A Crisis of Trust

Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. If this loss of trust persists, it could be very costly, as much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance.

LONDON – Public trust in financial institutions, and in the authorities that are supposed to regulate them, was an early casualty of the financial crisis. That is hardly surprising, as previously revered firms revealed that they did not fully understand the very instruments they dealt in or the risks they assumed.

It is difficult not to take some private pleasure in this comeuppance for the Masters of the Universe. But, unfortunately, if this loss of trust persists, it could be costly for us all. As Ralph Waldo Emerson remarked, “Our distrust is very expensive.” The Nobel laureate Kenneth Arrow made the point in economic terms almost 40 years ago: “It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”

Indeed, much economic research has demonstrated a powerful relationship between the level of trust in a community and its aggregate economic performance. Without mutual trust, economic activity is severely constrained.

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