Death of trust in financial system, by Sin-ming Shaw, Commentary, Project Syndicate: A friend recently asked a seemingly naive question: “What is money? How do I know I can trust that it is worth what it says it is worth?” We learn in introductory economics that money is a medium of exchange. But why do we accept that? Banknotes are just pieces of paper with a number attached to them.
We believe in banknotes because we collectively decide to trust the government when it says that 100 is 100, not 10 or 50. Money, therefore, is about trust, without which no society can function.
Just as we obey our leaders’ orders to fight and die because we trust their judgment, we entrust our careers and our money to those who run Citigroup and Goldman Sachs and other such banks, because we believe their leaders will be fair to their employees and clients, and honourable in their business practices. We do not grow up wishing to work for crooks and liars.
Once that trust breaks, bad things happen. Money ceases to have credibility. Leaders become figures of contempt or worse.
As I write, inflation in Zimbabwe has reached an unimaginable (if not unpronounceable) level of more than 500 quintillion per cent. One quintillion is 1mn trillion. A year ago, inflation was ‘only’ 100,000%. This is what happens when trust vanishes.
Fortunately, Zimbabwe is not a country of real consequence for world stability. But the Weimar Republic and China in the 1940’s were. One opted for Hitler and the other for Mao Zedong to restore trust. So the risks are clear.
Are we now seeing an erosion of trust in America and in the United Kingdom? …
We grew up admiring leaders such as Robert Rubin, John Thain, and Henry Paulson. … The universities these men attended – Harvard and Yale for Rubin; MIT and Harvard for Thain; Dartmouth and Harvard for Paulson – have been magnets for the world’s finest young minds. The rest of us thought that these institutions could instill the wisdom, insight, and character of which we all wished we had more.
Perhaps parents all over the world should re-examine their often obsessive craving for these ‘name-brand’ universities, pushing their children as if an Ivy League degree was an end in itself.
Now we know that Wall Street’s titans were never all that smart, and certainly not very ethical, for they failed the only test that counts. All of the firms they led collapsed, and were saved only by money from those who could never get a senior job on Wall Street or a place at Harvard.
These Wall Street princes were smarter in one way, however: they managed to pocket a fortune while the rest of us are stuck with the mess they left behind. Bernard Madoff who hailed from down-market part of New York City and attended a middling university will spend time behind bars, but none of the titans of Wall Street with blue-chip pedigree will ever do so.
History has not been kind to societies that lose trust in the integrity of their leaders and institutions. We need to save our economic system from its abusers, or else.
I suppose it’s like toxic assets on banks’ balance sheets. Nobody knows which assets are good and which are bad, so there is no way to evaluate solvency and this leads to lack of trust across the board. Here, nobody knows which leaders are good and which are bad due to failures of integrity and character that aren’t always transparent, and that leads to a general lack of trust. I guess that makes them toxic leaders.
Originally published at the Economist’s View reproduced here with the author’s permission.