From Mr William Gamble.

Sir, Prior to the use of law, people used something more basic: trust. There is a neurological basis for this. The work of Nobel laureate Vernon Smith and Paul Zak has shown that there is actually a neurological payout for trust in the form of the feel-good neuropeptide, oxytocin.

The problem with trust is illustrated in game theory. It has to be built up over repeated games before reputations are established. What occurs in these repeated games is that information about the dependability of the counterparty is transferred. With more information, the parties can establish a relationship and their transactions can become more efficient.

This is the problem with the Fed’s actions. This is the problem with markets around the world.

Rate cuts and liquidity cannot by themselves restore trust. This takes time. What can help the process is for all markets to require as much transparency and disclosure as possible. Unfortunately, the economic incentives to withhold information are enormous, so markets are left with as many suspicions as the partner of a philandering spouse. These problems are exacerbated in emerging markets where weak legal systems allow silence or fraud. It is only when the truth finally comes out that markets can determine true value again.

Rate cuts provide only the presumption of solvency, not the reality.

William Gamble,
Emerging Market Strategies,
East Providence, RI 02914, US