Financialization, wealth, and the changing political aftermaths of banking crises

Jeffrey Chwieroth and Andrew Walter

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Households face two politically salient risks associated with financial instability. The first risk, which has existed for perhaps centuries, is associated with the indirect effect of systemic banking crises on employment and income flows. The second risk arises from the direct effects of crises on asset prices and thus household wealth stocks. Historically, the second risk mainly affected only a small wealthy elite. We argue that the rapid expansion and financialization of middle class wealth since the mid-twentieth century mean that many voters now have “great expectations” regarding government responsibility to protect their wealth. The political risks of financial instability for incumbent governments have thus increased sharply, especially when institutional constraints hamper their ability to respond to voters’ new expectations. We show that the probability of incumbent governments facing significant institutional constraints retaining office after systemic banking crises has indeed fallen sharply in recent decades compared to the pre-1945 period.

Keywords: financial crisis; wealth; financialization; Political Economy; democracy; inequality (search for similar items in EconPapers)
JEL-codes: F50 O50 P10 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2022-01-01
New Economics Papers: this item is included in nep-ban and nep-his
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Citations: View citations in EconPapers (1)

Published in Socio-Economic Review, 1, January, 2022, 20(1), pp. 55–84. ISSN: 1475-1461

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:103759

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