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Thursday, Sept. 27, 2007 Japan Times
Crunch: a question of trust
By DAVID HOWELL
LONDON — Financial markets all round the world, from New York to London to
Tokyo, have been rattled by the recent squeeze on credit and lending,
which originated in the United States. All kinds of lessons have been
drawn from the experience, many of which boil down to the simple adage
that dubious long-term housing loans to those who may never be able to pay
interest on them, let alone pay back the capital, should be avoided. But a
further aspect of the whole drama deserves comment, and this concerns the
matter of trust in institutions and authorities.
In the British case the crisis took the form of an alarming and sudden
"run" on the country's fifth-largest mortgage bank, Northern Rock, which
had been offering generous rates of interest to all who could be persuaded
to deposit money with it, and re-lending it many times over to home-buyers
on very favorable terms.
When suddenly its usual lines of credit and sources of funds dried up, and
lenders everywhere grew ultra-nervous about extending credit to anyone,
including each other, Northern Rock turned to the Bank of England to help
it meet, or at least stand behind, its obligations and promises, and allow
it to carry on with its attractive lending activities to homeowners.
News of this request leaked out and instantly people who had their savings
with the bank rushed to remove their cash, convinced that the whole mighty
edifice was about to crash. Assurances from the Bank of England had no
effect; in fact they made matters even worse. It seemed that trust in
bankers, even central bankers, had evaporated. Eventually, to calm the
panic, the British government had to promise that no depositor or saver
would lose money. Regardless of what happened to Northern Rock, all cash
would be returned to those who had put their savings into the bank.
Recriminations continue as to why this incident occurred, whether the
banking system is as sound as was believed, who will now pay for the
government guarantee, to whom does it apply and for how long, and a
thousand other questions. Some said that state rescue intervention merely
rewarded the imprudent and unwise and would simply lead to future
excesses. Some said help should have been offered sooner.
Either way, the sharpest lesson of all was that people had lost almost all
faith in official pronouncements and reassurances. Neither government nor
great institutions like the Bank of England were believed anymore.
This is worrying, but it should not have come as a surprise. Three
powerful developments have made the world a less respectful place, with
the public far less willing to defer to those claiming to be in control
and in possession of superior wisdom.
The first of these is that with the rise of the Web, tens of millions of
people round the world feel they know as much as any central authorities,
or even more. In particular they feel this when it comes to managing their
money, since they only have to switch on to gain entry to dozens of
programs telling them how to look after their savings and make them grow.
When they sense that a bank or other institution looking after their money
is in trouble, no amount of soothing verbiage from on high or
public-relations activity is going to ease their doubts.
The second development is a big decline in trust in the word of
governments themselves. Ministers have too often over-used the arts of
presentation to "spin" glowing stories and make everything sound sunny and
cheerful, while hiding the bad news. When a real crisis comes, and the
authorities may indeed know better and see the bigger picture, they are
not believed and their credibility is zero, especially when it comes to
people's personal wealth.
The third new aspect is that there are now very few secrets and private
walls behind which deals can be done and bad news kept quiet or
suppressed. The age of almost total transparency as arrived, with
knowledge and information on just about everything, and everybody freely
and instantly available.
In many ways this is good, allowing fresh air to flow, and visibility to
open up, where previously the dark and arcane secrets of money management
and manipulation prevailed.
But carried to the extremes that the microchip now allows, total
transparency about what is being said, discussed or even thought about can
lead to rule by rumor and instant judgment in place of longer-term and
more mature assessments. The fickle mentality of the crowd can take over,
with changes of mood and opinion as frequent, and as unpredictable, as the
weather.
In short, the information age has brought more openness, and millions more
people into the capitalist system, but also much more volatility in public
affairs, especially with respect to the attitudes governing and shaping
financial business. And precisely because the world is now in effect one
enormous global financial market, a nervous shift of sentiment in one part
of the network is instantly transmitted to every corner of the system.
There is nothing that can be done about this. The genie cannot be pushed
back into the bottle. But at least it tells authorities and governing
agencies to be ready for far more violent swings in human affairs and
attitudes than ever before, and to be agile enough, and flexible enough,
to cope with them each time they occur.
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