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Saving the Market From Itself: The Politics of Financial Intervention Open Access

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What accounts for divergent and unexpected patterns of state response to banking crises? Contrary to predictions of convergence, significantly different patterns persist across countries. Moreover, these are contrary to expectations. States with a tradition of "laissez-faire" economic policy, such as the United States and United Kingdom, rely heavily on intensive and punitive state intervention, including compulsory nationalization of banks. Conversely, states such as Germany, with an "organized capitalist" tradition in which the state plays an active role in managing the economy, favor state intervention on much more generous and voluntary terms. Such states also see far more extensive privately-organized and -funded rescues than the laissez-faire states.I draw on the comparative capitalisms and multi-level governance literatures to explain these patterns by examining the organization of the financial system and the presence or absence of private governance networks. Divergence is explained by different conceptions of the self-interest of healthy banks in times of crisis. In organized capitalist states, a focus on interbank cooperation produces private governance networks, and means that healthy banks are invested in the fate of failing banks and willing to take action to support them. The healthy banks and institutions of private governance organize privately-funded rescues and lobby the state for generous terms of public assistance. By contrast, in the Anglo-American states interbank relations are atomized, with little or no private governance. In such an environment, healthy banks are unwilling to take action to supportviistruggling peers. Thus there are few private rescues, but without healthy bank lobbying state policymakers are free to impose more stringent terms on banks receiving state-funded rescues. Research has been carried out in a combination of interview and archive-based case study research of American, British, and German responses to the 2007-2009 crisis and of quantitative analysis of state responses to banking crises in the advanced industrial world from 1974 to present.This research offers a valuable contribution to the comparative capitalisms and governance literatures. It demonstrates how corporatist capitalist systems perpetuate themselves in time of crisis through political influence rather than economic functionalism. It also offers comparative examples of how private governance or its absence can play a crucial role in shaping responses to banking crises. Moreover, it highlights how private governance can be both boon, through increased burden-sharing by healthy private interests, and bane, by compelling the state to offer more generous assistance.

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