Two excellent columns in the FT last week explored the extent to which the credit crunch is a crisis of trust – and not just in the obvious sense of whether you trust your bank to be able to pay you back your deposit, or whether banks trust each other as counterparties.
As Chrystia Freeland notes, one dimension of the broader crisis of trust is the collapse of faith between electorate and political establishment in the US, seen in vivid colour in the House of Representatives’ initial refusal to approve Paulson’s bailout. For all that “the nearly unanimous verdict of what we might once have called the wise men in both parties, in government and in business, in academia and in the so-called MSM (mainstream media), was that the Paulson plan definitely, absolutely, undoubtedly should be approved”, 228 members of Congress – and countless voters on the phone to their offices – “decided they didn’t believe their country’s political and economic establishment”. She continues,
Americans have good reason to distrust their elite. The country’s political rulers, led by George W. Bush’s strong-arm White House, have made it easy to believe that the US government just doesn’t work. From Katrina to the war in Iraq (at least before the surge), to the budget deficit, to the lack of a national energy policy, Washington doesn’t seem to be delivering very good value to its citizens.
Nor do the nation’s business leaders appear particularly trustworthy at the moment. Even before the credit crunch bit, median wages were stagnating while the incomes of the super-rich soared, creating a gap bigger than at any time since the Gilded Age.
All of this makes the nation’s widely felt, bipartisan impulse to just “kick the bastards out” easy to understand. [But] here’s the rub: the current financial crisis is global, fast-moving and fiendishly complicated. It is precisely the sort of thing it takes selfless, sophisticated technocrats to fix. But, even if America can find the necessary, honourable financial wizards – no mean feat – can it bring itself to trust them?
Luke Johnson, on the other hand, explores the collapse of trust that led to the credit crunch in the first place. Most commentators, he notes, blame Wall Street for the crisis – and yet,
…the heart of this wealth destruction is a collapsing subprime property market. And in that dark and catastrophic place, I suspect that there have been more lies told than by all the world’s bankers put together. It is inconceivable that the many thousands of realtors, mortgage brokers, valuers, developers, builders and other members of the great daisy chain were not in on the game.
Moreover, the homeowners themselves were also willing participants. Many lied to get mortgages and paid more for properties than they could afford, thinking they would flip them for a profit – because property only goes up in value, right?
We may be witnessing the greatest financial fraud of all time – on many levels. Western societies have been guilty of living beyond their means, and the reckoning we face is a sobering jolt. As they say: I have seen the enemy, and it is us.
The breakdown of trust in financial services is fraying the basic systems we rely on to conduct our daily lives. If citizens cannot rely upon multinational banks to safeguard their money then our way of life will grind to a halt. So many participants – executives, regulators – appear to have been negligent and some perhaps worse. In this miasma, who is delusional and who is deliberately misleading? Many of the players are themselves the losers: the staff of Lehman Brothers held $10bn worth of their own shares – now worthless.
The biggest victim in the whole shambles is not the foreclosed householder, the sacked investment banker or the devastated shareholder. It is our self-confidence and belief in the institutions that help fund almost everything.
The current collapse of trust in institutions is not new, and has been well documented for a while now. But we’ve rarely seen the effects of that collapse in quite such sharp relief, or in quite so many dimensions, as during the current financial crisis.
