One of the most famous exchanges in the history of finance took place a century ago. An aging J.P. Morgan, the most powerful financier in the world, testified before a House committee. The committee was investigating the tangled web of financial interests that dominated the economy. J.P. Morgan’s inquisitor was Samuel Untermyer, a tough corporate lawyer.

Untermyer: "Is not commercial credit based primarily upon money or property?"

Morgan: "No sir; the first thing is character."

Untermyer: "Before money or property?"

Morgan: "Before money or property or anything else. Money cannot buy it... because a man I do not trust could not get money from me on all the bonds in Christendom."

Morgan’s language may be from another era, but his essential insight remains true today: Markets work off a foundation of trust. And a lack of trust—in a sense "character"—largely explains the disturbing divergence between an economy gaining traction and a stock market flailing lower.

The good news is that the economy is getting stronger. Consumer spending remains healthy. The manufacturing sector is improving. Productivity is up smartly. Profit margins are widening. And business investment in high-tech equipment is taking a turn for the better.

But investors are in a deep funk. What started out as a scandal at Enron has grown into the biggest business crisis since the 1930s. The trouble is reminiscent of Wall Street's "cockroach theory": Where there is one cockroach scuttling across the floor, there is bound to be a whole lot of the creatures not far behind. Each day brings new revelations that there are many more executives that share the insatiable greed and deceptive behavior of a Kenneth Lay of Enron, a Dennis Kozlowski of Tyco, a Rigas family of Adelphia Communications, and a Gary Winnick of Global Crossing. Today, no one trusts the numbers certified by chief executives and their investment bankers, accountants, and lawyers.

America's business and financial elite is morally tarnished. CEOs make sure they get their corporate pension and health care payments for life while scaling back employee benefits. All the while, they are claiming a divine right to gargantuan pay packages with no financial penalty for failure. Character, to paraphrase Morgan, is lacking.

Trust is a core concept of what economists and sociologists call "social capital." Physical capital is a computer. Human capital is a college education. Social capital can also have a profound effect on economic growth and vitality. Although difficult to measure and define, social capital is the network of connections, values, and reciprocal relationships in a community. The stronger the ties of trust the greater are the potential for the kind of innovation and risk-taking that improves everyone's standard of living. The opposite is also true. A lack of trust and character produces less cooperation and investment.

There are positive signs. Investors are forcing some needed reforms, especially in bookkeeping and corporate reporting. Financial regulators are also pressing for clearer financial statements. Transparency or openness is a practical policy for reestablishing trust in a market economy.

But it will take even stronger action to repair the breach in trust. Sad to say, bold leadership among CEOs is lacking. Few executives, outside of the maverick billionaire Warren Buffet and Goldman Sachs chieftain Henry Paulson, are talking about how to enforce equity, fairness, and responsibility. That’s a shame. The risk is high that the economy will grow far beneath its potential—hurting everyone’s paycheck—without substantial reform.