Are we losing trust in the financial system?

After a fairly dismal speech from the Governor of the Bank of England, we enjoyed this piece from Simon Rose over at Save our Savers.

The Governor of the Bank of England this week seemed a mite perplexed that the economy was doing quite so badly. As ever, he blamed anything but the MPC’s own decisions. But clearly he felt baffled that over three years of record low 0.5% bank rate and £375 billion of quantitative easing have had so little effect.

Given the appalling, underhand confiscation of savers’ funds through the Bank’s policies, we’re used to raising an eyebrow when Merve the Swerve opens his mouth for another of his “Nothing to do with me, guv” speeches. What was encouraging, however, was the rough ride he was given by many of the attending journalists, particularly about why the Bank’s growth and inflation forecasts were so often wildly inaccurate.

The Bank of England litters its Inflation Report with graphs in the belief that you can quantify everything that influences the economy. But there is one commodity they cannot chart. Trust.

The importance of trust in finance

We’ve heard a great deal about the loss of confidence in our economic prospects. However, many economists and psychologists believe that it is trust that is the most important prerequisite for ensuring an advanced, healthy economy. Richard L. Peterson and Frank Murtha said in 2008: “Trust is the oil in the engine of capitalism. Without it, the engine seizes up. Confidence is like gasoline. Without it, the machine won’t move.”

Daniel Hameresh points out that ”income levels and real growth depend upon trust – trust greases the wheels of exchange.”

In 2006, Forbes magazine ran a piece called “The Economics of Trust”:

“Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. A little taste of life in a world without trust – now imagine trying to arrange a mortgage… Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.”

According to Steve Knack, a senior economist at the World Bank who has studied the economics of trust for over 10 years, “If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia.”

Can we trust anybody any more?

The MPs’ expenses scandal led to a massive loss of trust in our politicians. That trust has not been restored by MPs doing all they can to ensure their snouts remain in the trough by ensuring that the electorate can no longer see details of their expenses. Even though the Independent Parliamentary Standards Authority was specifically set up in the wake of the scandal to clean up parliament, it has ruled that it is too expensive to publish receipts of the type that were so revealing in the 2009 exposé.

Plans to reform our pension system might be better supported by those people affected were MPs to do as they had promised and reform their incredibly generous gold-plated pension scheme. Fat chance. In 2008, David Cameron said: “We have to look at our own pension arrangements and recognise that a very generous final salary scheme, going on into the future, is not appropriate.” The Lib Dems, too, said they would ditch the defined benefit scheme. Yet MPs have so far refused and won’t even agree to last year’s proposal that their pension age should rise from 65 to 68.

But it is the 5-year-old credit crunch and its aftermath that is so undermining trust in the financial system, without which the economy cannot  possibly thrive. Politicians argue pointlessly about the merits of “growth” and “austerity” without ever admitting their own complicity in the dash for electorally-popular credit-fuelled growth which so dangerously undermined savings and fuelled the debt bubble.

It sticks in the craw that Mervyn King denies any responsibility, despite being so deeply involved with the MPC’s loose interest rate policy, without which the bubble could never have inflated in the first place.

The regulators, too, have let us down. As Damien Rees wrote in The Daily Telegraph: “The FSA, SFO, Bank of England and the rest have cost us hundreds of millions over the past decade but have comprehensively failed us, too. We’ve had a raw deal from regulators.” What repercussions were there? Private Eye recently discovered that while 461 FSA staff were disciplined between August 2008 and December 2011 for “failure to adhere to the FSA clear desk policy”, failure to spot the disaster brewing in British banks which necessitated those expensive taxpayer bailouts led to not one disciplinary incident, let alone any dismissals.

You can bank on the banks to let us down

It is one thing to discover that the banks had overextended themselves through a combination of imprudence and incompetence. It is quite another to find that their behaviour has been verging on the criminal – or beyond. Of late we have had revelations that banks have:

• Missold PPI policies, the compensation bill for which now tops £10bn.

• Missold complicated Interest Rate Swaps to small and medium-sized businesses. It is not yet known how large the compensation bill will be.

• Manipulated the London Interbank Offered Rate, on which a staggering number of other financial instruments are based. Barclays has been fined £290m, but many other banks are involved, including HSBC, Lloyds and RBS, and the compensation and lawsuits will surely leave the banks will a bill running into billions of pounds.

• Laundered money for Mexican drug lords, rogue states and terrorists, as HSBC did, undoubtedly resulting in the loss of life, for which it has set aside £450m though it admits the bill may be over £1.25bn.

Can trust be restored?

Can we trust any bank again? They are on the hook for fines of many billions of pounds. Yet the fines are levied against the institutions, not individual bankers. As a result, those fines will eventually be paid through reduced returns to shareholders and by increased charges and decreased interest to customers.

How can we trust a system where the banks are bailed out by the taxpayer when they get it wrong, but allowed to keep profits and to pay bonuses when they make money? This is crony capitalism at its most blatant.

Worst of all, these appalling misdemeanours have met with an utterly inadequate response from the authorities. If the law has been broken – and many laws have been smashed to smithereens – why have there been no prosecutions? If a college student with no criminal record can be jailed for six months for taking a £3.50 case of water during last year’s riots, what message does it send when nothing happens to bankers who behave so reprehensibly?

A new campaign, A Question of Trust, points out that “trust in our financial institutions is in short supply. This is a major threat to the future financial well-being of millions.” The recent revelations about the banks must make its uphill task even steeper.

Given what has happened to savers over the past few years, our level of trust in the system has hardly been high in any case. Politicians who made specific promises to savers when in opposition have reneged on those promises when in government. The central bank charged with keeping inflation under control has ignored its statutory obligation with impunity.

It is surely no coincidence that Iceland, one of the few countries that has prosecuted and imprisoned bankers, and even put its former Prime Minister on trial, is now seeing one of the fastest growth rates in Europe.

It is the rule of law that holds society together. Countries that let politicians, bankers and regulators get away with behaviour that offends against a sense of natural justice must not be surprised if trust disappears. If there is one rule for them, and another for the rest of us, then we are – to use a nautical metaphor of the sort which Sir Mervyn King so favours – sailing into very dangerous waters indeed.

At the rate things are going, how long will it be before even the words “I promise to pay the bearer” on our banknotes are greeted with the sound of hollow laughter?

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