The Secret of Credit
The key ingredient in credit is trust
Posted January 23, 2012
Trust Is the Glue...
Most of us view trust as valuable and desirable, something that improves the quality of our personal lives. We seldom take the next step and view it as indispensable, a vital ingredient in society - and in the economy. But all credit is based on trust, and the fundamental problem in a credit crisis is not just the lack of "liquidity" but also the absence of trust, the trust that is essential to all financial transactions.
British Historian Geoffrey Hosking noted recently: "A liberal, free market society needs ‘trust in the trustworthy' as the core of its values, not just as a Quixotic moral ‘extra'." (See, "Trust: Money, Markets and Society.") Operating somewhere between hope and certainty, trust is the belief that the other person means what he says. That is, he could be wrong but he is not trying to deceive. He is reliable in the same way we feel ourselves to be reliable.
In times past, a handshake was often considered sufficient to seal a deal. But such a handshake had to be "trustworthy," offered by someone who knew himself, knew his resources, and was aware, as well, of the dangers in making a promise he couldn't deliver.
Hosking points out: "The 2000s were bad years for social trust, at least in the UK and USA. They were the culmination of several decades during which generalized social trust had been declining. Surveys in the UK suggest that, when asked in 1959 ‘Would you say that most people can be trusted?' 56 per cent replied ‘Yes'; in 1998 the equivalent figure was 30 per cent. In the USA, when asked the same question in 1964, 55 per cent answered ‘Yes', but in 1995 only 35 per cent."
And then came the credit crisis with the collapse of investment values. The exposure of the greed, carelessness and fraud that permeated the financial industry leading up to that crisis eroded even further the public's trust. The extraordinary salaries and bonuses subsequently meted out to those responsible for that failure finished the job.
Hosking pointed out that more than financial inefficiency and distress is at stake. With distrust pervading the population, all the social services that government traditionally provide become more difficult to administer and more expensive: "As a result, there are today more overworked teachers and demoralized social workers, there is more litigation, greater reluctance to help the police, greater recourse to private health care and the like."
The essential point is not that people need to be encouraged to trust. Most of us want to trust and have the basic capacity to trust. We need institutions that are trustworthy.