Trust, post-crunch

David Stoughton of ValueKinetics writes:

Listening to to the radio I hear yet another banker go through the motions of a ritual mea culpa and then, quite suddenly, switch gear into a vigorous defence of huge salary differentials and astronomical bonuses. His interview finished on a stridently defiant note, "regulators should understand that they change the way we do business at their peril".

Add mine to the 1,000 million voices asking the same question. What is it about bankers? Which part of "The party's over!" don't they understand. But I don't speak from motives of revenge or even protest, I am genuinely puzzled - in fact I've been puzzled by the bankers for a long time now.

It's not just the bankers, but their disgrace starkly exposes the increasing abuse of trust that has crept over businesses, and governments of all stripes, for years. Financial services are an easy target now and, because they highlight the issues so starkly, they offer a good way into the maze.

Economists, even the classical kind, emphasise the importance of trust to successful economies. Any analysis of what makes for success in developing countries will always highlight the need for property laws, including protection for IP, for trusted financial institutions, and for low levels of corruption.

Behavioural economists go further, they point out that it's not just a reliable institutional structure that counts; trust is also necessary between individuals. Peter Lunn in his book, Basic Instincts (Marshall Cavendish, 2008) highlights some of the behavioural patterns displayed between people when high levels of uncertainty are involved. In particular I was struck by  the YUCKI (You Can Keep It) instinct that comes into play when unfairness is suspected.

Trust is, as Rory Sutherland of Ogilvy has pointed out, what we are compelled to do when we don't know enough to ask sensible questions. Trust enables us to take the plunge, buy the new gizmo and, yes, take out a pension. Absent trust the whole shebang falls apart. Digitally enabled business increases our dependency on this basic trust. We no longer see the white's of the salesman's eyes; we are forced in the end to assume that basic honesty prevails.

You can argue - I have many times - that the wealth of information the internet provides, peer communication,  price comparison and rating services, and a host of other new capabilities, make for better informed and less gullible customers. And, yes, there is some truth in this, but at bottom it depends on a trusted financial intermediary, the credit card company or bank. If trust in the intermediary is eroded no amount of information helps.

More generally, those behavioural economists have only pointed out an obvious, but often overlooked, fact. If the playing field is perceived to be tilted too far in favour of one player, the YUCKI instinct takes over and other side stops playing.

What we really have now is an economic system teetering on the brink. Absent trust the whole house of cards comes down. We've all put up with years of up-selling, cross-selling and arbitrary changes of price and conditions. In the feeding frenzy of financial services we've also, mostly, ignored its dark underbelly when it showed - pension mis-selling, intermittent collapses, ponzi schemes. Somehow we were all suckered into going along with it. The vast rewards being garnered at our expense seemed acceptable when we were living it up too. No longer though, the imbalance of the playing field is now obvious to all.

It would be a mistake to think it was all just the bankers, many businesses got drawn into the web. Government too got in on the act, encouraging a mountain of debt and giving tax breaks to the scam merchants who were concocting these deals. Unsurprisingly, when governments prop up the bankers, citizens start to wonder which side they are on; and it doesn't stop there. In the UK the government has been shovelling public debt over to private business and individuals as fast as they could - think PPP or student loans. For the most part the account for deferred spending and unfunded profligacy remains a time-bomb to be settled by future generatons, but the most dodgy of these schemes, the London Underground PPP for instance, have already collapsed leaving users of the services and local tax payers to foot the bill. Where's the balance there?

Well, the music stopped! And of course bankers and governements want to see it return to the status quo ante, they were having such a good time. But we need to ask not just whether this is possible, but whether it is wise. Will people be willing to go back to be the docile playthings government and banks have come to expect? If banks won't become safe, dull, but trustworthy, guardians of our money; if governments won't limit their spending to today's revenue, in short if balance is not seen to be restored, will stability return? Or will we all continue saying "You Can Keep It" while the wheels continue to come off the economy?

Comments

[Mike Bayler]

Superb points david. Love it.