Stray Thought Re: O'Hare, Sunk Costs, Recoverable Costs, and the Bailout
Or: How Much Trust Should We Seek To Restore?

In his interesting post on the current financial crisis to which I linked earlier, Michael O'Hare writes that, inter alia, there is:

...a recoverable (iii) loss of the particular capacity to create value that is embodied in trust, especially trust that promises will be kept and that a thousand-dollar bond will be exchangeable years from now for a thousand dollars' worth of stuff. The third of these is not irretrievable, and it's really important, because we can have a lot more real economic welfare if capital markets allow people to trade resources across time and among strangers. And it's a cost that, if allowed to stand, is distributed all across society, in other words, almost like "across all taxpayers".

So I was wondering: don't we want some of the trust in question to be lost for good? I know virtually nothing about economics, so I'm not exactly sure exactly which trust we're talking about here, but it seems fairly clear that a good bit of the relevant trust was misplaced. Now, we--meaning, the non-criminal, non-greed-obsessed, non-a$holes...that is, we-not-the-people who caused all this--don't want to foster or promote a system in which normal people have more trust in a system largely run but criminal, greed-obsessed a$holes than is warranted. The only people who want normal people to trust crooks more than they ought to are, well, crooks.

So, since there was too much trust before, we need for some of the trust to be lost.

Though that's not a real loss, is it? It's actually a kind of gain--something like a gained capacity, a capacity to better determine how much trust one should put in the financial sector. Or something like that. No?

O'Hare also writes:

But I think we have to try it, even with the available sorry teams in place, and even with the risk of teaching wrong lessons, because all the social capital of the business world is a terrible thing to lose. Indeed, if we can't recover at least most of it, we're headed for a real catastrophe, because it's the one resource without which we can't create more than stone-age wealth levels.

Here he suggests that we need to recover "at least most" of the trust. That seems plausible to me, for whatever that's worth. But how much, roughly? About three-quarters of it? About nine-tenths of it? What's appropriate?

Speaking merely as an econo-dope, it seems that it's just as important to avoid restoring too much trust as it is to avoid restoring too little. It's important that people realize that the financial sector is basically run by people who are fairly smart, and who spend every waking hour trying to figure out how to take your money without going to jail. They don't want to ruin or kill you--they don't care enough about you [enough] to want any particular outcome for you. Like the Great Old Ones, they are indifferent to you. You have your life to live, and financial affairs are just a kind of sidebar to that life. To these people, finding legal loopholes that will allow them to take your money without donning an orange jump suit is their life--or so it seems.

Now, exactly how much trust was it that you wanted to put in the system run by these people again?

What we need here is what we need almost everywhere--an accurate picture of the relevant facts and attendant risks. So what we need--not to put too fine a point on it--is a system that really does deserve a certain degree, d, of our trust, and, incidentally, a way to communicate this fact to people. We shouldn't--unless I'm missing something fairly big and weird--just aim at convincing people that d is high, because this sounds a lot like trying to convince them that d is higher than it actually is. I don't think O'Hare was disagreeing with that, but I don't think he was carefully focusing on the point, either. But it may, in fact, be worth focusing on.