Eroding trust: Another economy red flag

It's hardly surprising that Americans don't trust banks and other financial institutions. Think Bank of America's $5 debit card fee; the wide array of fee hikes on all kinds of bank transactions; cancelled credit cards; the taxpayer bailout; and so on. It's a long list of justifiable complaints.

Still, it isn't good news for the economy that trust continues to erode. either. The 12th quarterly finding of the Chicago Booth/Kellogg School Financial Trust Index has only 23 percent of those surveyed in September 2011 saying that they trust the country's financial system. That's down from 25 percent in June 2011.

Worse yet, some 60 percent said they are angry or very angry about the current economic situation. It's the highest level of anger reported since the earliest months of the financial crisis.

Trust matters. It's kind of like a recipe or a software protocol that allows for economic exchange and all kinds of innovation. Nobel Prize laureate Kenneth Arrow famously remarked that "virtually every commercial transaction has within itself an element of trust." There's compelling evidence that both higher levels of trust in institutions and a belief in the general trustworthiness of individuals in society carry large economic benefits. Sociologists, political scientists and economists have all showed in an impressive body of research that higher levels of trust increase trade and even foster economic growth,.

The more trust, the better it's for an economy--and vice versa.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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