This would ordinarily be good news. In order to support global commercial activity in which buyers and sellers may never meet each other in person, there has to be a belief that each side will do what it says. And that the institutions supporting such interaction, such as banks, regulators, investment authorities, as well personal and corporate reputation will convince the participants to behave correctly.
Unfortunately, recent surveys suggest that such trust is diminishing. Belief in the efficacy of business and government has declined.
The financial crisis was a devastating blow. And the impunity with which those who caused it were treated only added to the perception that wrong-doers were immune if they were powerful enough. As a result, only 25% of those surveyed say they trust banks and even fewer, about 15% trust the capital markets. Corporations are keeping their earnings in cash rather than investing in new projects or innovation. The venture capital markets are quiet. Jobs remain scarcer than they have been by historical standards and government regulators appear fearful of crossing business and financial leaders.
This is a societal and not just an economic phenomenon. Prominent athletes continue to use performance-enhancing drugs despite the prohibitions and public approbation heaped on those who are caught. Cheating on school papers and exams has increased, according to research and surveys routinely report that leaders in any number of businesses would 'do what they have to' to win a sale, including paying bribes or indulging in other forms of illegal and immoral behavior.
There seems to be a great deal of self-justification in this: 'everyone does it,' 'we're just matching our competitors,' or 'I'll lose my job if I don't.' Fear of the loss of status, power and basic economic survival in the face of lower-cost alternatives is part of the answer. But a more fundamental explanation may be that the disruptions to the economy over the past couple of decades, between globalization and technological advances, have caused an all encompassing loss of faith based on the inability or unwillingness of previously respected institutions to safeguard those who believed in - and may have counted on their support. Until that trust is restored, business may continue to underperform. JL
Jon Hilsenrath reports in the Wall Street Journal:
One thing holding back the economic recovery may be a trust deficit.
Trust is an essential lubricant for economic activity. It makes investors, employers, policy makers and consumers willing to take part in transactions with each other, which in turn drives spending, investing and growth. You don't hand money or make promises to somebody unless you think that person is going to make good on his promises. "Virtually every commercial transaction has within itself an element of trust," the Nobel-prize winning economist Kenneth Arrow wrote in a 1972 paper.
Research has shown that measures of trust in society are closely connected to economic growth and the effectiveness of government. In places where trust breaks down, economic development is damaged. In one example, researchers have found that the slave trade in Africa damaged trust in segments of society and that this held back economic growth for centuries after it ended.
You don't have to look hard to find examples of fraying trust in American society today: Lance Armstrong admits to cheating to win seven Tour de France titles; Democrats and Republicans can't seem to work with each other; Wall Street keeps delivering new scandals.
Surveys by the University of Chicago's Booth School of Business and Northwestern's Kellogg School of Management show that only a third of Americans trust banks, and about one in six trust the stock market or large corporations. For banks, this gauge of trust continued to fall even after the financial crisis ended. A June poll by Gallup found that only 25% of Americans had much confidence in newspapers, while only 21% trusted television news or organized labor. Congress got a vote of confidence from just 13% of the population. Trust in all these institutions has been in long-term decline, which worsened heading into the recession that began in December 2007. A September Gallup poll showed that only half of Americans trusted the government to solve domestic problems.
A longer-term decline of public trust in government might have been particularly damaging during the financial crisis because it prevented the government from pursuing more aggressive fiscal-stimulus programs to revive the economy, says Justin Wolfers, a University of Michigan economist. "The government's ability to fight the recession was substantially constrained by the fact that its credibility was in tatters," he says.
Mistrust affects the relationship between government and business in other ways. When regulators don't trust the businesses they oversee, they regulate them more. While this is arguably necessary, it can also be an impediment to economic activity. Increased scrutiny goes beyond the banks at the center of the financial crisis. Dominic Barton, a McKinsey & Co. managing director, says executives he knows in the food industry are spending 30% more time meeting with regulators today than they did a few years ago. The regulatory trend isn't going to go away any time soon, says Mr. Barton, who has made trust a centerpiece of his strategy consultations with businesses.
Though surveys measuring trust in important American institutions have turned dangerously down in recent years, there also are glimmers it is stabilizing. Securitization markets are one example. In these markets, Wall Street firms bundle together car loans, business loans, credit-card debt or mortgages and use the cash these loans produce to issue securities. The 2008 financial crisis severely damaged investor trust in these instruments and issuance collapsed, draining credit from the economy.
They now show signs of revival. Wall Street issued $75.4 billion worth of auto-loan-backed securities in 2012, the most since 2005, according to Dealogic. That, along with low interest rates, has helped to boost car sales. Securities backed by credit-card loans and business loans also turned up in 2012.
Mortgage markets are another example. The housing crisis left in its wake a stew of mistrust in the mortgage industry because of prolific abuses during the housing bubble. After the crisis, borrowers faced much greater scrutiny and paperwork demands by lenders. Banks feuded with Fannie Mae and Freddie Mac the government-run mortgage-finance firms, over who holds the risk when a mortgage goes bad. However bank real-estate portfolios have quietly started to creep up; they were up 1.4% in early January from a year earlier to $3.6 trillion, according to Federal Reserve data.
A survey of 1,000 Americans by public-relations firm Edelman in November, after the election, showed big increases in measures of trust toward government, media and business compared with a year earlier.
Clearly, however, these institutions still have a long way to go after years of dismaying economic crises. A follow-up survey by Edelman in January makes that abundantly clear.
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