‘Caritas in Veritate,’ ‘Fratelli Tutti’ and the Current Banking Turmoil
COMMENTARY: The world of finance doesn’t exist outside of morality. Real-life decisions are made with real people’s money; real people grow wealthy or get hurt from those decisions.
The recent turbulence in the international banking sector and the implosion of the cryptocurrency exchange FTX last fall reveal that, well more than a decade after the global financial crisis of 2007-2008, our banks and investments are not as resilient as we might think.
It’s as good a time as any to revisit two of the more recent social encyclicals — Pope Emeritus Benedict XVI’s 2009 letter Caritas in Veritate and Pope Francis’ 2020 encyclical Fratelli Tutti — to see what they have to say.
Both encyclicals were written in the wake of global crises — the 2007-08 financial crisis and the first wave of the COVID-19 pandemic. Both encyclicals are clear that while the Church’s social teaching doesn’t make infallible technical pronouncements on economics and finance, she does offer the truth of Divine Revelation, of the human person and of the duty to promote the common good.
And the truth can ultimately have an awful lot to say about a dizzyingly complex financial world. When CEOs, hedge-fund managers, tech disruptors and bankers treat people’s retirement savings — and entire sectors of the economy — like a game of roulette, the nasty economic hangovers will keep coming (as they are wont to do) and the brunt of it will often be borne by the poor and the vulnerable.
First, to the recent bank runs. Two midsize U.S. banks — Silicon Valley Bank (SVB) and Signature Bank — were seized by federal regulators this month after depositors started pulling their funds in a hurry. The second- and third-largest bank failures in U.S. history — and SVB with the largest bank run, at $42 billion — don’t just materialize out of thin air.
Those failures in turn triggered a stock plunge for the global investment firm Credit Suisse, which was then bought out by the multinational financial services group UBS.
A common hypothesis is that U.S. banks — and the American economy at large — operated for years on a short-term gains strategy, benefiting from the Federal Reserve keeping interest rates low. They failed to implement a long-term strategy for when rates would inevitably rise. Once the Fed raised interest rates to stem fierce post-pandemic inflation, this reduced the value of long-term bonds, which made up the majority of SVB’s investments. By failing to diversify its investments, and exposing itself to risk, the bank suddenly had a smaller balance sheet.
SVB’s clients took note, and the run was on; within a matter of days, the feds had seized the bank — but not before bonuses were handed out internally for the bank’s 2022 performance.
The federal regulators obviously failed to do their job. The Federal Reserve Bank of San Francisco reportedly knew of SVB’s risk exposure a year ago, but failed to prod them on a path to more resilience.
So, what exactly might the popes have to say about all of this?
The Church doesn’t make infallible technical pronouncements, but Popes Benedict and Francis have emphasized that there is no such thing as “neutral” banking. The world of finance doesn’t exist outside of morality. Real-life decisions are made with real people’s money; real people grow wealthy or get hurt from those decisions.
When businesses or banks put short-term profits ahead of all else, it’s not a “neutral” decision that’s part of profit-making. It puts the common good — particularly the poor — at risk. Benedict decried the “speculative use of financial resources” in Caritas in Veritate; and Francis, in Fratelli Tutti, wrote that “financial speculation fundamentally aimed at quick profit continues to wreak havoc.”
There’s a certain logic to neoliberalism or technocracy that goes something like this: If we have just the right agencies or tools in place, the market will function like a well-oiled machine and everyone will prosper.
Businesses fail — that’s part of the normal function of a market.
What’s unusual is when the second- and third-largest bank collapses in U.S. history happen within days of each other. Institutions like the Federal Reserve aren’t enough to maintain the peace if the human beings running them don’t subscribe to the Catholic Church’s timeless teachings on the common good.
Benedict summarizes this well in Caritas in Veritate:
“In the course of history, it was often maintained that the creation of institutions was sufficient to guarantee the fulfillment of humanity’s right to development. Unfortunately, too much confidence was placed in those institutions, as if they were able to deliver the desired objective automatically” (11).
Benedict adds that the institutions “by themselves are not enough, because integral human development is primarily a vocation, and therefore it involves a free assumption of responsibility in solidarity on the part of everyone.”
No matter what history’s final verdict on the cryptocurrency craze and our current banking moment might be, a quick look around reveals that we have a long way to go as a society to reach the point where bankers see their work as a “vocation” for the common good. Sam Bankman-Fried’s uncanny honesty about the failure of regulators and his brazen willingness to do unethical acts for a good purpose summarizes this well.
Hopefully this crisis won’t metastasize into a global meltdown — but the need for international oversight is ever-present, Pope Francis notes in Fratelli Tutti.
Placed in the hands of unethical men, wealth can do great damage. Knowledge of profit-making is not enough; if bankers don’t operate with the truth of the human person and society, their actions will only do harm in the long run.
The previous crisis “provided an opportunity to develop a new economy, more attentive to ethical principles, and new ways of regulating speculative financial practices and virtual wealth,” Pope Francis writes.
However, things got worse, not better, he adds:
“It appears that the actual strategies developed worldwide in the wake of the crisis fostered greater individualism, less integration and increased freedom for the truly powerful, who always find a way to escape unscathed.”
As a brief disclaimer, I am fully aware of the irony of social encyclicals calling out the financial system for greed and disdain for the poor, while Curial officials make more-than-questionable investments with the Church’s purse, the Vatican suffers ballooning deficits and signs point to dark times ahead for the Holy See’s finances.
People point to the Church’s exhortations as well-intentioned but outdated. The Church doesn’t profess to make technical interventions. But it does have the truth of the human person and the common good as its offering.
What happens next is the million-dollar question. Might we see better regulations and investments by banks more concerned with long-term resilience than short-term risks and gains? Or will the march continue toward a nihilistic individualism?
Benedict saw this as clearly as anyone. “Without truth,” he says in Caritas in Veritate (12), “it is easy to fall into an empiricist and skeptical view of life, incapable of rising to the level of praxis because of a lack of interest in grasping the values — sometimes even the meanings — with which to judge and direct it.”
Matt Hadro is a public relations executive who previously served as the political editor for Catholic News Agency.