'Idolatry of the Market'?

by Thomas E. Woods, Jr.

The document released yesterday by the Pontifical Council for Justice and Peace calling for a world economic authority and condemning the "idolatry of the market" could have been written by any number of secular think-tanks in the United States.

It is also deeply confused. On the one hand, it speaks of excessive money growth as a problem that can lead to "speculative bubbles" whose bursting can do significant damage to economies around the world. On the other, it calls for a world economic authority that will…what? Be exempt from the errors and hubris of government officials and national central banks?

We were assured that the best and the brightest were running the Fed. These were people who told us the rise in housing prices was attributable to strong fundamentals. There was no housing bubble. Alan Greenspan told people to take out adjustable-rate mortgages. Ben Bernanke said in 2006 that lending standards were sound. And so on.

Whenever rising interest rates might have discouraged crazed speculation in real estate, the Fed kept the mania going by maintaining low rates. When the market was trying to send us red lights, in other words, the Fed was turning them all green.

Had we really been engaged in "idolatry of the market," as the Vatican document suggests, we might have listened to the market. Instead, the central authorities drowned out what the market was trying to tell us.

It’s been idolatry not of the market but of central banks, institutionalized sources of moral hazard and financial instability around the world, that has yielded us the boom-bust cycle. (The aura of infallibility and the cult of personality surrounding Fed chairmen make the language of idolatry more than mere poetic license.)
The widespread misdiagnosis of the crisis now engulfing us has led to the frequent claim that lax regulation, or deregulation, must have caused it, and that better supervision of the system can prevent future crises. This is a delusion, albeit a common one.

In the United States we have 115 agencies that regulate the financial sector, and the Securities and Exchange Commission never had a bigger budget or staff than under George W. Bush. There has been a threefold (inflation-adjusted) increase in funding for financial regulation since 1980. For reasons I’ve explained in my 2011 book Rollback, the repeal in 1999 of one provision of Glass-Steagall had zero to do with the financial crisis. Europe has never operated under Glass-Steagall-style restrictions and is none the worse for it. There is no repealed regulation that would have prevented the crisis consuming the world right now.

The banking industry is by far the least laissez-faire sector of the U.S. economy; it is a cartel arrangement overseen by the Federal Reserve and shot through with monopoly privilege, bailout protection, and moral hazard.

The present malaise, therefore, does not call for another layer of supervision, as the Pontifical Council appears to think. It calls for a serious moral and economic reevaluation of institutions, among them central banking and fiat money, that we have long taken for granted, and in support of which all manner of historical and theoretical fallacies have taken widespread root.

The last thing we need is a larger, more centralized version of what we have now. Our problem isn’t greedy people or bad personnel. Every society and every period of world history have had those. The problem is the system itself.

An excellent moral case can be made for a genuinely free economy, one not subject to the cronyism and manipulation at the heart of the present system. The chief obstacle in the way of such an outcome is the central bank, the anomalous central planning agency at the heart of a free economy. We’ve been assured that the central bank has found a shortcut to prosperity by managing the economy with its highly touted macro tools and by second-guessing the interest rates to which the free interactions of individuals give rise. The result has been bubble after bubble and – contrary to popular belief – far more banking and currency crises and overall instability than was ever seen in the oft-misunderstood era that preceded the age of central banking.

The Vatican document reflects a vague sense of what is wrong, but any solution that involves reposing our confidence in still another layer of time-serving drones supervising a largely unchanged system is no real solution at all.

ADDENDUM: For a more detailed reply to a very similar document, see my article "Truth and Charity," and for a more general defense of the market, see my book The Church and the Market: A Catholic Defense of the Free Economy.

October 25, 2011