The Political Economy of Financial Crises

Charles Calomiris and Matthew Jaremski

No 35101, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financial crises remain a recurrent feature of modern economies despite evidence that many are predictable and preventable. This chapter discusses how financial instability often reflects a political equilibrium rather than purely technocratic shortcomings. Contrasting economic and political perspectives on regulation, the chapter emphasizes how policymakers shape financial rules in ways that favor politically-influential groups but result in financial vulnerability. Key mechanisms include restricted bank chartering, safety nets, credit subsidies, and sovereign borrowing. Political forces also shape crisis management. Delayed interventions, selective support, and constrained policy responses can deepen and prolong crises. Together, these dynamics help explain the persistent and foreseeable nature of financial instability across time, legal origins, political structures, and institutional contexts. Instead of seeing financial crises as arising from an unavoidable vulnerability to external shocks they are better seen as a mirror of the societies in which they occur, reflecting their political structures, vying constituencies, cultural preferences, and blind spots.

JEL-codes: E44 F34 G01 H12 N1 N2 P16 (search for similar items in EconPapers)
Date: 2026-04
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-his, nep-pke and nep-pol
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