You can't buy trust and you can't mandate confidence. In its bailout fervor, the government has lost sight of logic and abandoned the crucial concept of letting businesses reap what they sow.
When policy-makers were asking last winter for us to be confident, it felt more to me like a bit of a con game. It stands to reason that if you feel like you just keep on getting mugged, again and again, while logic's flung out the window, it's hard to trust the world around you.
Although it's easy to focus on how both the Obama and Bush administrations have been running up staggering fiscal deficits, a recent Bloomberg commentary delved into the related idea that both administrations have "run up... [a] public trust deficit."
Less is just less when it comes to confidence
Bloomberg's Amity Shlaes hit on the concept of confidence versus trust, pointing out that a slight difference between the two is that trust is built over time.
Consumer confidence is a highly watched metric, especially now that the economy's in the tank, and Shlaes outlined a new index to measure it: the Chicago Booth/Kellogg School Financial Trust Index. This new index measures how much people trust economic entities and individuals (banks, the stock market, the government, and stockbrokers).
Some serious negativity comes across in the following question: "Have the government interventions in financial markets over the last three months made you more or less confident in investment in the stock market?"
When asked in December, 80% of respondents said "less," obviously a major blot against the crisis handling from the Bush administration, as well as the Treasury Department and the Fed. Asked again last month, a still-high 67% gave the "less confident" answer for the current administration.
I'm not too surprised. We've seen all kinds of distressing events occur over recent history, germinating during the Bush administration and continuing right on into the Obama administration. The outrage really started due to the hastily passed and sloppily executed TARP bailout. AIG (NYSE: AIG ) , Bank of America (NYSE: BAC ) , and Citigroup (NYSE: C ) have become government welfare cases with repeated capital infusions. Of course, then it turned out that General Motors (NYSE: GM ) was apparently "too big to fail," too.
Other elements have been even more distressing. How about when it turned out Goldman Sachs (NYSE: GS ) was a major beneficiary of AIG's bailout? The fact that the Department of the Treasury was headed up by Hank Paulson, who once worked for Goldman Sachs, certainly could remind us that the foxes too often guard the henhouses these days.
New Treasury Secretary Timothy Geithner has plenty of ideas as to how to direct public money, but somehow had his own problems paying taxes. U.S. Rep. Barney Frank is good at whipping up populist ire, but earlier this year The Wall Street Journal pointed out the whiff of political interference in some TARP bailouts, like how a relatively minor bank from Frank's home state (Massachusetts) got TARP money.
Meanwhile, there has been a woeful lack of transparency or accountability in the government programs at work to bolster the financial system. When it comes to the heads of many of these companies, there's been no remorse, and many of them already took home millions or billions in an environment that privatized profits and socialized losses.
It's not too hard to imagine why public confidence and trust are in short supply.
Rigging the game
Of course the idea of a game that's rigged is a disturbing one for true long-term investors.
The government choosing which companies survive and which don't is not a natural marketplace by any stretch of the imagination. Bailing out companies and giving them repeated capital infusions robs healthy entities of capital. Paying for economic plans by running the printing presses full speed ahead could put us on track for hyperinflation. Talk about a blow to consumer "confidence."
Meanwhile, the weak are growing. The recent bankruptcy of General Growth Properties implies that commercial real estate is another rather big shoe that's dropping, with regional banks like Fifth Third (Nasdaq: FITB ) and Regions Financial Corp. (NYSE: RF ) highlighted for holding a lot of rapidly souring commercial real estate debt. Then we recently learned that life insurance companies will be eligible for TARP funds, underlining the economic ripple effects that continue to mean more and more entities are deemed "too big," "too important," "too interconnected," or maybe even "too politically connected" to fail.
When does it end?
Another recipe for confidence?
When people sense a return to logic and reason, and cause and effect (for example, it's logical that unhealthy companies that made mistakes should fail), perhaps they'll feel more confident about investing and the economy in general. The government's actions are not an improvement from the bizarre financial engineering that helped create the massive asset bubble and an artificially overheated economy (and in fact, many policies helped contribute to the problems as well). And maybe a few of us suspect that even if that dream world can be recreated, that would set the stage for yet another huge economic blow-up.
Maybe when truth and logic are finally allowed to prevail in our economy, when merit brings success and mistakes bring failure, we can all face reality, then push our sleeves up and begin starting to build and invest anew. Maybe that's when the stage will be set for confidence and trust to return. Until then, the pleas for "confidence" may fall on deaf ears.