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A study from the newly formed Chicago Booth-Kellogg School Financial Trust Index finds that the lack of trust in financial leaders and financial institutions has plummeted.

Roadblocks to consumer confidence

Here at Auto Credit Express Car Loans, we can see that the auto manufacturers and their captive (and semi-captive) lending arms are doing everything in their power to bring customers back into dealer showrooms. But even with the proliferation of these unprecedented retail sales offers, there are still thousands of potential customers that are staying away from dealer showrooms.

Much of this reticence can be traced to the uncertainty in the job market as well as the declining fortunes of the housing market. A new research study adds a new element to the equation – American’s trust in financial institutions and the leaders who head those entities.

Financial Trust Index

To measure as well as study consumer trust, Paola Sapienza, Associate Professor of Finance in the Kellogg School of Management at Northwestern University and Luigi Zingales, Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow at the University of Chicago Booth School of Business created the Chicago Booth/Kellogg School Financial Trust Index and have published the first of their results today.

“Trust is a powerful motivator of economic behavior,” said Sapienza, “Our previous research and anecdotal evidence suggest that lack of trust can have paralyzing effects on financing and investments. We developed the Financial Trust Index to measure this often ignored economic indicator and gain insight into how the government’s reaction affects the economy.”

According to Professors Sapienza and Zingales, the Financial Trust Index will measure public opinion every three months and track changes in attitude over time. This should, in their opinion, provide “a better understanding of public trust, the absence of which can bring even the richest, most advanced economies to a grinding halt.”

Key Findings of the Report

• Only 22 percent of those surveyed currently trust the financial system.

• Trust in the financial sector has declined sharply over the last few months. When asked how their trust had changed over the past three months, respondents indicated a decrease across all categories, with perceptions of the stock market most soured.

Current events and government policy

Another aspect of the report was to determine how current events and government policy might influence the level of trust that people have in the financial markets. Here are the results:

• Respondents who identify the main cause of the 2008 financial crisis as lax government oversight (16 percent) or regulation (15 percent) exhibit the least trust in the market.

• Levels of trust were also low among those who blamed companies, citing poor corporate governance (15 percent) or managerial greed (36 percent).

Government intervention a factor

The report also goes on to explain that a “crucial” factor in this reduced trust is the perception of the way in which the government intervened:

• While the majority of respondents favor government intervention in financial markets, 80 percent said the way it intervened has made them less confident in the market.

• Even among the respondents who felt that federal intervention in the financial sector should increase, 75 percent still lost confidence as a result of recent federal intervention. This percentage rises to 95 percent among those who did not favor government intervention (3 out of 4 are less confident).

According to Zingales, “One of the key factors undermining trust is the perception that the rules have changed in the middle of the game. The government has done exactly this. What is most shocking is how deeply this has affected the trust of the average American.”

“Coziness” between government and finance

The report goes on to state that there is clearly a problem in the minds of many Americans regarding the strong ties between government officials in the finance industry. While 20% of those polled had no opinion on what motivated Treasury Secretary Henry Paulson in his response to the financial crisis, the remaining 80% were split with 40% believing he acted in the country’s best interest and the other 40% feeling that his solution was designed to benefit Goldman Sachs, where he was chairman and CEO before his Treasury appointment.

The Bottom Line

Clearly, there are a number of things that must happen to the current economy before Americans can begin to change their prevailing attitudes. From the results of this survey, it appears that trust in our government and financial institutions is something that is going to have to be earned back by both before we can begin to put the current credit crisis behind us.

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