In this interview below recorded last month at the annual Asia-Global Dialogue sponsored by the Fung Global Institute, Rob Johnson, president of the Institute for New Economic Thinking, pointed at the failure of the financial system to establish trust as the reason for demoralization in the financial markets.
Johnson said the financial sector has become the nerve center of the global economy. But in a world of banks and financial institutions that are deemed by regulators to be too big to fail, market discipline evaporates.
“People subject themselves to market discipline,” Johnson says. “Sometimes its painful.” However, at the center of the financial system as it’s currently constructed are institutions that will not be allowed to collapse regardless of what they do because regulators fear the repercussions on the broader global economy. This reality undercuts the sacrifices smaller firms make in order to keep their operations in line because it appears as if there are two sets of rules – one for the big guys and one for everyone else.
Johnson suggests that to restore trust in the financial sector the financial firms will have to recognize that together they have a responsibility to society, not just a pecuniary responsibility to shareholders. Absent that, the financial sector will never inspire the trust that a healthy financial system requires.