So what went wrong? Liquidity. Why? Exposure to sub-prime assets through complex financial instruments designed to reduce risk made banks chary of lending to each other. The knock-on effect of this was a collapse in confidence, as signalled through stock market indices. Self-righteous hindsight bemoans capital adequacy – which might have increased liquidity – and the hubris that led to over confidence in secularisation. But schadenfreude won’t restore confidence.
One traditional way to do so has been to regulate. Another is for the Government to intervene. But neither of these levers restore trust, instead they replace the need for it with guarantees. They underwrite the risk inherent in trust with security provided through recourse to law or through the public purse. But it is this habit of trying to secure risk that got the market into this mess in the first place. Fukuyama’s famous book on trust emphasises just how much markets rely on trust for their health. Leslie Hannah and others have argued that where trust wanes regulation and government intervention act as proxies, but also as a brake on the market.
So how can we restore trust rather than compensate for a lack of it? It occurs to me that our predicament is illustrated by the popularity of sceptics such as Dan Brown and Richard Dawkins and the ease with which religious people are dismissed as being credulous. This preoccupation with ‘the facts’ and dismissal of anything that cannot be proven lies at the heart of the banking crisis. Show Me The Money is exactly why you get a run on the bank. Religions, however, are experts in belief, and it is belief that is required if confidence is to be restored.