Saving the Market from Itself: The Politics of Financial Intervention

As global economic integration and financial innovation outpace regulation, academics and regulators increasingly focus on the capacity of private governance to complement or substitute for public regulation.  However, while private governance allows the state to shift some of the burden of regulation onto private actors, organizational advantages of banks with networked systems, such as Germany or Italy, or greater government-finance linkages, as in formerly state-owned French banks, can produce greater concessions from the state to banks in times of crisis than in disorganized Anglo-American financial systems.  This paper explores how the organization of financial actors produces unexpected patterns in state responses to financial crises.  The US responded to the 2007-2009 crisis with compulsory nationalizations and other policies that imposed high costs on the financial sector, despite having long sought to limit state interference in the economy.  Germany, by contrast, has a tradition of state management of economic activity but provided aid on generous terms and avoided state ownership.  To explain this divergence, I contrast Germany’s highly-interdependent networked financial system, with the more atomized interbank relationships in the United States.  Greater bank interdependence produces stronger private governance institutions, providing healthy banks the incentive and means to both produce substantial private rescues and lobby the state for more generous terms for public rescues.  I supplement my case studies with a statistical analysis of banking crises from 1974 to 2009; this analysis illustrates that a pattern of more generous public rescues in states with networked financial systems holds across the advanced capitalist states.