Trust no one

Guiso explores the impact of the financial crisis on people's trust, using the Financial Trust Index Survey from the University of Chicago conducted several time after the crisis on a sample of American households. It doesn't look pretty. Traditionally Americans trusted banks and financial markets 50 percent more than they trusted a random person, which is normal since we don't rely on a random person to keep our savings. This measure experienced a u-turn: 

The fall in trust was so strong that after the crisis people show more trust towards a generic unknown individual than towards a bank or a banker, that is towards those institutions and people that should deserve to be trusted the most in light of the role they play as the custodians of our savings.

Guiso also aptly separates two kind of confidence and ties it to the risks an investment implies. Confidence about an institution's ability to repay its debt, which implies intrinsic riskiness is different from the confidence that one will not be cheated when entering economic relationships. That second notion of confidence entails a social risk and is much harder to rebuild than the first one. The trust measures below taken from Guiso's study "reflect the greater perceptions of an increased social risk that has deteriorated the relation between investors and financial intermediaries".  

 

Now add to this the notion of  trust in political systems (national and European institutions) which has been tracked by Roth, Nowak-Lehman and Otter, and you get the beginning of a picture where economic crises (that financial sectors may cause or not) have political repercussions. 

The economic and social importance of the LIBOR

The allegation of LIBOR manipulation by some banks offers one the opportunity to ponder on the importance of that single number. Donald MacKenzie gave the following figures in 2008:

Judged by the amount of money directly dependent on it, the British Bankers’ Association’s London Interbank Offered Rate matters more than any other set of numbers in the world. LIBOR anchors contracts totalling around $300 trillion, the equivalent of $45,000 for every human being on the planet [...] For instance, the level of LIBOR determines the monthly payments on around half of the adjustable-rate mortgages in the US: rates are set as LIBOR plus a fixed margin and reset periodically at LIBOR changes [...]  LIBOR is even more central to the huge market for interest-rate swaps.

The process of its calculation rest on a conditional question asked to banks however. That is, at which rate each bank "could borrow funds, were it to do so by asking for and then accepting inter-bank offers in reasonable market size just prior to 11.00. " (11.00 being the time each bank has to submit their rate). The flaw in this process is obviously the jugdement of what a bank could do, instead of what it has done. But the risk of manipulation is thought to be mitigated by the fact that that manipulation would have to take place in the public arena, since the inputs of the LIBOR are highly scrutinized. So a banks lowering artificially its rate while others wouldn't would be spotted easily and risk exclusion from the panel.

So in order to manipulate the rate to profit from the derivatives contract connected to it, for example, banks must cooperate.

And they seem to have just done that. 

The Wall Street exception

Here's an interview with Gretchen Morgenson on the different set of rules Wall Street seems to enjoy compared to the rest of society. Seeing it as formal (law, regulation) and informal constraints (norms, tradition, worldviews), in the tradition of Institutional Economics can be valuable. What kind of informal constraints have been changed in the financial sector (and within the corresponding regulatory agencies) so that a change in formal constraints have taken place ? The interview with Morgenson reveals a shift from what is considered serious criminal offence for the rest of society - fraud - to some sort of minor mistake. As the the interviewer Chris Martenson puts it, it is change of both the "perception and the application of the rule of law".