Public trust has economic consequences

The market will prove one side right before too long.

In the United States, there is now a more systematic, independent survey promoted by economists at the University of Chicago Booth School of Business.

Their financial trust index, based on a large-scale survey of financial decision-makers in American households, did show a sharp fall in trust in late 2008 and early 2009, following the collapse of Lehman Brothers.

That fall in confidence affected banks, the stock market, and the government and its regulators.

Furthermore, the survey showed that declining trust was strongly correlated with financial behaviour.

In other words, if your trust in the market and in the way it is regulated fell sharply, you were less likely to deposit money in banks or invest in stocks.

So falling trust had real economic consequences.

Fortunately, the latest survey, published in July this year, shows that trust in banks and bankers has begun to recover, and quite sharply.

This has been positive for the stock market.

There is also a little more confidence in the government’s response and in financial regulation than there was at the end of last year.

The latter point, which no doubt reflects the Obama administration’s attempts to reform the dysfunctional system it inherited, is particularly important, as the sharpest declines in investment intentions were among those who had lost confidence in the government’s ability to regulate.

It would seem that rebuilding confidence in the Federal Reserve and the Securities and Exchange Commission is economically more important than rebuilding trust in Citibank or AIG.

Continuing disputes in Congress about the precise details of reform could, therefore, have an economic cost if a perception that the system will not be overhauled gains ground.

All these data are at an aggregate level and reflect average views among voters and investors.

Yet we also know that individual views are remarkably heterogeneous.