THE FUTURE OF FINANCE BLOG

Broken Trust

January 27, 2017

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At this year’s World Economic Forum gathering in Davos, Switzerland, PR firm Edelman shared its comprehensive annual Trust Barometer, confirming what we all know: global trust in institutions and leaders is at an all-time low.  Fully two-thirds of countries are now considered “distrusters” (under 50% trust in the mainstream institutions of business, government, media and NGOs to do what is right), compared to about half a year ago.  This is a stunning collapse in trust, even from last year’s low base.

Trust in leadership is equally low. Only 37 percent of the general population believe CEOs are credible, even worse for government officials – 29 percent credible.  A paltry 15 percent believe the system is working.  Ironically, it was Chinese Premier Xi, in his first address at Davos, who stood in defense of globalization (quoting Abraham Lincoln, it should be said), arguing that the system is sound, but it is (Western democratic) governance that has failed.  Note China ranked second on the trust index, second only to India.

Talk about a humbling moment (if that’s possible) at the annual gathering of the global economic and political elite.

There was lots of talk this year at Davos about “inclusive capitalism” (Jack Ma actually puts substance behind the slogan in his must-watch interview — a great example of Alibaba’s seemingly regenerative business model in service to its network partners rather than extracting from them, and a sharp contrast to Amazon’s model, as Ma explains).  But the “inclusive capitalism” talk included little honest analysis of the root cause of this stunning collapse in trust, why it is so dangerous (the rise in extreme forms of authoritarian populism rooted in emotion more than evidence and its unpredictable path), and what if anything can be done about it at this late date.  Nobel Economist Joseph Stiglitz wrote a prescient piece on this topic in 2013, and called for strong regulation and bold regulators to enforce the laws.  Clearly, we have failed.  And without a culture that not only values trust but demands it, I am not optimistic about better regulation and stricter enforcement.

The decline in trust pervades all four institutions studied in the Edelman survey. Unfortunately, Edelman did not single out finance and report on it separately from business.  Surely few would doubt that the finance sector (Wall Street mega banks, in particular) would rank at the bottom of the trust barometer within the business category.  In fact, research confirms that bankers are more likely to cheat than the rest of us. (As a former banker, this is upsetting to me!)

Nothing defines banking’s breach of public trust better than the 2008 financial collapse.  Being told to move on, It is easy to forget how much of the world’s current social and economic woes can be traced to the financial bubble and subsequent 2008 systemic collapse, either directly or indirectly.

Recall that the financial collapse destroyed $19 trillion of economic value in the U.S. alone, permanently destroying the economic security of millions of families across America.  An estimated 34 million jobs were destroyed globally in the process.

The rise of today’s dangerous brand of authoritarian populism—manifesting first in Brexit and now Trump—is directly connected to Wall Street’s breach of trust.  It’s not just because of “globalization” or “technology” taking our jobs as if it were all inevitable.  We cannot forget that compounding and exacerbating these legitimate and complex challenges, and more (climate change-induced drought driving immigration, linked to the Syrian carnage comes to mind) was the willful act of dropping a bomb into an already vulnerable society.  The Goldman Sachs/John Paulson Abacus trade was the Hiroshima of modern financial history.

The mortgage fiasco was a massive, reckless act of violence, perpetrated upon global society by an industry failing in its critical purpose while instead proving itself willing to do just about anything to make grotesque profits through fraud and egregious deceit.  The efficient market narrative of bringing home ownership to the masses was all a cynical cover.  And the industry’s ongoing fraudulent activities post the crisis, from the LIBOR scandal to FX price rigging, to wrongful foreclosure with robo-signers to Wells Fargo’s opening millions of fake accounts out of its “community banking” division of all places (where the do-gooders are supposed to work), sealed the fate of the industry as devoid of trust for some time to come, unfair as that may be for the many honest bankers out there.

Blaming populism on bankers’ unparalleled breach of trust is a strong claim.  But think about it:

Less speculative finance, less speculative real estate lending.  Less boom created from unsustainable misallocation of human, physical, and financial capital to speculative real estate. Less wasted carbon in the atmosphere and less farmland destroyed, exacerbating the drought-driven migrations.  Less unearned wealth for bankers and less resulting inequality, and less power for the sector to rig the rules, buy off and brainwash the politicians and even regulators, resulting in asymmetric risks only the opportunist bankers truly understood.  (Trump once referred to the bankers—now his advisors—as “killers” on the campaign trail, and he’s had to cross them more than once, so he knows).   Less demand on the public sector to socialize the losses to “save the system” and therefore less public debt and no need for the misguided austerity driving society further into despair.  That means more resources available to address the consequences of globalization and automation, and greater acceleration of investment into the transition to renewable energy and into rebuilding our aging yet vital infrastructure.  More assets channeled into education, perhaps even into the revival of civics classes!  We know how this narrative continues.  We know it does not end with the election of a fraud to the most powerful office in the land.

Donald Trump, whose ethics seem guided by the probability of winning lawsuits, is about as unlikely a remedy for broken societal trust as one can imagine, as his hopeful supporters are sadly about to learn.  Coal is not coming back, sorry.  So the consequences of lost trust will only amplify in dangerous and unpredictable ways that now stunningly include the Orwellian introduction of “alternative facts” into the Trump Administration’s everyday narrative.

The so-called “activist investor” Carl Icahn is Trump’s fellow bully buddy and now Special Advisor on Regulatory Reform.  He has defended the need for Dodd-Frank banking reform in the past and held the banks responsible for the financial crisis in public statements.  That is a testament to his common sense and refreshing objectivity as a Wall Street insider.  Time will tell whether a man who has spent half a century as an opportunist (bully) stock speculator can come to see that an ideology that conflates speculation with investment and means (finance and the stock market) with ends (a healthy economy) can guide us to a more enlightened and still desperately needed financial system reform and begin the long process of rebuilding trust in Wall Street, and in the process within society.

Not holding my breath.

Comment<Back
  • Michael Davis

    Great post! The level of denial at Davos was breath taking. Few of the discussions I watched involved particularly innovative or interesting ideas. I watched an interview of Sergey Brin, Google co-founder, at Davos. The topic was supposed to be artificial intelligence, but the interview was both fawning and trivial. When asked about the issues of jobs lost due to AI, the response was something about the need for quality and affordable education, something that the vast majority of the world’s people lack access to. It also ignores the fact that AI and other forms of computer automation are destroying large numbers of highly educated jobs. When the question of the social responsibility of Silicon Valley corporations came up, Brin said this was very important, but he wondered out load how corporations could have priorities other than “shareholder value”. Clearly he has never heard of B-Corps.

    There is the thoughtful commentary on Davos at the New York Times: https://nyti.ms/2jA6cAk

  • Doc Hall

    Good post John. I checked Jack Ma’s interview, which I had missed.

    The financial world centers on Wall Street and the City of London. However, for many people in the world, including most Americans, these places and their institutions remain an arcane environment which they comprehend about as well as Mars. Therefore the implications of public policy on finance is also murky. They don’t like big banks, but mesmerized by belief in free markets, they will cede them free rein, actually expecting market forces to shut down inefficient or downright malevolent practices.

    However, out here in fly-over country, the shortcomings of our financial system show up in the thought patterns of ordinary people. Some will aggressively fend for themselves, like growing their own food, but most feel compelled to ever be chasing money, even minimum wage money. They can’t live without it, can’t pay for food, fuel, autos, child care, utilities, or mortgage payments. Add up all the presumed necessities, and little or no discretionary income remains. And so they must ever think about that next dollar.

    (My wife works at a thrift shop. At the beginning of the month she makes change for $10 bills, and sometimes $20s. At the end of the month, fewer people come, and most payments are in change and tightly crumpled $1 bills.)

    And why is that? We are surrounded by blandishments to consume, while basic needs like water systems languish because no one wants to hike water rates until maintenance can no longer be deferred. Whole communities slide into entropy; can’t afford fix up. And we blame this on the laziness of the bottom enders stuck “on the wrong side of the tracks.” Some are apt to seek either a dab of happiness or escapism by indulging for instance, in substance abuse. Others take out anger on each other, so crime rates are higher.

    What struck me even in Jack Ma’s interview was that business people cannot fathom a different kind os system that goes beyond business success, creating more jobs, getting more outside money coming into the community, increasing the money flow. That is, there is little vision of the future as something other than a higher consumption extension of the past.

    Pile our environmental problems on top of the fairness issues, and visions to cope with it shrivel into deferring action. “When we get enough money” we will think about it.

    What can we do to break this whole pattern of thinking? Too many people, even at the basic level, can’t see through the money to comprehend what we are really doing.

  • Don Shaffer

    Such a great post John! Very happy to see you laying it on the line like this. We should all brace up for the confluence of AI, genetic engineering, and the boundless egos here in the Bay Area in 2017. This will be the next big issue, I believe – upstream and even more far-reaching than the current Trump fiasco. Onward we go!