All markets and all free governments are based on Faith and credit.  Today we have lost all faith and credit in not only the markets, but we are on the verge of losing our faith and credit in our form of government.  Credit and faith can be lost for a variety of reasons, but the actions of the US Government – including the recent acts by the Obama administration, as well as the Bush administration and Congress – have engendered a monumental loss of confidence in both systems.

When rules are established to induce people to participate in a system, the rules need to be followed and unacceptable variations from the rules need to be corrected swiftly.  We are not doing that and as a result are undermining our entire system and way of life.  The term credit is derived from the latin word creditum meaning something entrusted to another.  The key concept is trust.  Faith on the other hand is derived from the term fides but also has its roots in trust and belief that one will honor their credit.  When rules are not enforced we lose trust in the system.  We lose faith that the credit we place in the markets and in government will be honored.

When we place our own money in a system, we expect that there will be uniform rules.  We credit the system with being if not fair at least consistent.  When we pledge allegiance to a form of government, our consent to be governed is based on the credit we place in the government to act fairly, impartially and with prudence.  We also have faith that the markets will return our funds, or at least give us the bargain that we thought we made.  In the same vein, we have faith that our government will not take actions in an arbitrary, capricious manner, and we have faith that our government will regulate the markets with fidelity.

One of the essential functions of all governments is to regulate the markets so everyone will have confidence in the system.  From time immemorial, governments intervened in markets for the benefit of those governed.  The most basic example is the setting of standard weights and measures. When you go to any market to buy a pint of milk or a bushel of corn or a pound of beef you have faith that the merchant is giving you the pint, bushel or pound for the bargained for price.  If those weights and measures were not standardized, you would not have faith in the system and you would not place any credit with the merchant.  You and others would simply choose not to do business in that market.  It is no surprise that the US Constitution confers on Congress not only the power to regulate commerce, but to specifically fix the standards of weights and measures.

The precarious position we are in today is a direct result of the abdication of the government’s power to root out Fraud in the system – the most pernicious deviation from the standards set for the market and government itself.  Much has been written already about the fraud existing in the system.  Not the common garden variety type fraud like those perpetrated by the Madoffs and Stanfords of the world (see, Fraud, Fraud, Fraud), but the systemic fraud that is hidden from ordinary market participants, but when aggregated form a larger fraud than any perpetrated before.  When the game is rigged, people take their money and go home.  The massive withdrawal of funds from the markets and the amount of cash sitting on the sidelines is a direct result of the government’s failure to act to root out the fraud and create a level playing field.  The money won’t come back and the values of the baby boomer’s retirement accounts will not return, if ever, until the system is fixed.

The following are just a few examples of the systemic fraud that needs to be rooted out before faith and credit will be restored to the markets and our system of government:

1.       Continuing to bail out financial institutions at taxpayer expense when the institutions are insolvent and can’t be saved (for example, see Aig Black Hole - Us Continues To Pour Money Into Saving The Insurer );

2.                 Shifting losses from risk assumed by businesses to the taxpayers;

3.                 Refusing to regulate the credit default swap market;

4.                 Refusing to prosecute those borrowers who lied on their mortgage applications;

5.                 Refusing to take action against lenders and mortgage brokers who knowingly facilitated loans based on falsified mortgage applications;

6.                 Refusing to take action against the various ratings agencies that were paid to classify securities as AAA when they were based on falsified applications;

7.                 Refusal to prosecute those involved in the fraud and failure to enact legislation authorizing citizens to act as private attorneys general to ferret out the fraud (see, Hold Those Responsible Accountable!) ;

8.                 Refusal to impose mark to market accounting rules immediately;

9.                 Refusal to identify the recipients of taxpayer funds and to keep the markets, as well as government action, transparent (see Fed Still Refuses To Identify Recipients Of Our Money)    ; and

10.             Spinning official messages to give the impression that certain action is being taken when the exact opposite is being planned (see, e.g., Obama Calls For Fiscal Responsibility - Yeah, Right! and Fiscal Responsibility Summit Held to Pull Wool Over Nations Eyes).

There are many more examples, but the bottom line is that confidence needs to be restored to the system.  Fraud needs to be rooted out.  Wasteful spending needs to stop.  Playing favorites needs to end.  Effective representation of the people and the States needs to begin anew.  Only then will faith and credit be restored.