Portside

In America today, we are sometimes made to feel that it is naïve to be preoccupied with trust. Our songs advise against it, our TV shows tell stories showing its futility, and incessant reports of financial scandal remind us we’d be fools to give it to our bankers.

That last point may be true, but that doesn’t mean we should stop striving for a bit more trust in our society and our economy. Trust is what makes contracts, plans and everyday transactions possible; it facilitates the democratic process, from voting to law creation, and is necessary for social stability. It is essential for our lives. It is trust, more than money, that makes the world go round.

We do not measure trust in our national income accounts, but investments in trust are no less important than those in human capital or machines.

Unfortunately, however, trust is becoming yet another casualty of our country’s staggering inequality: As the gap between Americans widens, the bonds that hold society together weaken. So, too, as more and more people lose faith in a system that seems inexorably stacked against them, and the 1 percent ascend to ever more distant heights, this vital element of our institutions and our way of life is eroding.

The undervaluing of trust has its roots in our most popular economic traditions. Adam Smith argued forcefully that we would do better to trust in the pursuit of self-interest than in the good intentions of those who pursue the general interest. If everyone looked out for just himself, we would reach an equilibrium that was not just comfortable but also productive, in which the economy was fully efficient. To the morally uninspired, it’s an appealing idea: selfishness as the ultimate form of selflessness. (Elsewhere, in particular in his “Theory of Moral Sentiments,” Smith took a much more balanced view, though most of his latter-day adherents have not followed suit.)

But events — and economic research — over the past 30 years have shown not only that we cannot rely on self-interest, but also that no economy, not even a modern, market-based economy like America’s, can function well without a modicum of trust — and that unmitigated selfishness inevitably diminishes trust.

Take banking, the industry that spawned the crisis that has cost us dearly.

That industry in particular had long been based on trust. You put your money into the bank, trusting that when you wanted to take it out in the future, it would be there. This is not to say that bankers never tried to deceive one another or their clients. But a vast majority of their business was conducted on the basis of assumed mutual accountability, sufficient levels of transparency, and a sense of responsibility. At their best, banks were stalwart community institutions that made judicious loans to promising small businesses and prospective homeowners.

In the years leading up to the crisis, though, our traditional bankers changed drastically, aggressively branching out into other activities, including those historically associated with investment banking. Trust went out the window. Commercial lenders hard-sold mortgages to families who couldn’t afford them, using false assurances. They could comfort themselves with the idea that no matter how much they exploited their customers and how much risk they had undertaken, new “insurance” products — derivatives and other chicanery — insulated their banks from the consequences. If any of them thought about the social implications of their activities, whether it was predatory lending, abusive credit card practices, or market manipulation, they might have taken comfort that, in accordance with Adam Smith’s dictum, their swelling bank accounts implied that they must be boosting social welfare.

Of course, we now know this was all a mirage. Things didn’t turn out well for our economy or our society. As millions lost their homes during and after the crisis, median wealth declined nearly 40 percent in three years. Banks would have done badly, too, were it not for the Bush-Obama mega-bailouts.

This cascade of trust destruction was unrelenting. One of the reasons that the bubble’s bursting in 2007 led to such an enormous crisis was that no bank could trust another. Each bank knew the shenanigans it had been engaged in — the movement of liabilities off its balance sheets, the predatory and reckless lending — and so knew that it could not trust any other bank. Interbank lending froze, and the financial system came to the verge of collapse, saved only by the resolute action of the public, whose trust had been the most abused of all.

There had been earlier episodes when the financial sector showed how fragile trust was. Most notable was the crash of 1929, which prompted new laws to stop the worst abuses, from fraud to market manipulation. We trusted regulators to enforce the law, and we trusted the banks to obey the law: The government couldn’t be everywhere, but banks would at least be kept in line by fearing the consequences of bad behavior.

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