Sunday, 15 July 2012

As far as I could throw him

I've noticed a mini upswell in concerns about the erosion of trust lately. This is unsurprising given the background of the LIBOR scandal, phone-hacking, MPs expenses and the like, and the more recent panic over border controls and Olympic security. It appears the Army may have become the irreducible kernel of public trust in British society, which is worrying given the way that sort of thinking tends to pan out. It was not so long ago that the Egyptian Army was being lauded as the defenders of the revolution. I doubt we're headed for a military coup, but the fact that we struggle to find others worthy of our trust is telling.

The degree to which trust has collapsed in the banking industry was nicely illustrated by the shop-front of the "Bank of Dave" (which isn't a bank). Otherwise known as Burnley Savings & Loan (which makes me think of the Bailey Building & Loan in It's a Wonderful Life - perhaps deliberately), this sold itself not just on old-fashioned values but explicitly on "Captain Mainwaring". What this shows is that trust is much more than a contractual adornment between consenting adults. It's a proxy for wider social relationships, for solidarity and shared values, for culture.

From the beginning of the 2008 crisis trust was seen as a critical component of capitalism that had somehow been mislaid, and policy was framed in part as an exercise to restore it. Thus the banks must trust each other and lend on the interbank market to prevent a credit crunch. Whereas confidence and demand are seen as effects, i.e. behavioural responses to the economic situation that fluctuate naturally, trust is seen a first-order element, a cause, that must be present in the beginning. Without trust how could a market mechanism evolve?

Trust is an interesting concept in a market society as it extends beyond the transactional to the realm of faith. Indeed, there is something fundamentally suspect about it, if you follow the thinking of Friedrich Hayek and the Austrian School, because it presumes tacit knowledge beyond the rationally calculable. For them, trust must be reduced to a commodity whose value can be determined by the market.

The homo economicus model assumes that each party pursues their self-interest and makes balanced decisions in respect of the marginal utility of each transaction. But trust is not explicitly defined by the terms of a contract, nor is it contingent for each transaction. Trustworthiness is deemed to be a quality of the trustee that is general and persistent.

In late Victorian society, one's good name was considered to be a core value that transcended the merely transactional, while the terrifying obverse of this was the character whose morality (and name) shifted depending on the transaction: Doctor Jekyll one moment, Mister Hyde the next.

In the modern era, personal core values have been subsumed (or suppressed) by corporate core values that mean nothing beyond the maximisation of shareholder return. Thus Bob Diamond loves Barclays. He identifies with the corporate entity and sees his trustworthiness as an extension of the corporate whole, the Barclays' Borg. In another age, a banker would be expected to exhibit a more distanced (more aristocratic) relationship, valuing his own honour and good name above the day job. My point is not that the old merchant banker model was better, but that it located trust in the social realm, independent of the contingencies of commerce.

Trust is developed in a social context, through relationships and prior behaviour, but its history is generally tacit and its exercise generally implicit. The greater the trust, the less it is openly referred to. The acme of trust is Caeser's wife. Not only can she be trusted, not only is she seen to be trustworthy, but we should not even need to question it. This offers an interesting contrast with social media, which claims to provide quantifiable trust through behavioural tracking and the wisdom of the crowd (your seller rating on eBay etc). In fact, this is just translating trust into a tradeable commodity a la Hayek.

What one might call high quality trust depends on proximity (we talk of trust in terms of distance: "wouldn't trust him an inch"). This means frequent interaction, the knowledge that you'll have to face the people you deal with again, the fear of a bad reputation among your peers etc. Of course such a degree of trust is not always available, particularly in a globalised market, so you (as a supplier) will seek to mitigate the risk that I (as a buyer) may fail to pay you by checking on my reputation. In the past, this meant relying on the opinion of others (whom you trust), who had experience of dealing with me. In the modern era, this essentially social process (which depended on formal and informal networks from the chamber of commerce to the golf club) became increasingly commoditised through the development of the credit rating industry.

The recent financial crisis has called into question the usefulness of credit ratings, notably in respect of CDOs and other derivatives, but the unreliability of such data goes all the way back to the industry's origins in the 19th century. Credit ratings have never been accurate predictors of future outcomes. How could they be? So why do we invest them with so much authority?

The reliance on credit rating agencies went well beyond pragmatic use, i.e. acceptance that they were the least worst option available. Indeed, credit ratings were raised to the status of holy writ, not just in respect of financial securities but in respect of sovereign viability. We have today the bizarre spectacle of nation states responding to a rating agency downgrade like a teenager who has been dumped, and agency ratings being written into regulations despite the agencies own reluctance to bear such a burden of authority.

The growth of the credit rating industry over the last 50 years is seen as a symptom of generally benign commercial growth, and in particular the growth in credit, but perhaps we should see it more as a growth in the level of mistrust and the desperate search for authority, for faith, in an increasingly marketised society.

We, as individuals, never used to have a formal credit rating because we never had commercial debt, i.e. credit cards and mortgages (in most cases). Our reputation tended to be little more than the consensus view of the street we lived on. Now, we are encouraged to worry about and tend our public credit rating. It has become a mysterious object, an alienated commodity in its own right, that exists independently of us and seems at times both unrecognisable and uncontrollable, like Mister Hyde appeared to Doctor Jekyll. It seems we can't even trust ourselves.

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