If confidence is the gasoline, then trust is the oil in the engine of Capitalism!

Being able to trust people might seem like a pleasant comfort, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

“If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia,” ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. (Any prices for computing - it’s 99% of the US economy!!)

“Virtually every commercial transaction has within itself an element of trust,” writes economist Kenneth Arrow, a Nobel laureate. When we deposit money in a bank, we trust that it’s safe. When a company orders goods, it trusts its counterpart to deliver them in good faith. Trust facilitates transactions because it saves the costs of monitoring and screening; it is an essential lubricant that greases the wheels of the economic system.

Since last two years, world clearly don’t trust the big banks and financial companies.

Trust is gone: there is no longer trust between counterparties in the financial system. The Fed has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that uncertainty that the balance sheets of financial firms are credible. So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not.

Bank lending won’t get going again until trust in the markets can be restored. Fighting a Great Depression era problem probably won’t help. More transparency, which means more write-downs and failures, is probably necessary if we’re going to get through this. Unfortunately, we’re still sailing in the opposite direction.