Lack of Trust

The fabric of any society lies in trust. In our personal lives, we trust our family our close friends and our life partner. Society and civilization grew as an extension of this trust. In modern day, we trust our government, our firms and institutions to uphold their responsibilities and trust. The origin of finance lies in trust too and credit is a measure of this trust. 

Financial transactions are a set of promises. Money is an agreement that a piece of paper can be exchanged for goods or services. Financial framework began with small loans within families and trusted friends. As the circle of borrowers and lenders grew, the complexity of financial transactions increased; promises became harder to enforce. The modern financial structure became so complex and interconnected that businesses had to trust each other for the engine to run smoothly. Men and society in general, driven by greed, lost corporate and personal ethics. Trust was lost, credit bubble burst and the engine has stopped running. The fed can try to expand balance sheet, buy agency or corporate debt might even buy long dated treasury; but none of these will promote easing of credit. 

I would like highlight few instances of lack of trust that reinstates my point. First in my article written in November '08, I had indicated that the first bailout package would neither be enough nor be properly used. Out of the first $350 bln, $18.5 bln was used to pay wall street bonuses. So the poor taxpayer who has seen his net wealth reduce by 50% has paid out even more money to the greedy, corrupt and rouge bankers and traders. Second, can I trust the rating agencies, research analysts and regulators? When State Street posted unanticipated record losses last weeek, 9 analysts had a buy and 8 were on hold. Kudos to your hard work and million dollar pay. Regulators were on top of their game that we have witnessed countless of ponzi schemes and fraud accounting. Rating agencies downgrade Greece and South Korea who are in downturn, but hey we in the US are still AAA despite nightmarish CA deficits and total external debt. 

In terms of market, I ask the same questions. Can I trust the profitability, capital structure and the sustainability of corporations in US? Can I trust that the policy-makers understand the complexity and depth of the problem that their bailout packages can revive the system with no medium/ long term fiscal problems? If you have the answers for these you know the state of S&P, dollar and interest rates. 

Trust is an acceptance of other's value and ethics. In the modern world , man and hence society has lost corporate and personal morality. Most people ask me what will turn this crisis around and I wonder maybe when society adheres to Goethe's words

"As soon as you learn to trust yourself, you will know how to live."