by Washington's Blog
May 04, 2012
from
GlobalResearch Website
The signs are everywhere: Americans have lost
trust in our institutions.
The Chicago Booth/Kellogg School Financial Trust Index published
yesterday shows that only 22% of Americans trust the nations financial
system.
Robert Shiller
said Monday:
Our whole economy has been affected by
variations in confidence. Central banks are sort of trusted, but the
actions they have often affect peoples confidence by appearance rather
than substance. Were not in the most trusting mood now.
The National Journal
noted last week:
Seven in 10 Americans believe that the
country is on the wrong track; eight in 10 are dissatisfied with the way
the nation is being governed. Only 23 percent have confidence in banks,
and just 19 percent have confidence in big business.
Less than half the population expresses a
great deal of confidence in the public-school system or organized
religion. We have lost our gods, says Laura Hansen, an assistant
professor of sociology at Western New England University in Springfield,
Mass.
We lost [faith] in the media: Remember
Walter Cronkite? We lost it in our culture: You cant point to a movie
star who might inspire us, because we know too much about them. We lost
it in politics, because we know too much about politicians lives.
We've lost it that basic sense of trust and
confidence in everything.
After a 50-year decline, just 14 percent of
respondents in a 2011 Gallup Poll said that the federal government could be
trusted a great deal
Gallup reported last month that for the second year in a row Americans said
that
gold is the safest long-term investment. This shows that Americans
don't
trust the government.
Specifically, as Time Magazine
points out:
Traditionally, gold has been a store of value when citizens do not trust
their government politically or economically.
Indeed:
-
A tiny percent of Americans believe that
the U.S. government
has the consent of the governed
-
A higher percentage of Americans
believed in King George of England during the Revolutionary War than
believe in congress today
-
Many Americans
disbelieve the
government's rosy statements about the economy
-
An NBC News/Wall Street Journal poll
from November found that 76% of Americans believe that the country's
current financial and political structures
favor the rich over the
rest of the country
-
The U.S. financial system is so corrupt
and unregulated that many don't believe the government and
businesses promises to follow the rule of law and simply
won't do
business here anymore
Its not just the U.S.
As the Economist reported in January, trust in institutions is
plunging
worldwide:
The latest annual trust barometer published
by Edelman, a PR firm, on January 24th [finds that] overall trust has
declined in the leaders of the four main categories of organization
scrutinized government, business, non-governmental organizations and the
media.
Of the 50 or so countries examined, 11,
nearly twice as many as last year, are now judged skeptical, with less
than 50% of those polled saying they trusted these institutions. Trust
in Japanese institutions plunged to 34%, from 51% in 2011, not
surprising given the handling by leaders of the Tsunami and its
aftermath.
But the collapse in trust was even more
striking in Brazil, the country in which trust was greatest in 2011, at
80%, but now, following a series of corruption scandals, has slipped to
51% (admittedly, still above America and Britain, among others).
This headline slump in trust is due, above all,
to the public losing faith in political leaders.
In 2011, across all countries, Edelman found
that 52% of those polled trusted government; this year, it was only 43%.
Government is now trusted less even than the media. Trust in business fell
slightly, from 56% to 53%, as did trust in NGOs, which still remain the most
trusted type of institution, at 58%, down from 61% in 2011.
As in previous years, the barometer is based on
a poll of what Edelman calls informed people, which typically means
professional and well-educated, though this year for the first time the
views of the informed were benchmarked against a poll of the public as a
whole.
For each institution, the broader public was
even less trusting than the informed, with government trusted by 38%,
business 47%, NGOs 50% and the media 46%.
Lack of Trust Is
Killing the Economy
Top economists have been saying for well over a decade that trust is
necessary for a stable economy, and that prosecuting the criminals is
necessary to restore trust.
Indeed, as we have
repeatedly noted, loss of
trust is arguably the main reason we are
stuck in an economic crisis
notwithstanding
unprecedented action by central banks worldwide.
Economist Daniel Hameresh writes:
A number of economists have shown recently
that income levels and real growth depend upon trust greases the wheels
of exchange.
In 1998, Paul Zak (Professor of Economics
and Department Chair, as well as the founding Director of the Center for
Neuroeconomics Studies at Claremont Graduate University, Professor of
Neurology at Loma Linda University Medical Center, and a senior researcher
at UCLA) and Stephen Knack (a Lead Economist in the World Banks
Research Department and Public Sector Governance Department)
wrote a paper
called
Trust and Growth, arguing:
Adam Smith observed notable differences
across nations in the probity and punctuality of their populations. For
example, the Dutch are the most faithful to their word.
John Stuart Mill wrote: There are countries
in Europe... where the most serious impediment to conducting business
concerns on a large scale, is the rarity of persons who are supposed fit
to be trusted with the receipt and expenditure of large sums of money
(Mill, 1848, p. 132).
Enormous differences across countries in the
propensity to trust others survive today.
-
Trust is higher in fair societies.
-
High trust societies produce more output
than low trust societies. A fortiori, a sufficient amount of trust
may be crucial to successful development. Douglass North (1990, p.
54) writes,
-
If trust is too low in a society,
savings will be insufficient to sustain positive output growth. Such
a poverty trap is more likely when institutions - both formal and
informal which punish cheaters are weak.
Heap, Tan and Zizzo and others have come to
similar conclusions.
In 2001, Zak and Knack
showed that strengthening the rule of law, reducing
inequality, and by facilitating interpersonal understanding all increase
trust. They conclude:
Our analysis shows that trust can be raised
directly by increasing communication and education, and indirectly by
strengthening formal institutions that enforce contracts and by reducing
income inequality.
Among the policies that impact these
factors, only education, and freedom satisfy the efficiency criterion
which compares the cost of policies with the benefits citizens receive
in terms of higher living standards. Further, our analysis suggests that
good policy initiates a virtuous circle: policies that raise trust
efficiently, improve living standards, raise civil liberties, enhance
institutions, and reduce corruption, further raising trust.
Trust, democracy, and the rule of law are
thus the foundation of abiding prosperity.
A 2005 letter in premier scientific journal
Nature
reviewed the research on trust and economics:
Trust plays a key role in economic
exchange and politics. In the absence of trust among trading partners,
market transactions break down. In the absence of trust in a country's
institutions and leaders, political legitimacy breaks down. Much recent
evidence indicates that trust contributes to economic, political and
social success.
Forbes wrote an article in 2006 entitled
The
Economics of Trust.
The article summarizes the importance of trust in
creating a healthy economy:
Imagine going to the corner store to buy a
carton of milk, only to find that the refrigerator is locked. When
you've persuaded the shopkeeper to retrieve the milk, you then end up
arguing over whether you're going to hand the money over first, or
whether he is going to hand over the milk.
Finally you manage to arrange
an elaborate simultaneous exchange. A little taste of life in a world
without trust now imagine trying to arrange a mortgage.
Being able to trust people might seem like a
pleasant luxury, but economists are starting to believe that its rather more
important than that.
Trust is about more than whether you can leave your
house unlocked; it is responsible for the difference between the richest
countries and the poorest.
If you take a broad enough definition of trust, then it would explain
basically all the difference between the per capita income of the United
States and Somalia, ventures Steve Knack, a senior economist at the World
Bank who has been studying the economics of trust for over a decade.
That suggests that trust is worth $12.4 trillion
dollars a year to the U.S., which, in case you are wondering, is 99.5% of
this country's income.
Above all, trust enables people to do
business with each other. Doing business is what creates wealth.
Economists distinguish between the personal,
informal trust that comes from being friendly with your neighbors and the
impersonal, institutionalized trust that lets you give your credit card
number out over the Internet.
In 2007, Yann Algan (Professor of Economics at Paris School of
Economics and University Paris East) and Pierre Cahuc (Professor of
Economics at the Ecole Polytechnique - Paris)
reported:
We find a significant impact of trust on
income per capita for 30 countries over the period 1949-2003.
Similarly, market psychologists Richard L.
Peterson M.D. and Frank Murtha, PhD
noted in 2008:
Trust is the oil in the engine of
capitalism, without it, the engine seizes up. Confidence is like the
gasoline, without it the machine wont move.
Trust is gone: there is no longer trust
between counterparties in the financial system. Furthermore, confidence
is at a low. Investors have lost their confidence in the ability of
shares to provide decent returns (since they haven't).
In 2009, Paola Sapienza (associate
professor of finance and the Zell Center Faculty Fellow at Northwestern
University) and Luigi Zingales (Robert C. McCormack Professor of
Entrepreneurship and Finance at the University of Chicago Booth School of
Business)
pointed out:
The drop in trust, we believe, is a major
factor behind the deteriorating economic conditions.
As trust declines, so does Americans willingness
to invest their money in the financial system.
Our data show that trust in the stock market
affects peoples intention to buy stocks, even after accounting for
expectations of future stock-market performance. Similarly, a persons trust
in banks predicts the likelihood that he will make a run on his bank in a
moment of crisis: 25 percent of those who don't trust banks withdrew their
deposits and stored them as cash last fall, compared with only 3 percent of
those who said they still trusted the banks.
Thus, trust in financial institutions is a key
factor for the smooth functioning of capital markets and, by extension, the
economy. Changes in trust matter.
They quote a Nobel laureate economist on the subject:
Virtually every commercial transaction has
within itself an element of trust, writes economist Kenneth Arrow, a
Nobel laureate. When we deposit money in a bank, we trust that its safe.
When a company orders goods, it trusts its counterpart to deliver them
in good faith. Trust facilitates transactions because it saves the costs
of monitoring and screening; it is an essential lubricant that greases
the wheels of the economic system.
In 2010, a distinguished international group of
economists (Giancarlo Corsetti, Michael P. Devereux, Luigi Guiso, John
Hassler, Gilles Saint-Paul, Hans-Werner Sinn, Jan-Egbert Sturm and Xavier
Vives)
wrote:
Public distrust of bankers and financial
markets has risen dramatically with the financial crisis. This column
argues that this loss of trust in the financial system played a critical
role in the collapse of economic activity that followed. To undo the
damage, financial regulation needs to focus on restoring that trust.
They noted:
Trust is crucial in many transactions and
certainly in those involving financial exchanges. The massive drop in
trust associated with this crisis will therefore have important
implications for the future of financial markets. Data show that in the
late 1970s, the percentage of people who reported having full trust in
banks, brokers, mutual funds or the stock market was around 40%; it had
sunk to around 30% just before the crisis hit, and collapsed to barely
5% afterwards. It is now even lower than the trust people have in other
people (randomly selected of course).
In his influential 1993 book Making Democracy
Work, Robert Putnam
showed how civic attitudes and trust could account for
differences in the economic and government performance between northern and
southern Italy.
Political economist Francis Fukiyama wrote a book called
Trust in
1995, arguing that the most pervasive cultural characteristic influencing a
nations prosperity and ability to compete is the level of trust or
cooperative behavior based upon shared norms.
He stated that the United
States, like Japan and Germany, has been a high-trust society historically
but that this status has eroded in recent years.
Chris Farrell
notes:
Trust matters. Its kind of like a recipe or
a software protocol that allows for economic exchange and all kinds of
innovation.
There's compelling evidence that both higher
levels of trust in institutions and a belief in the general trustworthiness
of individuals in society carry large economic benefits. Sociologists,
political scientists and economists have all showed in an impressive body of
research that higher levels of trust increase trade and even foster economic
growth.
Dallas Fed president Richard Fisher
said last year that a growing
distrust of the nations political institutions is keeping businesses on the
sidelines.
Forbes notes in March that a lack of trust was
one of the main factors
hurting the Greek economy:
There are a number of issues that have
contributed and exacerbated the levels of distrust. For instance,
Greece, with the help of Goldman Sachs,
concealed the state of their
finances for over a decade until they ran into this major debt crisis.
Because they failed to disclose the extent of their financial problems,
the EU and other players in the global credit market are extremely
reluctant to cooperate or put faith in the representations made by the
Greek leadership.
If the leadership in Athens cannot reestablish
trust with the citizenry and develop open and honest communication amongst
themselves, their constituents, and the individual leaders of the financial
institutions involved, the agreements they make will not even be worth the
paper they are written on.
Ken Eisold - an internationally respected authority on the
psychodynamics of organizations -
writes:
Most of us view trust as valuable and
desirable, something that improves the quality of our personal lives. We
seldom take the next step and view it as indispensable, a vital
ingredient in society and in the economy. But all credit is based on
trust, and the fundamental problem in a credit crisis is not just the
lack of liquidity but also the absence of trust, the trust that is
essential to all financial transactions.
But the problem is not that people should be
more blindly and naively trusting.
The problem as Eisold points out is that the
institutions have to act in a more trustworthy manner:
The essential point is not that people need
to be encouraged to trust. Most of us want to trust and have the basic
capacity to trust. We need institutions that are trustworthy.
No Economy-Revving
Optimism Without Trust
Economist Robert Higgs who has studied the effect of World War II on
the economy in great detail argues that it was optimism, rather than
stimulus spending, which
got us out of the depression:
The performance of the war economy broke the
back of the pessimistic expectations almost everybody had come to hold
during the seemingly endless Depression. In the long decade of the
1930s, especially its latter half, many people had come to believe that
the economic machine was irreparably broken.
The frenetic activity of war production
never mind that it was just a lot of guns and ammunition dispelled the
hopelessness. People began to think: if we can produce all these planes,
ships, and bombs, we can also turn out prodigious quantities of cars and
refrigerators.
The transformation of expectations justify an
interpretation that views the war as an event that recreated the possibility
of genuine economic recovery. As the war ended, real prosperity returned.
Unlike after WWII, Americans now are pessimistic (even though we've been
various wars against third-rate countries far longer than we were in WWII)
and our expectations are stuck in the gutter.
Why?
Perhaps because we don't trust our government, our big corporations or our
other institutions to do anything very helpful for the country. Indeed, we
don't trust our government, big corporations and other institutions to even
allow a fair playing field where we have a chance of competing fairly to get
ahead on our own initiative.
Why should we work harder, invest more or spend more when we don't trust
that we might have a bright future?
Prosecuting the
Criminals Is Necessary to Restore Trust
Nobel prize winning economist Joseph Stiglitz says that we
have to
prosecute fraud or else the economy wont recover:
The legal system is supposed to be the
codification of our norms and beliefs, things that we need to make our
system work. If the legal system is seen as exploitative, then
confidence in our whole system starts eroding. And that's really the
problem that's going on.
I think we ought to go do what we did in the
S&L [crisis] and actually put many of these guys in prison. Absolutely.
These are not just white-collar crimes or little accidents. There were
victims. That's the point. There were victims all over the world.
Economists focus on the whole notion of
incentives.
People have an incentive sometimes to behave
badly, because they can make more money if they can cheat. If our economic
system is going to work then we have to make sure that what they gain when
they cheat is offset by a system of penalties.
Robert Shiller
said recently that failing to address the legal issues
will cause Americans to lose faith in business and the government:
Shiller said the danger of foreclosure gate
the scandal in which it has come to light that the biggest banks have
routinely mishandled homeownership documents, putting the legality of
foreclosures and related sales in doubt is a replay of the 1930s, when
Americans lost faith that institutions such as business and government
were dealing fairly.
Economists such as William Black and
James
Galbraith agree.
Galbraith
says:
There will have to be full-scale
investigation and cleaning up of the residue of that, before you can
have, I think, a return of confidence in the financial sector. And
that's a process which needs to get underway.
Galbraith
also says that economists should move
into the background, and criminologists to the forefront. Government
regulators know this or at least pay lip service to it as well.
For example, as the Director of the Securities
and Exchange Commissions enforcement division
told Congress:
Recovery from the fallout of the financial
crisis requires important efforts on various fronts, and vigorous
enforcement is an essential component, as aggressive and even-handed
enforcement will meet the publics fair expectation that those whose
violations of the law caused severe loss and hardship will be held
accountable.
And vigorous law enforcement efforts will
help vindicate the principles that are fundamental to the fair and
proper functioning of our markets: that no one should have an unjust
advantage in our markets; that investors have a right to disclosure that
complies with the federal securities laws; and that there is a level
playing field for all investors.
Nobel prize winning economist George Akerlof
has demonstrated that failure to punish white collar criminals and instead
bailing them out- creates incentives for more economic crimes and further
destruction of the economy in the future.
Indeed, William Black
notes that
we've known of this dynamic for hundreds of years. And see
this,
this,
this and
this.
And when Zak and Knack quoted above discuss enforcing contracts, raising
civil liberties, and reducing corruption, they are talking about enforcing
the rule of law, which means prosecuting violations of the law. Likewise,
when they refer to enhancing institutions, they mean regulatory and justice
systems which enforce contracts and prosecute cheaters.
And when Zak
and Knack promote reduction of inequality, that means prosecuting fraud as
well. Specifically, as I recently
pointed out, prosecuting fraud is the best
way to reduce inequality:
Robert Shiller [one of the top housing economists in the United
States]
said in 2009:
And its not like we want to level income.
I'm not saying spread the wealth around, which got Obama in trouble. But
I think, I would hope that this would be a time for a national
consideration about policies that would focus on restraining any
possible further increases in inequality.
If we stop bailing out the fraudsters and
financial gamblers, the big banks would
focus more on traditional lending
and less on speculative plays which only make the rich richer and the poor
poorer, and which guarantee future economic crises (which hurt the poor more
than the rich).
Moreover, both conservatives and liberals agree that we need to prosecute
financial fraud. As I've
previously noted, fraud disproportionally benefits
the big players, makes boom-bust cycles more severe, and otherwise harms the
economy all of which increase inequality and warp the market.
Of course, its not just economists saying this.
One of the leading business schools in America - the Wharton School of
Business -
published an essay by a psychologist on the causes and solutions to
the economic crisis.
Wharton points out that restoring trust is the
key to recovery, and that trust cannot be restored until wrongdoers are held
accountable:
According to David M. Sachs, a training and
supervision analyst at the Psychoanalytic Center of Philadelphia, the
crisis today is not one of confidence, but one of trust.
Abusive financial practices were unchecked
by personal moral controls that prohibit individual criminal behavior,
as in the case of [Bernard] Madoff, and by complex financial
manipulations, as in the case of AIG.
The public, expecting to be protected from
such abuse, has suffered a trauma of loss similar to that after 9/11.
Normal expectations of what is safe and dependable were abruptly
shattered, Sachs noted. As is typical of post-traumatic states, planning
for the future could not be based on old assumptions about what is safe
and what is dangerous.
A radical reversal of how to be gratified
occurred.
People now feel more gratified saving money than
spending it, Sachs suggested.
They have trouble trusting promises from the
government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a
librarian with two teenage children and a husband, John, who had recently
lost his job. She felt betrayed because she and her husband had invested
conservatively and were double-crossed by dishonest, greedy businessmen, and
now she distrusted the government that had failed to protect them from
corporate dishonesty.
Not only that, but she had little trust in
things turning around soon enough to enable her and her husband to
accomplish their previous goals.
By no means a sophisticated economist, she knew that some people had
become fantastically wealthy by misusing other peoples money hers included,
Sachs said. In short, John and Betty had done everything right and were
being punished, while the dishonest people were going unpunished.
Helping an individual recover from a traumatic experience provides a useful
analogy for understanding how to help the economy recover from its own
traumatic experience, Sachs pointed out.
The public will need to hold the perpetrators of
the economic disaster responsible and take what actions they can to prevent
them from harming the economy again. In addition, the public will have to
see proof that government and business leaders can behave responsibly before
they will trust them again, he argued.
Note that Sachs urges hold[ing] the perpetrators of the economic disaster
responsible. In other words, just looking forward and promising to do things
differently isn't enough.
As Wall Street insider and New York Times columnist Andrew Ross Sorkin
writes:
"They will pick on minor misdemeanors by
individual market participants, said David Einhorn, the hedge fund
manager who was among the Cassandras before the financial crisis. To Mr.
Einhorn, the government is not willing to take on significant
misbehavior by sizable firms.
But since there have been almost no big
prosecutions, there's very little evidence that it has stopped bad
actors from behaving badly."
Fraud at big corporations surely dwarfs by
orders of magnitude the shareholders losses of $8 billion that Mr. Holder
highlighted
If the government spent half the time trying to
ferret out fraud at major companies that it does tracking pump-and-dump
schemes, we might have been able to stop the financial crisis, or at least
wed have a fighting chance at stopping the next one.
Of course, the Europeans have been trying to
avoid fraud prosecutions as
well.
On the other hand, Iceland has prosecuted the
fraudster bank heads (and
here and
here) and their former prime minister, and their economy is
recovering
nicely because trust is being restored in the financial system.
Indeed, even evangelical leader Pat Robertson
agrees:
Pat Robertson discussed the banking crisis
and glowingly spoke about how Iceland jailed many of the bankers who
devastated their nations economy by taking out fraudulent loans.
Robertson hailed the Nordic nation for its actions and said that
Americans should deal with the financial crisis in the same way.
They are putting people in jail.
Prime ministers are being indicted. They are
going after banks. The people said the banks are ripping us off. We don't
like what they did, and they brought our country to ruin. Suddenly, Iceland
is turning around and they look like a big success story!
We could start putting all of those bankers in jail. There was not one
banker prosecuted and so many people were lying, and so-called no-doc loans
and liars loans, and none of them have been held accountable.
Iceland is leading the way and their GDP is growing, and all of a sudden,
they were in a terrible mess, terrible mess, and look what is happening!
