Trust in the financial system
Trust is essential in the economy and current banking system, which has not undergone any significant change since its inception. When an individual deposits his money in the bank, he trusts the bank. When the bank issues a loan, it trusts the debtor to repay it. When the bank expands its balance sheet, the government trusts the bank to keep within its limits (not take on too much risk on its balance sheet).
Yet in recent times public trust has been stretched thin, if not replaced altogether with distrust and a feeling of victimisation. Indicators and incidents such as a rising income inequality, taxpayer funded bailout of financial institutions, and central bankers favouring financial institutions over the public for whom they were created (Alan Greenspan’s approach to ‘clean up’ after the mess).
It is common knowledge among the learned public that the government funded capital injection TARP (Troubled Asset Relief Program) was paid off to CEOs and other top rung employees as hefty bonuses. Yet a simple google search reveals that the government has recollected all of its TARP money. As of the day of writing, the Fed has recovered 98.9% of the TARP money. Post 2008 crisis bankers have been vilified by the public. In fact since the rise of Christianity bankers who charge interest on loans have been considered as sinners. Religion coupled with popular plays such as Shakespeare’s “Merchant of Venice” have further compounded this idea. But bankers are not inherently greedy or bad. No business-school professor teaches budding financiers unethical methods to make money. The bankers typically strive for innovative but legal manners through which they can make more money, but the public is not intentionally targeted.
Yet they are not all saints. They arm-twist government officials and ignore the multilateral institutions such as IMF and World Bank (unless they need help). The importance of MNCs in an economy is so high that they’ve triggered a wage race to the bottom, obviously to the advantage of the MNCs.
Here when I say “they”, I mean the majority of bankers, hedge fund managers, and MNCs. It is highly plausible and probable that there exists a few bankers, and a few MNCs who don’t’ use their “muscle-power” to get things done. All things considered, the governments wouldn’t keep the MNCs if there was no benefit.
So are most of the people in positions of power bad, or morally corrupt as the media says them to be? It is easy to dismiss the causations of crises and problems by having someone to blame. Hardly any attempt to right the wrong is attempted as these men are deemed “powerful”. Consequently the problems rise again and again. The men in power are further ridiculed. The middle class and the poor people throw up their hands, and cry foul.
It is hard to believe that all businessmen who begin their career as an entrepreneur or an insignificant employee in a firm do so with an intent to gain money by hook or crook. And those who begin their career in good intention might be forced to change by the circumstance. And as ‘game theory’ proposes even a small number of unfair men are enough to pull down the honest men down to their level. And those who refuse to be pulled down, are eventually forced to exit as their ‘fairness’ puts them at a serious disadvantage. Therefore there are honest bankers, and MNC CEOs, but they are forced by circumstance to participate in unfair competition.
Unbiased and effective policies which detect these unfair players in the market and take action against them should be put in place. No financial institution should be allowed to grow “too big to fail”. It was because power was too centralised to the king that we moved from monarchy to democracy, why then should a financial institution be deemed too ‘powerful’ when we can have multiple financial institutions helping the economy. But it should be noted that any economic policy will take its time to bear fruits.
Business is not supposed to be a virtueless trade, but sadly as Socrates said “The more men value money-making, the less they value virtue”. Yet all hope is not lost, through economic reform it is possible to transform the economic landscape. People have to trust economics and finance, but not necessarily economists and financiers. It is a common saying that “trust has to be earned”, and fortunately trust in the financial world is unlike that of personal life. Even if it is broken once, it is not broken altogether. But conducting stress tests on it is definitely not helping the economy.
References:
http://www.economist.com/blogs/freeexchange/2009/08/the_roots_of_the_clean_up_afte
http://www.treasury.gov/initiatives/financial-stability/reports/Pages/TARP-Tracker.aspx
http://www.economist.com/blogs/freeexchange/2013/11/labour-standards
