Banking crises and politics: a long run perspective

Are the policy responses to the financial crises of 2007-9 and the political events that followed them exceptional? We show that over the course of nearly 150 years, severe banking crises have become increasingly consequential for policy and politics in democracies. First, governments have come much more likely over time to opt for extensive bailouts and other policies aimed at wealth protection during crises. Second, the inclination of voters to punish governments that are in office when crises occur has also increased sharply over time. We argue that the main cause of these developments is the rise of ‘great expectations’ among large segments of society in modern democracies regarding the protection of wealth in the post-1945 era, especially since the 1970s. From this time, severe banking crises returned as an important threat to this wealth, resulting in rising ‘mass pressure from below’ on governments to provide costly bailouts and with increasingly powerful political effects.