Restoring Trust in Our Economic System & The Institutions of Our Democracy

This is the first article in a three-part series on the FCIC. The article originally appeared at the New Deal 2.0 project, [1] where I am a Braintruster.

The Financial Crisis Inquiry Commission (FCIC), which started work last week, will have a significant impact on the health of our democracy. When the FCIC completes its efforts, we will either be stronger or weaker as a nation. There is no middle ground. We must fervently hope that the Commission rises to this challenge with a comprehensive investigation.

The work of the Commission is important for two reasons. First, by openly educating the public about the causes of the financial crisis it will pave the way for reform. Existing interests will inevitably resist change. Reform becomes far easier when its advocates can point to a roadmap of specific problems that must be addressed. This is one of the central lessons [2] of the Pecora Commission’s work. By clearly demonstrating why the Great Crash occurred, the Pecora Commission created the rationale, and the necessary public support, for legislative initiatives such as the Glass-Steagall Act, and the establishment of the Securities and Exchange Commission.

Second, America is becoming an angry nation, with diminished faith in its institutions. There is a growing sense among all but the wealthiest Americans that “the game is rigged” [3] against them. The public perception of the work of the FCIC will inevitably affect, for better or worse, our basic level of trust in the nation’s democratic system.

In Trust, Francis Fukuyama demonstrated that societies with high trust are vibrant and productive, because individuals trust their interests will be protected. In the absence of trust, rigid work rules, contracts, litigation, and a range of other costs are created as everyone in the economy attempts to protect him or herself. In 1972, Kenneth Arrow, the Nobel laureate wrote, “Virtually every commercial transaction has within itself an element of trust.”

As discussed in It Could Happen Here, [4]trust is a central element of a healthy democracy as well as a healthy economy. When trust disappears, people become increasingly cynical. As this cynicism grows, citizens become disengaged from the political process: There’s no point in voting or working toward any civic-related goal if you cynically believe nothing will ever change. At the same time, government becomes increasing ineffective as people no longer believe elected officials will fulfill their responsibilities or promises. As a result, a cynical society can quickly become a paralyzed society.

Ultimately, cynicism can also play a role in shifting a paralyzed society toward actual political instability. One of the causes of the collapse of the Soviet Union was the extraordinarily high degree of cynicism toward the government. Two centuries earlier, the government of Louis XVI was almost universally mistrusted before the French Revolution. In part, because cynicism has never been a central aspect of the American character, we have always regarded our nation as immune to such extreme circumstances.

I fear that one result of the development of our trader nation culture—which encourages us to see our participation in the economy with a “heads I win tales you lose attitude”-- is unhealthy, growing cynicism. Last week, I wrote an article that appeared on my blog [5], The Business Insider,, the New Deal 2.0 blog [6], in The Huffington Post [7] and elsewhere. The article critiqued the data and conclusions of a front page Wall Street Journal [8] article that inaccurately down-played the extent of economic inequality. The article attracted hundreds of comments across the Web. The vast majority of these comments effectively said: What else did you expect? I discovered that cynicism is the reigning sentiment.

We are not becoming a nation of whiners. Far worse, we are becoming a nation of cynics.

To date, the growing cynicism of the American public is sadly justified. No one on Wall Street has apologized. No one has accepted responsibility for causing the crisis. While jobless victims of this crisis face increasing foreclosures, many of the firms that caused the crisis are—with government assistance—returning to past habits.

Few of us were alive at the time of the Pecora Commission. However, many of us remember an equally famous investigation that gripped the attention of the country: The Senate Watergate Committee [9] (formally known as the Select Committee on Presidential Campaign Activities). In a bipartisan effort, Senators Sam Ervin and Howard Baker led the country through a national catharsis that exposed wrongdoing in the Executive Branch and restored vital trust in our democratic institutions.

Both of these investigations reflected essential, self-correcting mechanisms that have allowed our democracy to flourish for over two centuries: The ability to hold individuals—no matter how powerful or wealthy—equally accountable for their actions, to publicly acknowledge when something has gone wrong, and to enact meaningful reform.

The work of the FCIC represents both a similar opportunity and a potential danger. By shining a bright light on the causes of this crisis, the FCIC has the chance to once again demonstrate that no one is approve reproach and to provide a clear map of the problems that successful reform must address. With these results, the FCIC can demonstrate that the American system continues to work, and enhance trust in our democratic system.

The danger is that the FCIC does not fulfill this critical mandate, and it is ultimately perceived as failing to have aggressively searched for the truth. If this happens, my hypothesis is the nation will almost inevitably slide further on the path toward paralyzing cynicism. What happens then?