Con Games Don't Build Trust

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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.

Related Foolishness:

Alyce Lomax does not own shares of any of the companies mentioned. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 27, 2009, at 3:35 PM, MADACASTO wrote:

    Another Motley Fool regurgitation of what we're hearing over and over in the media. How many times can this story be spun? Here's an interesting twist - how about giving us an analytical and hypothetical picture of what would have happened in the world YOU are in charge of and tell us precisely how we survive as a country in your model? Enough of this spouting off, a la Rick Santelli. The banks, wall street and the world got fat off of nearly 10 years of a grossly under-regulated financial industry and a massive vacuum could take many (if not all) financial institutions down, along with other industries in its wake, whether they participated in the derivitives game or not.

    Be glad you get paid whatever you do to write this garbage. If we had the collapse that you appear to have hoped for, you'd be lucky to have a soap box to pontificate from. GET ORIGINAL AND PROVIDE A REAL SOLUTION - OTHERWISE, SHUT IT!!!!

  • Report this Comment On April 27, 2009, at 8:08 PM, nuf2bdangrus wrote:

    Spot on. How can you play a game when the referee changes the rules?

  • Report this Comment On April 27, 2009, at 9:19 PM, beadgrrl wrote:

    So, madacasto, let me see if I understand you. You're saying that if you don't have a proposal for the perfect solution, then you shouldn't critique the situation?

    I respecfully disagree. Often it is useful to raise the question of whether something is reasonable, without necessarily proposing a way to fix the problem. In fact, a lot of the time it is not clear what the problem is even though it is clear that there is a problem. In those cases a thoughtful review and discussion of the facts can be extremely useful.

    Your criticism is similar to those who say you shouldn't critique something that you cannot do yourself; that is, a movie reviewer should shut up if he or she cannot make an Oscar-winning film.

    If you disagree with the content of the Motley Fool's analysis, then by all means, criticize away. But to knock the writer for not proposing the perfect solution is a waste of everyone's time.

  • Report this Comment On April 27, 2009, at 9:38 PM, whereaminow wrote:

    Great article Alyce. The issue of trust can also be extended to our monetary policy, as I and Sinchiruna have harped on quite extensively. Congrats on another great post.

  • Report this Comment On April 28, 2009, at 10:49 AM, TeeJ911 wrote:

    I think some people are missing the point of the article and how the government has hurt the trust of the average American with its recent action. As a single dad working to make ends meet and pay a mortgage I often think about the future and how I balance my financial obligations with my family and personal obligations which, as of right now, are conflicting. My girlfriend and I talk about moving in together someday in the near future but we both have mortgages and her house is the most logical choice to keep. I am now faced with the fact that I can't sell my house because it is worth about 20% less then I bought it for and after any sale taxes and commission will make it a loss and renting is an option but I have to bridge a gap of $500/mo. to still pay the mortgage. After trying to be responsible and paying a little extra each month to get a traditional mortgage and seeing how those with hybred mortgages get bailed out on top of the bankers getting bailed out and even keeping their bonuses what is stopping me from just walking away from the house. How many other working class responsible citizens are thinking the same thing right? I can't be the only one! Why should I care? The government will take care of the "toxic" debt and caring about being responsible has only hurt me lately.

  • Report this Comment On April 28, 2009, at 1:03 PM, Clint35 wrote:

    As usual Alyce, you're right on the money. If the government really wants to help they should stop handing companies bailouts and just let them fail or be bought out. That's how capitalism is suppose to work. Right? I'm not sure anymore it's been a long time since I saw capitalism in action. I wonder if it would still work? Anyway, great article.

  • Report this Comment On April 28, 2009, at 2:14 PM, jpanspac wrote:

    Alyce, you used to be my favorite MF writer, but lately it's been the same tirade over and over and over again.

  • Report this Comment On April 28, 2009, at 2:25 PM, McCrikey wrote:

    The government doesn't want to help business. It wants to take over business.

    Don't you get it? We're not capitalist. We're national socialist.

  • Report this Comment On April 28, 2009, at 2:35 PM, DiscoFinance wrote:

    Great point! This issue is exposed in a new movie ( FYI: I used coupon code: FREESHIP for free shipping of the DVD.

  • Report this Comment On April 30, 2009, at 11:20 PM, ShamrockG wrote:

    Shhhhh McCrikey, youll upset the sheep!

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