THE EROSION OF TRUST STALLS THE ECONOMIC ENGINE OF AMERICAN SOCIETY

THE EROSION OF TRUST STALLS THE ECONOMIC ENGINE OF AMERICAN SOCIETY

James R. Fisher, Jr., Ph.D.
© November 18, 2010

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REFERENCE:

As with all my missives, I attempt to put a human face on my wonderings. My interest is more in the "why" (i.e., the human cause) and less with the "what" (i.e., the mechanics of the paralysis) of our economic decline.

My sense is that a period of exponential boom (1950 – 1980) was followed by a period of existential bust (1980 – 2010). People in the know, who are in the business of tracking such things, confirm my premise.

We are what we think, and what we think we don’t always know, and worse yet, as I will show here, those who we think know, don’t as well, and so the blind lead the blind sometimes knowingly and sometimes not into distrust, corruption, incompetence, and greed.

It all starts with ordinary people who suspend self-responsibility, which allow them to be taken in with something that is too good to be true, but never is. Trust is always at issue.

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PRESIDENT OBAMA’S DEFICIT REDUCTION COMMISSION

Former Wyoming US Senator Alan Simpson (1979 – 1997) on PBSTV with Charlie Rose (Wednesday, November 17, 2010) said that for the last seventy-five years, or since the mid-1930s, people have been sent to Washington, DC to “bring home the bacon.”

People would say, “You haven’t helped us get a new dam or new visiting center.” Simpson said he would reply, “You have a dam and a visiting center. I won’t sign on for this.” They would reply, “What kind of a senator are you?”

He would be meeting citizens in a town hall, and they would say, “We need this or that.” A colleague would say to a staffer, “Write that down.” It would become an earmark like the bridge in Alaska that goes nowhere.

Greed is not new. Nor is it confined to Wall Street.

Simpson along with Erskine Bowles, former chief of staff in President Clinton’s Administration, heads President Obama's “Deficit Reduction Commission.” It is a committee of eighteen members with fourteen members having to agree on the proposal before it can be sent to Congress for consideration. The members of the commission are equally divided between Democrats and Republicans.

The aim of the commission is to take $4 trillion out of the budget in ten years. This means looking at Social Security, Medicare and Medicaid, Department of Defense budget, income tax deductions, and several other entitlements and tax saving opportunities.

Simpson and Bowles have been meeting since January with this commission attempting to find a common ground. Simpson confessed, “It took months since January to establish trust. This town (Washington, DC) is devoid of trust. It took us literally three to four months to trust each other.” How did they do it?

Nobody left the room. It took a long time for everyone to get passed stereotypes and personal and political biases.

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THE DRONE BRIGADE

We have gotten used to economic “experts” talking too fast beginning sentences by holding out their hands pointing on fingers problems from the national debt to global warming, from tax codes to fiscal insolvency. We take their glibness for intelligence and competence. Over the past thirty years, we have relied on such people not only to know what they are talking about, but also to be sincerely thinking in terms of our best interests.

We have become enamored of science and its marriage to super computers to devour us as sorting data, spitting us out in rational, viable and sensible, but inanimate solutions.

The economy has been reduced to a big machine with us as its data. Quantitative macroeconomic models win Nobel Prizes for the data processors.

Data has no face. There is no need for ethics or morality, as emotions and psychology have been made irrelevant. New York Times columnist captures the sense of this in a syllogism:

“If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs. Everything is rigorous. Everything is science.”

The only problem is that the stimulus package has produced only a fraction of the jobs promised, while unemployment stubbornly remains at 9.6 percent.

American citizens in the last thirty years have not been engaged as people but only as members of the drone brigade.

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The History Channel recently had a segment on WWII in which fireside chats of President Franklin Delano Roosevelt was the narrative overlay as the war progressed.

The claim is President Obama cannot relate to ordinary citizens because of his intelligence, sophistication and distance culturally from them. FDR was a member of America’s aristocratic class, yet every citizen glued to the radio of those fireside chats felt he was speaking directly to them.

It made a difference. It was a boom to morale, which translated into industry, purpose and commitment to the war effort at great personal sacrifice because people felt connected. They trusted their president to level with them and keep them informed.

We have lost this connection. There seems no one on the horizon to restore it. Instead, the breach grows wider as self-delusion increases and self-responsibility decreases with many escaping into venality, corruption, greed and incompetence.

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ALL THE DEVILS ARE HERE (2010)

Bethany McLean of Vanity Fair and Joe Nocera of The New York Times have written a book of the recent financial crisis. It is not a “what” book but a “why” book, a hidden history of the recent financial crisis.

Charlie Rose (November 18, 2010) asked Joe Nocera why he was so hard on Goldman Sachs of Wall Street. Nocera didn’t dodge the question.

The firm’s core principle, he said, was that clients come first. Instead Goldman Sachs took full advantage of clients shoving lousy securities down their throats. The firm’s risk and financial exposure was reduced if not eliminated by laying the whole financial burden on clients.

Goldman Sachs failed to tell clients what it actually thought of these toxic securities.

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Bethany McLean explained that ethically it was a scam for Wall Street from the beginning. Wall Street would buy up mortgages, package them, and then sell them off to investors. Meanwhile, Wall Street was saying it was doing its diligence, which meant investigating these mortgages to see if they were sound. They didn’t do this because they knew they weren’t.

She went on to say she thought it was wrong for the “mortgage brokers” around the country to make loans to people they knew couldn’t afford them, getting borrowers to lie as to their assets so that they would qualify for these loans.

She also thought it was questionable for “regulators” in Washington, DC to look the other way when they heard the same story again and again from people who were getting loans they couldn’t afford and would have no way to pay them back.

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Nocera said that “this thing” had been happening over the past thirty years. It started with mortgage-backed securities to create new markets and release capital for home ownership on a wide scale.

McLean could see how good intentions initially drifted to a peculiar collusion between rating agencies and the government. The ratings problem couldn’t have occurred without the government’s participation. Sub-prime lending and securities needed the participation of Freddie Mae and Freddie Mac, especially Freddie Mae.

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The key to getting a loan was the ratings. The AAA rating was almost a guarantee of getting a loan.

Several things happened. The AAA rating became increasingly bogus. The traditional connection between the borrower and the lender (bank) was cut. This connection had existed for centuries between a bank willing to loan to a borrower who wanted to buy a house and a bank having the capital on hand. A bank wouldn’t loan money if it didn’t have the capital reserve to loan. A loaner wouldn’t be able to borrow if he didn’t qualify.

Once that was cut, mortgages were packaged into securities, and the securities into derivatives, with these in turn sold to investors. The risk was no longer with the bank. If fact, it was no longer with Wall Street. The risk was shipped off to investors in mortgage-backed securities. It was immaterial to the bank or Wall Street if the loan application was legitimate or not, which was the beginning of the horror story.

The moral and ethical authority of the banking was suspended to the point of non-existent.

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McLean noted that the ideology of modern finance was that innovation is always good, and the market is always right. This was an implicit/explicit relationship: implicitly everyone thought the same way, and explicitly money was changing hands.

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Nocera added that the Wall Street securities machine got built, and it used sub prime loans as fodder to keep it running. As the machine got bigger and more complex, few using it understood it, and if they did, they were operating just this side of criminality.

Eventually, nobody wanted AAA rated loans became they were essentially toxic. Incredibly, Merrill Lynch bought all these AAA securities and went belly up from $5 billion to $50 billion with no one quite sure how it happened.

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McLean said that in many ways the story of the economic crisis is the story of human nature:

(1) Self-delusion;
(2) Venality
(3) Corruption.

The self-delusion was the fact that people didn’t want to see what was right in from of them; venality was the ability to look at AAA ratings as legitimate despite the evidence to the contrary; and corruption was the insensitivity of the exploiters to the millions of trusting homeowners to a system they didn’t understand but believed was ethical when it was not.

A physicist who had been a trader said Wall Street was quantitatively illiterate, unable to look at the numbers under the numbers to understand what they meant. He added, “We fell for our own scam,” meaning people on Wall Street weren’t as smart as they thought they were. Still, people on Wall Street that were basically incompetent walked off with annual incomes from $10 million to $165 million.

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Have the risk management models or the rating agencies lost favor? McLean and Nocera don’t think so. People have lost trust in Wall Street, in these models and rating agencies, but business as usual continues as if nothing has been learned.

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McLean, who wrote a book on Enron, says the crisis is the story of people with the complex mingling of self-delusion with corruption. It is a cast of characters with a range of fatal flaws, a complicated mixture of ambition and greed.

Greed is not ethical but it is also not illegal. She can see few cases of this greed being criminally prosecuted.

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Given the absence of frugality and restrain over the past thirty years, and the stagnant income for working Americans, McLean says home ownership and sub prime lending was always at its core about people using their homes as a piggybank to refinance. People would then use the money to booster their stander of living. If people hadn’t been able to do this, she adds, consumer spending wouldn’t have been what it was.

People, she continues, who wanted a fixed rate 30-year mortgage like their parents had, were talked into optimal adjustable rate mortgages. Lenders did this because they could make more money by selling these instruments to Wall Street, which in turn could repackage them and sell them to investors for still more money. It had a snowball effect until the meltdown in 2008.

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Nocera adds it doesn’t matter whether sub prime lenders were making predatory loans, or whether borrowers were taking advantage of lenders buying houses they couldn’t afford. The fact remains millions of Americans were buying homes they couldn’t afford and could never pay back.

He asks, isn’t that a systemic problem? Shouldn’t Wall Street been able to see that was going to cause a heap of trouble? The answer is that most of them on Wall Street making millions of dollars weren’t competent to answer that question, but simply road the tide.

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TRUST IS WHAT MAKES THE WORLD GO AROUND

Ireland is now in financial trouble perhaps even worse than Greece. It needs cash to keep banks afloat with a current debt level of 32 percent of Gross Domestic Product compared to that of Greece of 15.5 percent.

The problem is Ireland doesn’t trust the Euro Zone Commission to bail it out without losing its national integrity and autonomy. It fears interference in its governance.

Unemployment in the United States is reported at 9.6 percent while banks and companies are sitting on more than $2 trillion that they are reluctant to pour into the marketplace for lack of trust of the economic system.

China is booming but still keeps it currency below the rate the world-at-large would like. It does so for many national reasons not least of which is its lack of trust of the world market, particularly the United States economy.

Trust is something that must be earned, and when trust is broken sometimes it can never be repaired.

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A TRUST BUILDING EXERCISE

The economic engine of trust is on display in every organization.

When I was an organizational development (OD) psychologist at Honeywell Avionics, the program manager of a major program came to me, said his program was in crisis and he would like a team building session as soon as possible.

“How about tonight?” I said. “I can make arrangements with the hotel next door.”

“Tonight?” he asked.

“You said you were in crisis. We can do it right after work.”

He rubbed his jaw. “I don’t know if everyone will be on board for that.”

“You’re the program manage. Make it imperative.” And he did.

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The program was in the range of $50 million and it was over budget and behind schedule, and there was bickering, finger pointing, and one little skirmish between two key people involving pushing and name-calling.

Involved were the program management staff, engineering, planning, product assurance, contracts administration, technical support, system analysts, and model building in manufacturing. In total, there were thirty people.

The hotel provided soft drinks, coffee and sandwiches. After everyone ate, the program manager stated the purpose of the meeting. This was met with glum faces. Nobody wanted to be there, couldn’t wait for this, whatever this was, to get over.

It helped that I was familiar to them and had worked with them in their areas. Still, they were surprised and then bemused when I said, “I don’t want to be here anymore than you do. Let’s go home!” They looked startled, and then laughed, knowing I was putting them on.

* * *

We got down to business. Counting off “one, two, three, four, five” formed six groups. People of the same discipline tend to sit together. This broke them up as the ones formed a group, the twos a group, and so on. Everyone, including the program manager participated.

Each group was given flip chart paper and a marker, and asked to choose a leader, and then tabulate specifics to deal with program problems, and what could be done about them. The main idea is to get them talking, discussing, and exchanging information..

By the time this detail was completed, and everyone reported back to the assembled group with their ideas, it was just past 10 p.m. The last report completed, everyone started to get up from their chairs to go home. They were tired after an eight-hour day, and a six-hour seminar.

Suddenly, someone said, “But we haven’t accomplished anything. We’re not done.”

It was true.

The walls were papered with flipcharts venting specific and collective frustrations, but territorial imperatives had not been breached, which was the key to everything.

As they looked to me frozen in step to leave, someone said, “Why aren’t we done? What else can we do?”

“We are not done, and the reason is,” I said as I walked around the room and wrote across the flipcharts with a red marker in large letters, “because TRUST IS STILL THE ISSUE.”

Everyone sat back down without prompting. The word “trust” appeared to prick their consciences dropping their defenses. They were exhausted but the word “trust” appeared to hit them like a bolt out of the blue. It tapped something dormant in them

For the better part of the next hour and one half they talked, often everyone at the same time, seemingly taking bullets from ideas from the flipcharts and weaving them into a tapestry that made a single cloth. It was near midnight when the meeting broke up.

The program manager came over to me, and asked, “Did you know this would happen?”

“If people are sincere, and they are capable of letting their hair down, it can happen. These are sincere people.”

“Were you going to let them go without finishing?”

“Of course.”

“Of course?”

“It was their show, not mine. I was just an observer.”

“Right! Well, everything changed when you wrote TRUST IS STILL THE ISSUE on the flipcharts.”

“No, that’s not true. Everything changed when your man said they weren’t done. I merely put before their eyes what they were already thinking.”

“Then they solved their own problem.”

“That’s the only solution there is.”

The program manager shook his head. “If you say so.”

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Trust was at issue, and once that bridge was crossed, the program was given new life while the walls between disciplines started to tumble down.

Former Senator Alan Simpson said it took the Deficit Reduction Commission months to establish trust. Sometimes putting people with artificial barriers between them in a room, the trust issue surfaces and gets battered about. Synergistic contribution is possible in that climate of civil conflict and exchange. Anything is possible with trust. Nothing is possible without trust.

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