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August 10, 2011 6:03 PM

Business

The Truth, the Banks and the Tooth Fairy

"Banks are like the tooth fairy, they go away when you stop believing in them. " That is, beyond all doubt, my favorite bit of commentary from the financial crisis -- the 2008 crisis, that is. I don't yet...

"Banks are like the tooth fairy, they go away when you stop believing in them. " That is, beyond all doubt, my favorite bit of commentary from the financial crisis -- the 2008 crisis, that is. I don't yet want to call this latest go around a crisis. Then again, with 500- and 600-point drops in market, it's hard to be optimistic.
The tooth fairy comparison came from a 2008 interview aired on National Public Radio, and I missed the speaker's name, but not his point.

Societies imbue organizations like banks, but also governments and their leaders with tremendous power by trusting them by believing that they are fair actors providing some sort of service or valuable oversight.

That power, we are finding, can drain away very quickly when public opinion shifts. Banks can go broke if people don't trust them with their money. And governments can fail when the governed lose faith. We saw the former happen in 2008, while the latter shook the Middle East this spring.

It would be easier on everyone if major institutions could be reformed and improved instead of just thrown out.

To make things better, though, we need to understand that the overarching crisis here is not just of confidence, but also truth.

People are lied to every day and they accept it.

Analysts who choose not to remember the lessons of the Enron implosion put bad stocks on "hold," not "sell," and the sliding scale is assumed by everyone. Politicians gloss over needed budget cuts or tax increases to get into office. Everyone knows it and everyone votes hoping their guy, or gal, doesn't change too much after they're sworn in.

But there is a glimmer of hope. It just happened to come from the spark that set off the current market crash.

With its downgrade of the U.S. credit rating, Standard & Poor's, either intentionally or not, has won some measure of redemption after missing the financial crisis.

At the very least, and by almost all independent accounts, S&P simply called it like it is -- Washington was by its own admission hours away from not being able to pay its bills last week.

And S&P said: "The downgrade reflects our view that the effectiveness, stability and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges."

That's just true. And we need a bit more truth even if it's bad for banks or governments -- or 401Ks. Without the truth, people won't be able to continue to believe in these institutions and they will, eventually, go away, just like the tooth fairy.
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