"Trust, but Verify." Only the Great Communicator could have perpetrated this philosophical oxymoron with impunity.
If you truly trust, then there is no need to verify. And if you need to verify, then there is obviously a dearth of trust.
From an accountant's point of view, trust is more than a philosophical issue. It often comes down to dollars and cents. That's not a crude take on a philosophical virtue. It's a direct read on current reality.
Consider the current credit crisis, an economic derivative of the sub-prime mortgage crisis. Mortgages were never granted on trust. They were granted on verification of the asset, and the means to repay the debt. That was in the good old days, when mortgages were granted by local institutions to local borrowers. Then Creative Management set these transactions free from the surly bonds of prudent lending and let them soar into the global currents of infinite Creative Financing where anyone, anywhere, could profit from funding a piece of the American Dream. Investors everywhere trusted that THE SYSTEM, whatever it was, would assure the quality of The Paper, and the inevitability of the Return, as promised. Yes there are Risks, but we know Smart People who have deployed scalable Smart Strategies that will Spread Risk to assure that our sorry Assumptions don't get blown to smithereens by a few Bad Apples. So much for Smart People. So much for Trust.
In my prior life as an auditor, I wrote many audit findings on the need for verification and controls. Sometimes I won; sometimes I lost. But when I lost, it was typically due to judgments of cost/benefit trade-offs. Business executives make those calls every day. So do average citizens.
Sometimes, the degree of trust we place in others is incredible. The internet age has perhaps done more to expose our vulnerabilities to unbridled trust than any other paradigm. This is true not only of individuals but of institutions as well. The need for greater investment in computer security has been a frequent subject of audits and articles in business and professional journals. Information technology is both incredibly powerful and incredibly vulnerable. We love the power; we often pay lip service to the risk.
Another factor in the spread of vulnerability to trust is what I call the atomization of our society, aided and abetted by information technology. Our social and economic relationships over the past three decades have been migrated from direct and personal to indirect and increasingly institutional. I don't have a personal banker anymore. I'm even discouraged from interacting with a human teller. Intended, of course, to provide me the best service at the lowest possible cost. But try to figure out where you have to go in this increasingly extenuated process to achieve redress of an error, or any kind of personal consideration of a valid exception to the entity's standard practice.
I refer to this atomization in the passive tense as something which has been imposed on our society, mostly by the private sector, because in many cases it is something we have accepted rather than selected. Our job moves; we move, maybe. Our bank is bought by an institution on the other side of the country; we change check stock. Our mortgage is sold by our local banker (if one still exists) to a national intermediary for 'securitization'; we accept the fait accompli, whether we like or trust our new 'partner' or not.
* * *
I began this post three weeks ago. Blogs are supposed to be extemporaneous exercises; thoughtful but timely. I have found the posts that I call the Capitalist Papers excruciatingly difficult to write. They spring from a cognitive dissonance between what my profession has taught me and the reality of a world that is rapidly descending into irrationality and immorality, aided and abetted by the supposedly best and brightest among us.
This past week has witnessed many of these B&Bs impaled on the instruments of their own invention, victims of excessive trust in their own fraternity, or their own arrogance, and finding themselves ironically as vulnerable as the rest of us. There would be some satisfaction in watching the fall of the mighty, if not for the fact that their debris is smothering the rest of us.
Yet, even as we watch the devolution of our capitalist system, the same Greek Chorus that told us that hedge funds didn't need to be regulated, that there is no real estate bubble, that private equity is a reasonable answer to the strangulation of securities regulation, that pensions are safe, that sub-prime mortgages are not risky,...they're now telling us that this is just another cycle that will correct itself. Nothing could be further from the truth. We've run out of gambits, and the road back will be long and slow, as has been the road down into our current abyss, of which we have not yet hit bottom.
The Savings and Loan meltdown
Black Monday
Pension Plan collapses
The dot.com bubble
Enron
Worldcom
Health South
Countrywide
Bear Sterns
Fannie and Freddie
Lehman Brothers
AIG
What's the cost / benefit of trust? I don't know. The tape is still running.
Verify
Verify
Verify
Onward.
2008/09/18
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