Vatican economic entity, the Administration of the Patrimony of the Holy See (APSA), which has oversight over the many properties in Italy owned by the Vatican.

The IOR is adminsitered by three organs: (1) Commission of Cardinals named by the Pope; (2) Supervising Council, made up of leading international bankers; and (3) General Direction, staff attending to the day-to-day activity of the Institute. The head of the cardinals’ commission is Cardinal Tarcisio Bertone, the Vatican Secretary of State and the right-hand man of Pope Benedict XVI. The other four commission members are Cardinal Attilio Nicora, Italian, who is the President of APSA; Cardinal Jean-Louis Tauran, French, President of the Pontifical Council for Inter-religious Dialogue; Cardinal Telesforo Toppo, Indian, the Archbishop of Ranchi; and Cardinal Odilo Pedro Scherer, Brazilian, Archbishop of San Paulo, Brazil.

I went to the medieval Tower of Nicholas V to meet Professor Caloia. In this historic place, I did not want to speak with him about history, but about our own time: the profound financial crisis that, in various ways, has affected, and will affect, all of us...

The present crisis is so serious and widespread that it is being compared to the Great Depression that followed the crash of 1929 and lasted throughout the 1930s. How are these two crises similar, and different?
Professor Angelo Caloia: No financial crisis has ever been the same as previous ones. This fact is still more valid when it concerns financial crises of enormous scope like those of the 1930s and this present one. There are precise differences between these two crises. They may be summarized as follows:
(1) The geographic aspect. The current financial crisis directly concerns every country in the world, industrialized and not, developing countires, countries in transition, etc., because of the phenomenon of “contagion” that, in the 1930s, was limited instead to a few advanced countires and to the colonies (or semi-colonies) which received only indirect effects.
(2) Financial tools and intermediaries. Today, the tools at the disposal of finance are multiple and extraordinarily sophisticated, like the institutions that employ them. Under these conditions, effective regulation becomes quite difficult, in contrast to the 1930s when the tools were rudimentary and the number of banks relatively few.
(3) Intervention of government powers. Today the political parties, the social forces, public opinion and economic experts are all favorable to the intervention of national and international authorities, above all to stabilize the present situation and then to reorganize the world financial system. In the 1930s, up until the intervention of Roosevelt (1933), autonomous private activity was privileged at all costs and there was complete faith in the mechanisms of the market.
(4) Number of countries participating in the process of recovery. In the 1930s, agreement was easier, at least under the technical aspect, as it involved industrialized countries of the same cultural matrix and comparable financial systems. Today, when the great powers are more numerous and have very diverse interests and quite differing productive characteristics, agreements are more difficult and complex.

Keeping these differences in mind, it is nevertheless possible to see analogies. In both cases, we find grave distortions in the markets for primary materials (then it was the grain market). In both situations, the world was coming from a period in which the US had followed an expansive monetary policy that, even with differing mechanisms, opened the way for degenerative processes. The first signal of the crisis was the same: lack of liquidity in the banking system, finding itself unexpectedly facing a situation of inability to pay down debts in the agricultural and housing sectors. In both cases, this was the first link in a chain which led inexorably to a crisis of the entire economy, with possible anologies in the consequences and in the impact on civil society.

The modern rise of derivative contracts has gone far beyond the useful task of better managing the risks of real economic and financial activity. The banks abdicated the task of distributing credit in a prudent fashion, losing ethical and economic legitimacy in the process. Before the crisis, the banks sought gains under the illusion of diminishing risks by packaging risky loans together, and they have paid the consequences.

In 1933, the new American president, Franklin Delano Roosevelt, implemented a reform program called the “New Deal” to overcome the crisis. What were these measures, and could they be adopted today?
Caloia: The reforms of Roosevelt, president from 1933 to 1945, were far-reaching and effective, thanks to the help offered by an exceptional team of experts whom he gathered around himself to combat the great crisis of the 1930s. This “New Deal” unfolded in two great phases: (1) The phase of 100 days in 1933, which included reinforcing healthier banks and closing weaker ones; the devaluation of the dollar; prohibition on exporting gold and foreign currency; support for agriculture and for homeowners.

There were three major measures passed to help agriculture, industry and infrastructure: the Agricultural Adjustment Act, the National Insutrial Act and the Tennessse Valley Authority; (2) In the second phase, beginning in 1935, measures were taken against unemployment and public works projects were launched. The National Labor Relations Act, to regulate the relations beteen employers and employees, and the Scoial Security Act, to help the unemployed, the sick and the old, were passed.

Roosevelt’s economic policy can be summed up this way: since the private sector was not able to find the necessary strength to interrupt the vicious cycle set in motion by the rise in unemployment and the reduction of demand, the task had to be taken over by the State. Thus he opened the way to a series of public works, able to absorb many laborers and to support demand, and so favoring the recovery of the private sector. The structure of American society (fluid, little inclined to class distintions) and the coming of the Second World War, favored the definitive end of the depression, even if it is difficult to say whether this outcome was due to the actions of the American government after 1933, and, still more, if those actions are relevant in the modern economic context.

Italy’s Minister of Finance, and others, have called for a new Bretton Woods agreement. What was the Bretton Woods agreement, and why is it no longer working?
Angelo Caloia: The Bretton Woods Accords of 1944, elaborated by the main Allied powers (including the Soviets) in Bretton Woods, New Hampshire, while the Second World War was still on, aimed in essence at the reorganization of the world’s monetary and financial system. The accords were the basis of the creation of the International Bank for Reconstruction and Development (today the World Bank) and of the International Monetary Fund (IMF). The accords produced an international monetary system based on gold and the dollar, with exchange rates relatively fixed and with loans to finance temporary balance of payment deficits.

The convertibility of the dollar into gold guaranteed the American currency an intrinsic value, while the regulation of the oscillations in exchange rates limited the phenomenon of competitive devaluation. The decline of government intervention in private economic activity, dissatisfaction with the pre-emince of the US (which began to export inflation impoverishing the global economic system) and the difficulty of the US to maintain its position, led President Nixon in 1971 to announce the abandonment of the convertibility of the dollar into gold and thus to end the model of organization agreed upon 27 years earlier at Bretton Woods.

In your view, is there a need for a new accord, and who should participate in the discussions, since the countries which met in 1944 represented 80% of the world’s wealth, but only 50% of the world’s wealth today?
Angelo Caloia: A repeat of the Bretton Woods conference today is a fascinating hypothesis. The present crisis is forcing the states to once again assume an active role in the economy. It would represent an attempt to find a global solution to the present crisis.

There should not be too many countries participating at such a new Bretton Woods. The so-called “global players” should all be present: the European Union, the US, Japan, Russia, China, India, Saudi Arabia, Brazil, South Africa, and a few others. The restriction on the number of particpants is required by the technical complexity of the task, by the need to conclude something quickly, and by the need to leave aside particular requests, even if they are legitimate. The talks would have to be held in such a way that the countries participating could fairly represent the intersts of the whole world and thus also of those countries, like many from Africa and Latin America, which would not be present.

There are many points to place on the agenda. But one that must be discussed is a new way to control the financial intermediaries at a global level, since the actions, the tools, the institutions of this sector, are completely globalized. Another important aspect is new design for the world monetary system, since the system of flexible exchange rates has not worked. A system of “target zones” seems more acceptable, once a minimum level of trust in the behavior of the central banks has been assured. A third interesting aspect (which already exists at a regional level) is a more strict cooperation in macroeconomic policy.

The Arab oil-producing countries have earned $1 trillion in the past few years; China, “the workshop of the world,” $2 trillion, the fruit of its extraordinary wave of exports; Russia too, with half a trillion dollars due to the sale of oil and gas, has grown wealthier. The world’s wealth has shifted from the West to the East, to countries which are either non-democratic or only partially democratic. How do you view this economic shift?
Caloia: The shift of the wealth of the world’s older industrialized economies (the US, Europe and Japan) to these newer countries started to occur at the end of the 1970s with the first and second “oil shocks,” when oil prices rose sharply. A greater shift has occurred since 1995, with the specialization of some large developing countries in some manufactures, and further oil shocks. The colossal sums earned have gone into what are called “sovereign wealth funds,” which are directed by public officials who have strategic objectives in their investments. But so far, despite these enormous transfers of wealth, the rising countries are unable to replace, or live without, the American economy, which still seems to be the engine for the world economy. Russia and China are suffering greatly in recent weeks from the financial difficulties of the mature economies. China in particular faces an explosive social situation. If Chinese exports slacken, and factories close, and workers have no jobs, the Chinese government faces an explosion.

Let’s go back to the present crisis. In recent years, the earnings of financial companies have represented more than a third of all corporate profits. Did financial companies get out of control in their speculations?
Caloia: Finance in recent years has without a doubt had excesses. These excesses were, with due distinctions made, the same as those which characterized the financial world in the months leading up to the crisis of 1929. The social system and human nature lead financial operators to seek unlimited profits and the capitalist system, left to itself, allows excesses.

But there were supposed to be controls within the system. The debt rating agencies, like Moody’s, Standard and Poors, Fitch, etc., rated many securities as “AAA” which turned out to be very risky and worthless. How could they have made such mistakes?
Caloia: There are many reasons why the rating agencies are not relibale and cannot foresee crisis situations looming over the companies they evaluate. Many of these instruments were of enormous complexity and very limited clarity. And then there is possible collusion, conflicts of interest and hidden interests linking the rating agencies and the companies.

The present financial crisis has caused many to raise ethical questions about the financial system. Some of these relate to Catholic social teaching. For example, the $1 billion that George Soros earned, sepculating against the British pound; or the $500 million that US Treasury Secretary Henry Paulson earned in stock options at Goldman Sachs. People are asking: are such earnings excessive?
Caloia: There is always a certain unease when one hears of such amounts of earnings. Among other things, — and this is the case with stock options — such options can cause the manager to focus on near-term results and sacrifice longer-term strategies that might render the company more solid and likely to endure.

The real question, however, concerns the role of finance in human society. In a capitalist system, every good has a price, which is what someone will pay, and this is true also for human capital. Stock-holders are disposed to pay a great deal for their managers because they think the persons chosen have an interest in creating value also for them.

The problem, therefore, resides in the capitalist structure which, in itself, without adequate mechanisms of control, justifies excesses. And it is only in a different perspective that we can conceive of a different way. This different perspective is that of social economy of the market where ethics is not something exogenous, but something internalized into all economic activity. In such a perspective, companies have a responsibility, not only to stock-holders, but also to the environment and to those who are affected by their activity: workers, creditors, civil society in general.

We need to think of a system capable of ethical discernment, a system able to reward financial activity in a way proportionate to the real effects that it produces. The solution is not the abandonment, but the maturation in the ethical and social sense of the present economic system.

What contribution can the Church’s social doctrine make in the solution of the present crisis and the creation of a more just and solid economic system?
Caloia: In the economy, the decline of discipline, of a discipline based on a solid ethical order, can cause the very laws of the market to collapse. The Church, for her part, has always been vigilant about idols. At the beginning of the recent Synod on the Scriptures, Pope Benedict XVI recalled that whoever builds his life on material things, on success, builds on sand. Above all, Benedict XVI has always said that, to act rightly, the reason must be purified, because its ethical blindness, which comes when self-interest and power prevail, is always a tragedy.

How has the IOR done during this economic crisis?
Caloia: The IOR, also because of the role it plays in the Catholic Church, have never sought to maximize its financial results, but rather to effectively carry out services on behalf of the ecclesial community spread throughout the world, especially in the poorest and most distant areas. It has done this through an investment policy characterized by prudence and conservation of capital. This approach has historically been realized through the use of simple instruments and these choices are helping us in this difficult moment to avoid being dragged under by this crisis.

You have been head of the so-called Vatican bank, the IOR, for 20 years. Prior to you, Archbishop Paul Marcinkus was the head of the bank. A “black legend” has been created around him. What should people know about the Vatican bank?
Caloia: First of all, that it is not a bank. We never make loans. We never have. And this is why today we are able to confront the disater that is occurring. Many religious orders and dioceses from all over the world entrust their money to us. By prudent investment, avoiding speculative operations, we have always been able to guarantee the preservation of capital and its immediate liquidity, as well a a small but dignified increase.

As for the “black legend” you mentioned, it survives, but in a ever more attenuated form, among those circles which do not know the true service rendered by the IOR to the most needy and marginalized everywhere in the world.


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