Noisy Politics, Resilient Expectations? Local Governments’ Swap Crisis from a Comparative Perspective

Subnational governments on both sides of the Atlantic have increasingly embraced financial derivatives (such as interest rate swaps and options) since the 1990s. Local authorities began to enter OTC derivatives markets in hopes of lowering interest costs or generating savings. In many cases, however, serious losses instead of expected gains exacerbated the fiscal crises that were already faced by several cities. The ‘loss of taxpayer’s money’ was scandalized in the media and fueled attempts to regulate the use of swaps by (semi-)public entities more strictly. Despite this ‘swap crisis’, public finance officers seem to continue praising derivatives as beneficial financial instruments and defend their risk management practices vis-à-vis their (mostly public) critics. In this paper, we analyze when crises change actors’ expectations and when they do not. The question is approached by applying the social learning approach (Hall 1993, Hay 2001) to the question at hand. We derive a typology to predict the effect of crises on expectations and argue that expectations will change only, if elite perceptions converge with public perceptions (given an objective crisis). In order to map elite and public perceptions over time, we employ automated content analysis of German and US newspapers as well as professional journals over the period from 1990 until 2010 as a first step. In a second step, we apply the typology on crisis and change in expectations by conducting the method of parallel demonstration of theory to selected cases in Germany and the USA.