The response in 2008 to the acute phase of the Great Financial Crisis undermined trust not just in our technocratic elites, but across every aspect of our society based on trust.

It is impossible to understate just how much damage the response caused.

Why was the response so damaging?

It was based on the fundamentally flawed notion we couldn’t handle the truth.

“We” includes both you and me.  It also includes the financial markets and the citizens of every country impacted by the financial crisis.

Instead of telling the truth, the technocratic elite offered up an obviously false narrative to justify their policies.  The false narrative: the Too Big to Fail banks had to be saved or we would experience a second Great Depression.

For the last decade, I have pointed out what everyone sensed was untrue about this narrative.  Everyone sensed there was no obvious risk of the commercial banks collapsing and going out of business overnight.  There is a reason everyone thought this.  In the 1930s, policymakers took steps to make sure it couldn’t happen.

The result of their efforts was the combination of deposit insurance and the central bank acting as a lender of last resort.  This combination allows even the most insolvent bank to continue operating indefinitely and supporting the real economy (in case you doubt this, the US Savings & Loans were major real estate lenders during the 1980s even though most of them were insolvent).

Unfortunately, the false narrative about the need to save the banks to prevent a second Great Depression was adopted by politicians and many economists.  It was repeated without being challenged by the mainstream media.  Championing a false narrative was not without consequences.

Whether in the media, politics or academia, liberal professions suffer a vulnerability that a figure such as Trump doesn’t, in that their authority hangs on their claim to speak the truth.

Championing the false narrative about the financial crisis undermined their authority.

A recent sociological paper called The Authentic Appeal of the Lying Demagogue, by US academics Oliver Hahl, Minjae Kim and Ezra Zuckerman Sivan, draws a distinction between two types of lies. The first, “special access lies”, may be better termed “insider lies”. This is dishonesty from those trusted to truthfully report facts, who abuse that trust by failing to state what they privately know to be true.

The degree of insider lying beginning in September 2008 and continuing to today has been breathtaking.

Consider for a moment the bank stress tests.  It is the ultimate in “insider lies”.  Everyone knows the bank regulators have “special access” to the facts.  After all, they have bank examiners located at the Too Big to Fail banks.

Yet everyone thinks when the results of the stress tests are announced they are being lied to.  Why do they think the results of the test do not reflect what the bank regulators privately know to be true?  The banks are still opaque.

For the stress tests to be credible, the banks must provide transparency.  To determine if the banks really can withstand economic collapse, both the regulators and the market need access to all the bank’s current exposure details.  The regulators need transparency to run the tests and the market needs transparency to confirm the results.

Several years after the first stress tests, Ben Bernanke admitted the Fed was engaged in insider lying.  In an April 8, 2013 speech, he observe the Fed still did not have the information it needed to run legitimate stress tests. [“These ongoing efforts are bringing us close to the point at which we will be able to estimate, in a fully independent way, how each firm’s loss, revenue, and capital ratio would likely respond in any specified scenario.“]

Insider lying wasn’t confined to the bank stress tests.  The bank regulators engaged in it when they covered-up bankers rigging the price of money.

Before the acute phase of the financial crisis began, the price of money was known as the London interbank offered rate (Libor).  This rate was suppose to be the rate at which banks were willing to lend to each other on an unsecured basis.  It was calculated daily based on estimates submitted by the banks.  Since it wasn’t based on actual transactions, Libor was susceptible to being manipulated by the bankers for private gain.  And that is what they did.

The financial regulators became aware of this in the fall of 2008.

Why?

Because the market for interbank lending froze and it was obvious the banks were lying about their cost of borrowing.  Once the interbank market froze, banks could not borrow in it.  Hence, any rate they estimated they could borrow at was pure fiction.

Having found out the bankers were manipulating the cost of money for personal gain and self-preservation (after all, a bank reporting it couldn’t borrow money in the interbank loan market would likely result in the bank not being able to borrow money from other investors too), how did bank regulators respond?  They embraced it!  Why?  The bank regulators didn’t want the markets to find out the truth about the insider lies the regulators were telling.

So there were the regulators encouraging the banks to submit and profit from demonstrably false estimates for the price of money.  Ouch!

But the insider lying didn’t stop there.  It was extended to the notion while bankers had misbehaved before the financial crisis, they hadn’t broken any laws.  Common sense and the vast gap between what investment bankers represented they were putting up and what they actually put up as collateral backing subprime mortgage loan deals strongly suggest this wasn’t true.

The insider lying didn’t stop with undermining the credibility of the elites and the rule of law, but I have to stop if this post is going to remain a reasonable length.

It truly is breathtaking the extent of insider lying related to the financial crisis that has occurred over the last decade.  Of course, all this insider lying meant the people telling the lies had to block restoring transparency to the global financial system.  Why?  The restoration of transparency would have shown they were and still are lying.

Unfortunately, until transparency is restored, trust will not be restored.

Why?

Transparency is the foundation for trust.  It is a lot easier to trust when there is transparency and the story we are asked to trust can be independently confirmed.