Vatican Bank Chief Condemns Keynesianism

Current fiscal and monetary policies in the United States and Europe risk increasing government control over national economies, resulting in weakened political strength throughout “the whole of the western world,” the Vatican’s top banking expert said.

Writing in the Jan. 14 edition of the Vatican newspaper, L’Osservatore Romano, Tedeschi warned of the growing influence of “Keynesian” economic theory on both sides of the Atlantic.

Governments on both sides of the Atlantic, he said, are committed to Keynes’ policy of increasing public debt to sustain levels of economic production, consumption, and employment.

He 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.

More. That sound you hear is Morning’s Minion’s head exploding.

As a conservative leaning libertarian, I am used to Vatican officials making pronouncements about economics with which I disagree. Now, finally, someone at the Vatican is saying what lots of conservatives and libertarians are saying, and I still disagree.

The problem is that Mr. Tedeschi seems to be equating zero interest rates with rates that are artificially low. Zero is a low number, so it might seem obvious that a zero rate is too low, but as Milton Friedman famously noted, low interest rates are a sign that monetary policy has been too tight, not that it has been too looose (in the same way that the fact my car heater is on full blast is a sign not that the car is too hot but that it is too cold). If you look at methods of calculating what interest rate should be such as the Taylor rule, what you find is that negative interest rates are called for, or at least would be called for if they were possible. If rates should ideally be negative but are in fact zero then rates are not artificially low, but artificially high (or too high, at any rate). Since the Fed can’t make interest rates go negative, it has tried to achieve the same result by other methods, but one shouldn’t think of this as pushing rates below where they should be.

Nor is any of this a de facto tax on poor savers. If QEII is successful increases in the money supply will be matched by increases in output (as millions of currently unemployed workers find jobs), so the purchasing power of savings need not be degraded. And if you are one of the millions of unemployed, you will in fact be much much better off.

So I guess I will have to get used to cringing when I hear Vatican officials comment on the economy.