Monthly Archives: December 2013

“One of the problems we have in the United States is that prosecutors like to make a name for themselves and they all try to distinguish themselves in one way or another. One way to distinguish yourself is to get the highest penalty ever against a bank…I don’t think it bears much resemblance to anything else. It is not rational.” Commissioner Daniel M. Gallagher, The Securities and Exchange Commission

US Republican SEC member blasts $13 bln JPMorgan settlement

Mon, Dec 9 2013

Dec 9 (Reuters) – A Republican member of the U.S. Securities and Exchange Commission blasted other government regulators on Monday for requiring JPMorgan Chase & Co to pay $13 billion to resolve allegations of mortgage misdeeds tied to the financial crisis.

“I think you would be hard-pressed to find any rational regulatory policy that would underlie a $13 billion penalty against shareholders,” said SEC member Dan Gallagher, a Republican.

Last month JPMorgan agreed to pay $13 billion to resolve claims from the Justice Department, a federal housing regulator, and others, that the bank overstated the quality of mortgages it was selling to investors in the run-up to the financial crisis. The SEC was not a party to the settlement, which included $9 billion in cash and the rest as help to consumers.

The Justice Department rolled several separate investigations and lawsuits into one large settlement, and said such a deal was designed to hold wrongdoers accountable for misconduct that contributed to the crisis.

The cost of the settlement forced JPMorgan to record its first quarterly loss under CEO Jamie Dimon and was expected to cost JPMorgan $9 billion after tax, a little less than half the company’s annual profit of $21 billion in 2012.

JPMorgan in a statement of facts acknowledged problems in its marketing of mortgage securities.

But the Justice Department did not release details of how it calculated the penalty, and did not release a complaint that laid out the entire scope of the misconduct government investigators had unearthed.

In an interview with Reuters last week, Attorney General Eric Holder defended the size of the fines. “What we have looked for in terms of the size of these things is really to do it in a way that’s appropriate, that’s proportionate,” he said.

“There is a mathematical basis to the offers that we make,” he said. “It’s not something that we simply look at the size of the institution or their balance sheet,” Holder added.

When announcing the deal, the Justice Department described it as the “largest settlement with a single entity in American history.”

Holder also said in the interview that the department planned to bring more mortgage fraud cases against other financial institutions early in 2014.

Soon after the settlement, JPMorgan’s general counsel Stephen Cutler criticized the large penalty imposed and described it as contributing to something of an arms race in government fines.

Speaking before an audience in Frankfurt at an event organized by the American Chamber of Commerce in Germany, Gallagher blamed that escalation on government lawyers looking to build a reputation.

“One of the … problems we have in the United States is that prosecutors like to make a name for themselves and they all try to distinguish themselves in one way or another,” he said.

“One way to distinguish yourself is to get the highest penalty ever against a bank … I don’t think it bears much resemblance to anything else. It is not rational,” he said.

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“So what is it with the Norwegians? Well, they have a kind of superiority complex.” Nobel Laureate Robert Shiller (explaining his psychological theory for what appears to be a current Norwegian housing bubble)

“I encourage you to read the two articles below on the current, worldwide housing bubbles. Shiller says Norway’s may be caused by their ‘superiority complex’ and Roubini says they are fed by low rates/easy money and the need to  hedge against inflation. In my opinion, these new bubbles are strong empirical evidence that the pre-2008 crisis housing bubbles in the U.S., UK, Spain, Ireland, Iceland, and Dubai were not primarily caused by imprudent lenders, but other macroeconomic forces; who knows, maybe even a national ‘superiority complex’ or two!!!” Mike Perry, former Chairman and CEO, IndyMac Bank

Jeff Gundlach: “Take a look at Norway if you want to see a country that really looks out of whack. The housing market has been so strong, and the debt ratios are so high….the Norway housing index has risen 77% from year-end 2004, an all-time high. The U.S. home-price index, by contrast, sat at a 3% loss, compared with its level at year-end 2004.”

Robert Shiller: “So what is it with these Norwegians? Well, they have a kind of superiority complex. First of all, they were smart enough not to join the European Union, and they don’t bear any of the burden of the Southern EU countries. And they have North Sea oil, and their economy looks good. So they just think they are immune from all the problems of the world, and people are coming to Norway for jobs. So it just sound to them that their real estate ought to be booming…”

Nouriel Roubini: “Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and back for an encore, the UK (well, London). In emerging markets, bubbles are appearing in Hong Kong, Singapore, China, and Israel, and in major urban centers in Turkey, India, Indonesia, and Brazil.”

“But the global economy’s new housing bubbles may not be about to burst just yet, because the forces feeding them….especially easy money and the need to hedge against inflation….are still fully operative…But the higher home prices rise, the further they will fall…and the greater the collateral economic and financial damage will be…when the bubble deflates.”

“What we are witnessing in many countries looks like a slow-motion replay of the last housing-market train wreck. And, like last time, the bigger the bubbles become, the nastier the collision with reality will be.”

December 3, 2013- “Jeff Gundlach, Robert Shiller, And Nouriel Roubini All Agree That One Housing Market Looks Like a Total Bubble”, Business Insider

November 29, 2013- “Back to Housing Bubbles”, Project Syndicate, Nouriel Roubini

“If you simply announce that things are irrational, then that alone doesn’t get you very far. You have to replace rational agents with some concrete notion of what it means to be irrational. You need to test that notion in a formal, mathematical model.” Nobel Laureate Lars Peter Hansen

“Mr. Hansen is an economist who shared the 2013 Nobel Prize in economics (for their work on asset prices) with the more famous economists Fama (markets are rational) and Shiller (no they are not). Let’s focus on a few things that I think everyone can agree on: First, unprecedented asset price volatility (major increases and then rapid declines in real estate, loans, and debt and equity securities prices) precipitated the 2008 global financial crisis. Second, there is tremendous disagreement as to what were the primary causes of this global asset price volatility (imprudent lenders, easy money central bankers, global trade imbalances, and/or recurring investment cycles). Third, we are once again experiencing major price increases globally in many of these same assets (with new concerns about asset bubbles bursting) and yet clearly this time it can’t be imprudent lenders. So, it seems to me you have to cross that one of your list of the true-root causes of the 2008 global financial crisis. Finally, read the interview below from this Nobel Laureate; it is filled with humility about our lack of knowledge of what really happened. Why then is the current Administration, populist politicians, and the mainstream press so confident in their improbable view that bankers worldwide (and all at the same time) acted imprudently and were the primary cause of the crisis?” Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpts From November 16, 2013 New York Times article: “Lars Peter Hansen, the Nobel Laureate in the Middle”:

“Are financial markets efficient or irrational?” repeats Professor Hansen, a University of Chicago economist. “I don’t really know how to answer that.”

“It’s an odd one for him because he has spent decades working with complex mathematical models of financial markets and the overall economy, and he isn’t sure that it is important to label the behavior he is modeling rational or irrational.”

“The science of economic model-building is very much a work in progress, he said. “The thing to remember about models is they’re always approximations and they will always turn out to be wrong,” he said. That shouldn’t be a surprise, he said, and it doesn’t mean that the models are useless.”

“But, he cautioned: “If you simply announce that things are irrational, then that alone doesn’t get you very far. You have to replace rational agents with some concrete notion of what it means to be irrational.” You need to test that notion in a formal, mathematical model, he said.”

In his own recent research, he has used econometrics to try to understand a crucial subject for this era: the precise linkages and interactions between financial markets and the overall economy. “There are enormous gaps in our knowledge,” he said.”

“Prevailing economic models do not adequately explain the financial crisis, the severe recession or the weak global recovery, he said. “Systemic risk” is a buzzword for politicians and financial regulators, he said, but “the truth is, we really don’t know how to measure it or what exactly it is.””

“This issue is critical, he said, because financial regulators are having to improvise solutions to dilemmas they don’t entirely understand.”

The New York Times

November 16, 2013

Lars Peter Hansen, the Nobel Laureate in the Middle

By JEFF SOMMER

Lars Peter Hansen understands why he is being asked, but he isn’t comfortable with the question. “Are financial markets efficient or irrational?” repeats Professor Hansen, a University of Chicago economist. “I don’t really know how to answer that.”

Yet since being named last month as one of three recipients of the Nobel Memorial Prize in Economic Science, he has been saddled with this question repeatedly.

It’s an odd one for him because he has spent decades working with complex mathematical models of financial markets and the overall economy, and he isn’t sure that it is important to label the behavior he is modeling rational or irrational.

But he shares the Nobel with Eugene F. Fama, a fellow economist at Chicago, and with Robert J. Shiller, an economist at Yale, and their dispute over this terminology has commanded attention.

He puts the matter positively: “A common theme in our work is that we’ve all characterized the puzzling implications that emerge from financial market data. But we take different approaches.”

That’s an understatement. In fact, the other two laureates don’t see eye to eye on some basic issues and have engaged in an unusual public debate — recently, in interviews and in a column in these pages.

Professor Shiller, a frequent contributor to Sunday Business, stresses the irreducibly human, irrational elements found in asset bubbles and busts. Professor Fama, known as the father of the “efficient markets hypothesis,” says market behavior can be explained quite well without any need to call it irrational.

Professor Hansen, 61, doesn’t want to become embroiled in this. “Shiller and Fama can speak for themselves,” he says.

But in a long telephone conversation this month, he was happy to speak about his own, rather different perspective. It was formed, in part, at the University of Minnesota in the 1970s with the help of two economists there. They were Thomas J. Sargent, now at New York University, and Christopher A. Sims, now at Princeton — the recipients of the Nobel two years ago.

The committee that awarded the Nobel to Professors Sargent and Sims also cited Professor Hansen’s contributions, and he continues to collaborate with Professor Sargent. In a symposium on the current prizes held this month at the University of Chicago, James J. Heckman, also a Nobel laureate, said that this year’s Nobel was, in a sense, “Lars’s second Nobel prize.”

The Nobel committee recognized Professor Hansen this year for developing a statistical technique, the generalized method of moments. He described it as “a method that allows you to do something without having to do everything.” For example, it’s still impossible to come up with a complete and entirely coherent model of either the overall economy or financial markets, to say nothing of combining the two. But his methods help make it possible to study some of the elements and connections in a statistically valid way. “The idea is to make progress,” he said, “even if you can’t do it all now.” And his approach is in wide use in other areas of social science.

Earlier in his career, along with Professor Sims and especially with Professor Sargent, he provided some of the mathematical underpinnings for what is known as the rational expectations theory — the notion that people use all available information in making economic decisions. It suggests that people may not “be fooled by policy makers” into making decisions against their own self-interest, he said — for example, by spending all the proceeds of a one-time tax cut if they understand that the windfall is only temporary.

With Professor Sargent, Professor Hansen says, he later “pushed back” on that theory “because it implied way too much precision on the part of individuals that we just didn’t think was very plausible.”

The science of economic model-building is very much a work in progress, he said. “The thing to remember about models is they’re always approximations and they will always turn out to be wrong,” he said. That shouldn’t be a surprise, he said, and it doesn’t mean that the models are useless. “You need to ask, are the models wrong in ways that are central to the questions you want to ask, or are they wrong in ways that aren’t so central?” The important thing is to make them better and to come up with interesting answers, he said.

He returns to the Shiller-Fama controversy, and suggests that he can see both sides of it. Collectively, the Nobel committee said, all three men have made major contributions to our understanding of asset pricing. And while he has generally worked with models of economic behavior containing “rational agents who are struggling to cope with uncertainty,” he said, human behavior in financial markets can certainly be called irrational.

But, he cautioned: “If you simply announce that things are irrational, then that alone doesn’t get you very far. You have to replace rational agents with some concrete notion of what it means to be irrational.” You need to test that notion in a formal, mathematical model, he said. Some of his students have been working at this. “As long as they’re doing this in formal and rigorous ways, I’m all in favor of it.”

In his own recent research, he has used econometrics to try to understand a crucial subject for this era: the precise linkages and interactions between financial markets and the overall economy. “There are enormous gaps in our knowledge,” he said.

Prevailing economic models do not adequately explain the financial crisis, the severe recession or the weak global recovery, he said.“Systemic risk” is a buzzword for politicians and financial regulators, he said, but “the truth is, we really don’t know how to measure it or what exactly it is.”

This issue is critical, he said, because financial regulators are having to improvise solutions to dilemmas they don’t entirely understand.

“Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.” Paul Krugman

“I think Krugman, despite having won a Nobel Prize in economics, is an intellectual lightweight and contradicts himself all the time to further his primarily political, liberal, anti-business agenda. For example, he regularly says that the current low yields of U.S. Treasury securities are strong market-based evidence for continuing easy money policies and running even bigger government deficits, to stimulate aggregate demand. Yet in saying this, he ignores the well-known fact that pre-crisis, market-based yields on assets like mortgage securities and other debts (like sovereign Greek bonds) were flat out wrong. In hindsight, they were far too low relative to their risks and they abruptly corrected and caused lots of problems worldwide. Krugman also ignores the fact that the Federal Reserve’s easy money policies (QE) are distorting the market for U.S. Treasuries; the Fed has been buying a huge percentage of U.S. Treasury debt issuance and artificially lowering their yields. That being said, I think the article below is one of the first Krugman articles that makes some sense to me. For example, he mentions our ‘persistent trade deficits’ (which I have discussed in other blog postings) as a potential cause of our economic problems. That’s why I am posting this Krugman article.” Mike Perry, former Chairman and CEO, IndyMac Bank

A Permanent Slump?

By PAUL KRUGMAN
Published: November 17, 2013

Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” Most though not all such officials accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low. Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.

Fred R. Conrad/The New York Times
Paul Krugman

But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?

You might imagine that speculations along these lines are the province of a radical fringe. And they are indeed radical; but fringe, not so much. A number of economists have been flirting with such thoughts for a while. And now they’ve moved into the mainstream. In fact, the case for “secular stagnation” — a persistent state in which a depressed economy is the norm, with episodes of full employment few and far between — was made forcefully recently at the most ultrarespectable of venues, the I.M.F.’s big annual research conference. And the person making that case was none other than Larry Summers. Yes, that Larry Summers.

And if Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time.

Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.

He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.

Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.

I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?

Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.

Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off. America’s working-age population rose rapidly in the 1960s and 1970s, as baby boomers grew up, and its work force rose even faster, as women moved into the labor market. That’s now all behind us. And you can see the effects: Even at the height of the housing bubble, we weren’t building nearly as many houses as in the 1970s.

Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.

Why does all of this matter? One answer is that central bankers need to stop talking about “exit strategies.” Easy money should, and probably will, be with us for a very long time. This, in turn, means we can forget all those scare stories about government debt, which run along the lines of “It may not be a problem now, but just wait until interest rates rise.”

More broadly, if our economy has a persistent tendency toward depression, we’re going to be living under the looking-glass rules of depression economics — in which virtue is vice and prudence is folly, in which attempts to save more (including attempts to reduce budget deficits) make everyone worse off — for a long time.

I know that many people just hate this kind of talk. It offends their sense of rightness, indeed their sense of morality. Economics is supposed to be about making hard choices (at other people’s expense, naturally). It’s not supposed to be about persuading people to spend more.

But as Mr. Summers said, the crisis “is not over until it is over” — and economic reality is what it is. And what that reality appears to be right now is one in which depression rules will apply for a very long time.

“Now we’re seeing another upswing in risky behavior. It began surprisingly soon after the crisis, spurred on by central bank policies that depressed the return on safe investments.” Howard Marks

“Howard Marks and his firm Oaktree Capital largely avoided the financial crisis and were aggressive buyers of distressed assets in the aftermath; earning strong returns for their investors. In other words, Mr. Marks has gained his views from successful market participation over a long period of time. There are two key points Mr. Marks makes that I would like to highlight: 1) he makes clear that the Fed has coerced investors into riskier investment behavior; higher risk tolerance (just like I and others believe the Fed did in the pre-crisis period), and 2) he also makes clear that investment risk (and therefore the financial crisis) did not come from companies and securities and fraud as the government contends, but from capital markets cycles ”that always repeat”, where market participants become too risk-tolerant and drive prices too high relative to fundamentals.” Mike Perry, former Chairman and CEO, IndyMac Bank

“Where does investment risk come from? Not, in my view, primarily from companies, securities – pieces of paper – or institutions such as exchanges. No, in my view the greatest risk comes from prices that are too high relative to fundamentals. And how do prices get too high? Mainly because the actions of market participants take them there.” Howard Marks

Other Excerpts from Howard Marks’ November 2013 Letter to Oaktree Clients:

“Now we’re seeing another upswing in risky behavior. It began surprisingly soon after the crisis (see Warning Flags, May 2010), spurred on by central bank policies that depressed the return on safe investments. It has gathered steam ever since, but not to anywhere near the same degree as in 2006-07.

As I’ve said before, most people are aware of these uncertainties. Unlike the smugness, complacency and obliviousness of the pre-crisis years, today few people are as confident as they used to be about their ability to predict the future, or as certain that it will be rosy. Nevertheless, many investors are accepting (or maybe pursuing) increased risk.

The reason, of course, is that they feel they have to. The actions of the central banks to lower interest rates to stimulate economies have made this a low-return world. This has caused investors to move out on the risk curve in pursuit of the returns they want or need. Investors who used to get 6% from Treasurys have turned to high yield bonds for such a return, and so forth.

Movement up the risk curve brings cash inflows to riskier markets. Those cash inflows increase demand, cause prices to rise, enhance short-term returns, and contribute to the pro-risk behavior described above. Through this process, the race to the bottom is renewed.

In short, it’s my belief that when investors take on added risks – whether because of increased optimism or because they’re coerced to do so (as now) – they often forget to apply the caution they should. That’s bad for them. But if we’re not cognizant of the implications, it can also be bad for the rest of us.

Where does investment risk come from? Not, in my view, primarily from companies, securities – pieces of paper – or institutions such as exchanges. No, in my view the greatest risk comes from prices that are too high relative to fundamentals. And how do prices get too high? Mainly because the actions of market participants take them there.

Among the many pendulums that swing in the investments world – such as between fear and greed, and between depression and euphoria – one of the most important is the swing between risk aversion and risk tolerance.

Risk aversion is the essential element in sane markets. People are supposed to prefer safety over uncertainty, all other things being equal. When investors are sufficiently risk averse, they’ll (a) approach risky investments with caution and skepticism, (b) perform thorough due diligence, incorporating conservative assumptions, and (c) demand healthy incremental return as compensation for accepting incremental risk. This sort of behavior makes the market a relatively safe place.

But when investors drop their risk aversion and become risk-tolerant instead, they turn bold and trusting, fail to do as much due diligence, base their analysis on aggressive assumptions, and forget to demand adequate risk premiums as a reward for bearing increased risk. The result is a more dangerous world where asset prices are higher, prospective returns are lower, risk is elevated, the quality and safety of new issues deteriorates, and the premium for bearing risk is insufficient.

It’s one of my first principles that we never know where we’re going – given the unreliability of macro forecasting – but we ought to know where we are. “Where we are” means what the temperature of the market is: Are investors risk-averse or risk-tolerant? Are they behaving cautiously or aggressively? And thus is the market a safe place or a risky one?

Certainly risk tolerance has been increasing of late; high returns on risky assets have encouraged more of the same; and the markets are becoming more heated. The bottom line varies from sector to sector, but I have no doubt that markets are riskier than at any other time since the depths of the crisis in late 2008 (for credit) or early 2009 (for equities), and they are becoming more so.

I think most asset classes are priced fully – in many cases on the high side of fair – but not at bubble-type highs. Of course the exception is bonds in general, which the central banks are supporting at yields near all-time lows, meaning prices near all-time highs. But I don’t find them scary (unless their duration is long), since – if the issuers prove to be money-good – they’ll eventually pay off at par, erasing the interim mark-downs that will come when interest rates rise.

Here’s my conclusion from The Race to the Bottom. I’ll let it stand – another case of “ditto.”

. . . there’s a race to the bottom going on, reflecting a widespread reduction in the level of prudence on the part of investors and capital providers. No one can prove at this point that those who participate will be punished, or that their long-run performance won’t exceed that of the naysayers. But that is the usual pattern.”

Howard Marks to Oaktree Clients – The Race Is On

“The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization…” Nobel Laureate Friedrich A. Hayek

Notable & Quotable: Hayek’s Nobel Speech

Friedrich A. Hayek on the arrogant pretense of social planners.

Nov. 29, 2013 7:14 p.m. ET

From Friedrich A. Hayek’s lecture “The Pretense of Knowledge” upon accepting the Nobel Prize in economics, Dec. 11, 1974:To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority.

Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based—a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, “dizzy with success,” to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society—a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

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“Venezuelans need a moral authority that defends their rights…they need a champion for a rule of law that will limit the power of the state over their person. Mother Church ought to be that voice. In siding with Mr. Maduro, however inadvertently, she harms her cause in the region.” Mary Anastasia O’Grady

Excerpt from December 1, 2013, WSJ article, “The Pope, the State, and Venezuela” by Mary Anastasia O’Grady:

“No Christian can doubt the love expressed in the pope’s message, which aims to shepherd the flock away from materialism. But the charge that grinding poverty in the world is the outgrowth of “the absolute autonomy of the marketplace” ignores reality. To be sure, even prosperous economies regulate markets. But those that have a lighter touch do better. Human history clearly demonstrates that when men and women, employing their free will and God-given talents, are able to innovate, produce, accumulate capital and trade even the weakest and most vulnerable are better off.

Instead the pope trusts the state, “charged with vigilance for the common good.” Why is it then that the world’s most desperate poor are concentrated in places where the state has gained an outsize role in the economy specifically on just such grounds?”

THE AMERICAS

The Pope, the State and Venezuela

Nicolás Maduro needs cover for an economy in free fall. He gets it from an unlikely source.

By

MARY ANASTASIA O’GRADY
Dec. 1, 2013 6:36 p.m. ET

Venezuela’s Nicolás Maduro once claimed to be a disciple of a famous Hindu guru. But like his predecessor Hugo Chávez, who died in March, President Maduro is not averse to posing as a follower of Catholic teaching when it suits him.In October he appeared in public wearing a rosary around his neck that was reportedly given to him by Pope Francis in Rome. It was a political gesture to suggest his government had the favor of the Holy Father. Some Venezuelans might believe it. The pope, like Mr. Maduro, has emerged as a severe critic of free-market economics.

Last week Pope Francis provided Mr. Maduro cover for his claim that state tyranny is morally justified when the pontiff blasted economic freedom in his first apostolic exhortation. Venezuelans are sinking further into poverty under Mr. Maduro’s anti-market policies. The pope wants the larger role for the state and an emphasis on equality of outcomes that those policies reflect.

Mr. Maduro needs a miracle. Venezuela will hold municipal elections on Sunday and the vote is seen as a referendum on his leadership. The government has multiple ways of cheating, but even so the opposition believes it will do well in the largest cities.

If that happens, it could signal change. Members of the armed service who were close to Chávez in the military and resent Mr. Maduro’s civilian status are said to be restless.

Venezuela’s President Nicolas Maduro Associated Press

To save himself, Mr. Maduro has been lashing out at Venezuelan importers, retailers and landlords in recent weeks, charging that annualized price inflation, which reached 54% in October, is a symptom of their greed. He says the private sector is at war with the nation. It is his job to defend the working class.

After a new round of price controls last month, shoppers stripped electronics and appliance stores of their goods. Retailers cannot replace inventories at prices that avoid losses because a dollar costs around 70 bolivares in the black market. The official rate of 6.3 cannot be had.

Mr. Maduro needs to pin it all on the market. Pope Francis seems eager to help. In the document released last week he admonished those who defend “trickle-down theories, which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world.” There is no empirical evidence for this, he wrote. It is instead “a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system.”

Millions of the world’s poor and excluded who landed in the U.S. in the 19th and 20th centuries have been witnesses to the polar-opposite conclusion. Immigrants to the pope’s homeland, Argentina, during the same period have not done as well—precisely because they’ve had to plod along in an economy not unlike the one he advocates.

Heavy state intervention was supposed to produce justice for the poor in the breadbasket of South America. We all know how that turned out.

No Christian can doubt the love expressed in the pope’s message, which aims to shepherd the flock away from materialism. But the charge that grinding poverty in the world is the outgrowth of “the absolute autonomy of the marketplace” ignores reality. To be sure, even prosperous economies regulate markets. But those that have a lighter touch do better. Human history clearly demonstrates that when men and women, employing their free will and God-given talents, are able to innovate, produce, accumulate capital and trade even the weakest and most vulnerable are better off.

Instead the pope trusts the state, “charged with vigilance for the common good.” Why is it then that the world’s most desperate poor are concentrated in places where the state has gained an outsize role in the economy specifically on just such grounds?

Exhibit A is Venezuela. It is an instruction manual on how to increase human misery. Without competition, the Venezuelan oil monopoly is a nest of corruption and a source of untold environmental damage. An unchecked chavista spending binge produced a fiscal deficit of 15% of gross domestic product last year, and the impulse to print money in order to pay for it. Among the unintended consequences of price controls are shortages, which drive hoarding for barter. An accumulated supply of toilet paper, for example, can be traded for cooking oil when none can be found.

Border states suffer shortages even more acutely since price-controlled items disappear rapidly into Colombia. The national chaos cultivates envy, hatred and violence.

Venezuelans need a moral authority that defends their rights to run a business, make a living, own property and preserve the purchasing power of what they earn. In short, they need a champion for a rule of law that will limit the power of the state over their person. Mother Church ought to be that voice. In siding with Mr. Maduro, however inadvertently, she harms her cause in the region.

Write to O’Grady@wsj.com

 
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