Market Update: In Trump We Trust? Hmmm.

In a key scene in the classic Frank Capra film, “It’s a Wonderful Life,” George Bailey (played by a noble, sincere James Stewart), faced with a run on his family-owned bank instigated by the evil, grasping Old Man Potter (played by a sneering Lionel Barrymore), tries to convince his friends and neighbors that even though he cannot meet their demands for mass withdrawals, their deposits are secure. He tries to explain that “the money isn’t here in the safe,” but has allowed the citizens of Bedford Falls to build homes and finance their needs at a reasonable price. If Potter is allowed to take over the bank, he warns, “There will never be another decent home built in this town.”

At first, he gets nowhere. The deposits are not insured and those who have mobbed the bank, although they like George personally, are terrified it will run out of money and they will be left with nothing. George, pleading with them to listen, is forced to pay out cash to a couple of depositors who remain unmoved. But soon his pleas begin to sway the men and women he has known all his life and who have been doing business with the bank since his father began it. The demand for withdrawals ceases, the bank is saved, and Potter is foiled.

In the end, there was only one thing that could have convinced the frightened, skeptical townsfolk to change their minds.

Trust.

That is the way banking works. It is, at its core, a fragile system. No bank could ever meet a demand for withdrawals by even a fraction of its customers because the money has either been loaned out or invested. In other words, if people lose faith in the system, it falls apart. And so, it is incumbent on those who oversee the banks to create the trust required for them to keep functioning, a relationship that also applies to the financial system as a whole. In the absence of trust, the markets will react to a far greater degree than the underlying economy would warrant. It will often gyrate wildly and sometimes collapse.

Sometimes these cataclysms occur through neglect, mismanagement, or even just plain bad luck, but almost never because a chief executive opts to create an atmosphere that incubates distrust and then shrugs and “refuses to rule out a recession,” as Donald Trump did while defending his tariffs, an initiative that has infuriated allies, empowered enemies, and baffled economists.

But the tariffs, as well as his tax bill, the purge of government employees, the elimination of government protections, or any other Trump initiative, cannot be evaluated solely on its economic or political impact. What Trump seems determined to do is more sociological—to return the nation to the good old days of the McKinley era, when there were no restrictions on businesses, no social safety net, no government regulations, no Federal Reserve (which he wants to either take over or abolish), no workplace protections, no right to unionize, no civil rights legislation, no FDA, EPA, consumer protections, etc. etc.

What Trump seems oblivious to is that the good old days were not so good. Just one example is the need to enact the Pure Food and Drug Act in 1906, which was spurred not only by Upton Sinclair’s devastating exposé of meat packing in The Jungle, but also by Samuel Hopkins Adams’s lacerating series on patent medicines in Collier’s, “Death’s Laboratory.” He forgets that Heroin was introduced by the Bayer Company in 1899, as a cough medicine for children and remained legal for years afterward. The regulatory legislation enacted by these and other scandals were meant to restore trust that the food we eat, the water we drink, the medicines we take, and cars we drive are safe.

The list of protections for ordinary citizens that Trump would eliminate, including for most of his core constituents, including veterans, is far too long to list. But it is the impact on the economy that will be the most widely felt.

Before William McKinley became president in 1896, he was an Ohio congressman who spearheaded the Tariff Act of 1890, which was far deeper and more extensive than those Trump has ordered. The legislation proved widely unpopular as it resulted in sharp price increases, which led to a Democratic rout in 1892 and a rollback, but not an elimination, of the tariffs. American manufacturing, which then as now was to be the beneficiary, did not see any expansion nor did the broader economy benefit.

In addition, in the absence of financial controls or a central bank, the economy whipsawed its way through the next two decades, which included a series of “panics,” the most devastating of which occurred in 1893 and 1907. The latter was so serious that private individuals, led by J. P. Morgan, were forced to use their staggering wealth to bail the nation out. In response, the Federal Reserve Bank was created as an independent entity, empowered to use interest rates and other monetary tools to moderate the severity of financial swings.

The Federal Reserve, because of that independence, not only provided financial stability, but also restored trust. That trust was put severely to the test in 1929, when abuses in the financial markets bred by the absence of controls led to the Great Depression. To prevent a repeat of that catastrophe, the Securities and Exchange Commission was created in 1934, charged with regulating financial markets and, once again, restoring trust in the system.

In other words, Donald Trump, bathed in nostalgia, has conveniently overlooked that during the period he longs for, there were devastating consequences, both economic and social, because government was so limited. All those federal controls he loathes were put into place because the private sector failed. When you mix this flawed vision with limited intelligence and a healthy dose of megalomania, you have created a highly combustible brew.

To counter the loss of trust in government institutions that Trump has engendered, he demands that we instead place our trust in…him. But one thing (among many) that Donald Trump has never learned is that trust cannot be demanded.

It must be earned.

How’s he doing so far?