Mmm there's more to it than that, and simplifying it that way is just as much an error as blaming "big pharma."
The mental hospitals were horrific; unambiguous human rights violations were the norm and ubiquitous in them. The core of the deinstitutionalization movement was a legitimate reaction to that.
It's also true that rapid developments, and growing (over) confidence, in psychiatric medicines were a major part of presenting an alternative that people could generally accept.
And it fit well into the Reagony zeitgeist of the time, of removing large-scale institutions of social support. Deinstitutionalization was supposed to have two steps: first was to remove the large generalized asylums. The second was to be replacing them with smaller, community support-based, specialized institutions more aligned with the needs of the individuals.
Obviously the second never happened, and you can argue that it was never meaningfully intended to by the people with the power to do it. But it wasn't even mostly a "breakdown in trust" in general, and actually displays a level of trust in large-scale commitment to social efforts that we rarely see anymore.
It wasn't naiveté either, the institutions were genuinely horrific! They needed to be replaced with something, instead they were replaced with nothing. The fault is in the followthrough rather than the original impetus to deinstitutionalize.