At root was the rapid enlargement of stock market capitalisations in the latter part of the 1990s that arguably engendered an outsized increase in opportunities for avarice. An infectious greed seemed to grip much of our business community.”  BIS Review 23/2003  3  5  the widespread use of certain reward mechanisms such as stock option schemes. As Alan Greenspan aptly put it: “The highly desirable spread of shareholding and options among business managers perversely created incentives to artificially inflated reported earnings in order to keep stock 6 prices high and rising”. Trust, as has been demonstrated for example by Francis Fukuyama in his best-seller Trust: The Social Virtues and the Creation of Prosperity, may be invaluable for economic processes, as it facilitates 7 economic interactions and lowers transaction costs. Recent economic research is increasingly emphasising that social capital represented by trust may be as important as physical capital for 8 economic growth and prosperity. Policy-makers and regulators can help to restore trust in financial markets and auditing processes by enhancing corporate governance mechanisms. I fully support measures which promote adequate governance of corporate behaviour and thereby contribute to the restoration of trust in financial statements and capital markets. However, at the end of the day the crucial contribution to restoring trust has to come from the corporate sector itself. The sector has to recognise that easy profits are like killing the goose that lays the golden eggs. Executives in private business have a collective interest in promoting high standards of ethical behaviour.

When share prices collapsed, households experienced substantial losses in their financial wealth, bringing the ratio of financial wealth to disposable income back to levels similar to those witnessed at the end of 1997. The costs of the developments in financial markets over the past few years, which were often linked to the “new economy”, can also be measured by a critical erosion of trust. Examples of accounting malpractice, corporate greed and imprudent stock market valuations have started to appear in increasing numbers, undermining the basic trust and confidence of investors in financial markets. There has been a lot of discussion about whether this unfortunate behaviour has been promoted by  3  D. Erasmus, “The Praise of Folly”, (translated by J. Wilson), Great Mind Series, Prometheus Books, 1994. 4  See for “irrational exuberance”: A. Greenspan, “The Challenge of Central Banking in a Democratic Society”, 5 December 1996, speech at the Annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research, Washington, D.C.: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?”; R.J. Schiller, “Irrational Exuberance”, Princeton University Press, 2000; See for “infectious greed”: A. Greenspan in his Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, 16 July 2002: “Why did corporate governance check and balances that served us reasonably well in the past break down?