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Commodity of Limitless Value

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We take it for granted.

It’s little understood. But without it, the wheels of modern commerce as we know it will come to a screeching halt.

It is trust.

Everything we do, whether in business or our everyday lives, is predicated on some level of trust.

We trust our alarm clock will wake us in the morning; that the gas we put in our tank will start our engines, or that the trains will run when we step onto the platform. We trust that when we buy a carton of milk that the sell-by date is accurate, and that it will be free from unwanted bacterium. We trust that when we step on the brakes, our car will actually stop, and that if a national credit rating agency issues an opinion about a stock or security, that the evaluation is unvarnished and credible.

Trust may seem amorphous. But more and more, economists and other folks who study trust, believe that it may be the critical difference between the richest and poorest countries.

Trust is at the core of even the simplest financial transactions. For example, when you hand the clerk money at the corner store, you trust he automatically will give you your groceries. When you deposit money in the bank, you trust that the government will assure that your savings are protected. If we didn’t, most of us would have very lumpy mattresses and go to sleep each night with a .45 under our pillows.

Trust Here and Trust There

Consider the contrast between the U.S. and Somalia. With the disappearance of a central government in Mogadishu, Somalia has been reduced to a chaotic amalgam of competing warlords and pirates. The only rule in Somalia is that there are no rules. Consequently, there is no trust, no sustainable economy. It’s virtually every man for himself.

A recent study by the Pew Research Center found that Americans' trust in government and its institutions has plummeted to a near-historic low. Only 22 percent of Americans surveyed by Pew say they can trust government in Washington “almost always or most of the time” — among the lowest measures in the half-century since pollsters have been asking the question.

This poses a continuing conundrum for public figures like President Obama. Post-election polls show that he was elected because voters trusted him. Even a year after he took office, polls still show that Mr. Obama, as an individual, is still considered trustworthy. But the institution over which he presides – the federal government – is not.

While there may be furious debate over the scope and size of government, there is scant question that it has no value if it cannot be trusted.

Recently, scientists have found that there actually may be biological component to the concept we know as trust. Researchers have found that individual trust is regulated by oxytocin, a little understood hormone. Repeated studies have shown that the higher our level of oxytocin, the greater is our tendency to trust those around us.

These same researchers have also determined that stress neutralizes the production of oxytocin, thus lowering our individual feelings of trust towards others. Given the economic stress that most Americans have experienced over the past two years, this may, in part, scientifically explain our diminished view of government and other centralized institutions.

Further Clarity Required

The science of trust, however, does not explain the suspect conduct of credit rating agencies whose role in the precipitation of this waning financial crisis is now coming into sharp focus.

An ongoing probe of the credit-rating industry by the Senate Permanent Subcommittee on Investigations found that firms used not only used outdated models, but were influenced by their clients in waiting too long to downgrade investments as the collapse in the housing market intensified. According to material released yesterday, employees at the credit-rating companies were so hungry for fees, they willing to compromise objective analysis on the quality of investments they were trusted to evaluate.

An oxytocin deficiency also does not explain how unchecked greed overcame good judgment. Nor does it explain how or why key private financial institutions, like Merrill Lynch or Lehman Brothers, acted in their own short term financial interests without regard to the sustainability of the system or the continuing welfare of their clients.

In the end, no matter how thoroughly you explain, it comes down to a simple yet complex question of trust. Without it, we are nothing more than another Somalia.

John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com

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