In What Do We Trust?

Robert Reich:

Hope and Trust, and the Mini Depression, by Robert Reich:  When the history of the Mini Depression of 2008-2010 is written by future historians, the word "distrust" will appear again and again.

Financial stocks are in free fall because no one trusts financials any longer. ...[I]t has become clear (even to Alan Greenspan) that the only way anyone is going to trust what they see on bank balance sheets is if bank regulators take over troubled banks, at least until those balance sheets are washed clean. ...

Meanwhile, economic distrust is spreading around the globe. What started two years ago with a sub-prime lending problem in the United States is now global, the ugly consequence of untrustworthy global capital markets and inadequate worldwide demand (led by fearful consumers in the United States). ...

Given all this, America's stimulus isn't nearly large enough. At the least, it should be replicated, proportionally, by every major economy. Central banks around the world must also continue to lower interest rates and open their lending windows. Bank bailouts must be coordinated. Protectionism should be avoided.

In this world of economic distrust, it's vitally important that President Obama and his administration maintain credibility on the economy. Raising false expectations would do far more harm than good. In remarks aired this morning ... former president Bill Clinton said... "...I just would like [Obama] to end by saying that he is hopeful and completely convinced we're gonna come through this." Clinton's suggestion is understandable but misguided. Happy talk at this point in time is so incongruous with what most Americans (and others around the world) know and are experiencing that it could undermine Obama's credibility.

The truth is that no one has any idea how long this crisis will last or exactly how to reverse it. ... And because restoring trust is so central to mending the economy, our leaders must be extremely careful not to indulge right now in the audacity of hope.

I think the most important element along these lines is to give people confidence that the administration knows what it is doing, i.e. that it understands the problem and has a plan to deal with it. They did well with the housing plan, there was some disagreement with it on some points, but overall it was received well and there was no sense that it was based upon a failure to understand the problem, that ideology rather than analysis controlled the outcome, or that the plan had no chance of helping.

That was quite a contrast to the roll out of the still in development bank rescue plan. Some people have defended it, even its vagueness, but overall my view is that it did not give people confidence in the administration's ability to deal with this problem, and in fact probably led to more distrust in their abilities than before the announcement.

However, the bank bailout episode isn't over and apparently more details about the bailout plan will be coming soon, so we'll see how it all plays out once the actual plan is presented. I expect there will be many who disagree with the approach the administration takes, more than with the housing plan no matter what they decide to do, and that will make recovering lost trust harder. It's not impossible, but it will be harder (though if nationalization were to be ruled out I think the reactions won't be largely unfavorable). But if the plan is based upon a solid foundation, if it leaves a path to temporary nationalization of troubled institutions, and if it does not have a tin ear politically, trust can still be recovered. So we shall see.

Update: I meant to add one more thing. Nationalization of banks is a politically difficult step to take, and I think the administration is correct to worry about how it would play and to try to set the stage for temporary nationalization before moving in that direction. In that regard, it's been interesting to watch Republican after Republican, Greenspan for example, slowly come over to the idea that nationalization is unaviodable in some cases since their doing so gives political cover to the nationalization step. The administration can argue "we don't like it any more than anyone else, and we did our best to avoid it, but as you can see from the Republicans gradually accepting the inevitability of nationalization, we really had no choice." If this is what they had in mind all along, to let the political cover develop before moving, then it's fairly clever, but I suspect the truth is that they really did want to avoid nationalization, but are also coming to the realization - at least I hope they are - that it cannot be avoided.