Accelerating financialization and rising societal wealth have meant that democratic governments increasingly provide bailouts following banking crises. Using a new long-run data set, we show that despite frequent and virulent crises before World War II, bank bailouts to protect wealth were then exceptionally rare. In recent decades, by contrast, governments have increasingly opted for extensive bailouts—well before the major interventions of 2007–2009. We argue that this policy shift is the consequence of the “great expectations” of middle-class voters overlooked in existing accounts. Associated with the growing financialization of wealth, rising leverage, and accumulating ex ante financial stabilization commitments by governments, these expectations are suggestive of substantially altered policy preferences and political cleavages. Since the 1970s, when severe banking crises returned as an important threat to middle-class wealth, this “pressure from below” has led elected governments to provide increasingly costly bailouts with no historical precedent.

A decade after the global financial crisis, agreement on appropriate policy responses to banking crises remains elusive despite an apparent political consensus on the need to eliminate bailouts and end “too big to fail” (Binham, 2017). Furthermore, many experts doubt that measures adopted since 2008 to limit taxpayer-funded rescues will achieve this objective (Admati & Hellwig, 2013; Bernanke et al., 2019; King, 2016). Meanwhile, elected governments, most recently in Italy, continue to implement costly bailouts regardless.

The commonplace explanation that bailouts are the consequence of pressure from financial sector interests is not the whole story (Barofsky, 2012; Johnson & Kwak, 2010).1 We argue that the emergence of “great expectations” among a large segment of society regarding financial stabilization has been a critical but overlooked factor driving long-term changes in government responses to banking crises toward increasingly extensive and costly bailouts. This evolution in the policy expectations of households and voters has been driven by three interrelated developments: the financialization of wealth, the democratization of leverage, and accumulating ex ante government policy commitments to financial stabilization. These developments have increasingly linked the interests of middle-class households2 to financial markets and thereby broadened and intensified their effective demand for protection from the fallout from crises.

Utilizing a new data set that codes policy responses for 58 democracies in 112 systemic banking crises since 1848, we provide the first statistical analysis of government policy responses to banking crises over such an extended time frame and a large sample of systemic crises. Our findings are consistent with the claim that the wealth effect has generated a rising tendency toward bailouts. They relate to other studies suggesting that deepening ties to asset markets now challenge, if not supplant, those with the labor market as the dominant economic cleavage in politics (Ansell, 2014; Callaghan, 2015; Harmes, 2001; Langley, 2014). They also extend work emphasizing how this “democratization of finance,” often associated with a new policy narrative of individual self-responsibility for embracing and managing life cycle risks, has a tendency to disappoint (Erturk et al., 2007; Langley, 2009). Voters strongly resist the idea that they should accept personal responsibility for wealth losses in an era of great expectations.

Our findings are inconsistent with the argument that “democratic governments, constrained as they are by links of electoral accountability, are more cautious in implementing costly policies that are ultimately shouldered by taxpayers” (Rosas, 2009, p. 4).3 This claim overlooks the dynamic forces we identify that have weakened the democratic constraint on bailouts. Great expectations effectively place modern governments under a very different standard of democratic accountability by requiring them to compromise minimizing taxpayer liability in systemic banking crises in favor of bailouts aimed at wealth protection. They thus raise doubts concerning the general claim that democratic institutions promote fiscal credibility (North & Thomas, 1973; North & Weingast, 1989).

In the next section, we elaborate our argument. We then present the new data set and the results of our statistical analysis. We conclude by considering the implications for how we can understand evolving political cleavages.

Conclusion The expectation that democratic politicians will seek to avoid extensive crisis interventions producing large taxpayer liabilities draws on a long tradition of theorizing about the impact of electoral accountability in democratic settings. However, the evidence in this article raises doubts. Instead, it suggests that democratically elected politicians in the modern era have become increasingly prone to respond to the demands of an increasingly wealthy but also exposed middle class. These great expectations arise from the three interrelated developments—the financialization of wealth, the democratization of leverage, and an accumulating ex ante policy commitment to financial stability. We have shown that each of these factors is associated with more extensive bailouts. This was true not just for all the democracies that faced systemic banking crises over 2007–2009, but more importantly we show that it is part of a longer and deeper evolution of the political economies of developed, emerging, and even developing countries. Our findings also point to the complex and evolving interest cleavages characterizing increasingly financialized political economies. Much political economy theory has traditionally understood interest cleavages as deriving from actors’ positions in the division of labor and the way these shape flows of income to classes (capital, labor, and rentiers) or to cross-class sectoral divisions (Frieden, 1991; Hiscox, 2002; Rogowski, 1990). Financialization, by linking the wealth and consumption of many households to asset and credit markets, blurs this picture (Ansell, 2014; Gourevitch & Shinn, 2006, p. 221; Langley, 2009; Pagliari et al., 2018). Income flows still matter to middle-class households, defined (as we have throughout) as those comfortably out of poverty but still needing to work, but now these households as homeowners and DC pension-holders fret more about asset and credit market downturns. They often also value highly the ability to refinance mortgages and other debts at lower interest rates in the wake of financial crises and to maintain consumption via expansion of consumer finance and credit. Others who are less leveraged (and often older) may be less exposed, but as likely to be concerned about the threat financial instability poses to the value of their pensions and houses. The implications of these new cleavages and coalitions defined by wealth rather than income are potentially far-reaching. It has posed challenges to the contemporary welfare state and complicated efforts to forge constituencies in support of more redistributive measures after the 2007–2009 crisis (Ansell, 2012, 2014). It may also increase political support for consumption-driven growth models linked to the expansion of credit as opposed to export-driven models based on labor cost moderation and the real exchange rate (Baccaro & Pontusson, 2016). It may make it harder to build constituencies in favor of moderating housing and asset booms and the growth of private debt (Baker, 2018). Booming housing markets may also heighten the salience of political cleavages between home owners and renters, which are often layered on wealth disparities between generations and between those living in prime versus peripheral locations (Ansell, 2017). Home ownership may also have effects on political preferences for environmental protection, fuelling NIMBYism aimed at blocking liberalization of supply-side constraints on home construction that could lower house prices. Perceptive politicians such as Margaret Thatcher saw political advantage in policies promoting asset ownership among the working and middle classes (Francis, 2012). But our evidence suggests that her attempt to drive a wedge through the left’s constituency and generate a permanent majority for pro-market conservatives was only partly successful. The promotion of private house ownership and privatized pensions produced more extensive crisis interventions, consistent with the preferences of an increasingly asset-rich middle class. Their preferences may be time-inconsistent, favoring deregulation in credit booms and supporting heavy government intervention and re-regulation when crises strike. These interventions in turn may generate the rising moral hazard Thatcher so detested, destabilizing the market capitalism she and others sought to restore. Furthermore, in creating a policy trap that reinforces the very threat to financial stability from which many voters demand protection, it could increase political instability and contribute to rising citizen dissatisfaction with government and politics in many democracies (Chwieroth & Walter, 2017; Foa & Mounk, 2016, 2017). This link, which has been little explored to date in the burgeoning literature on populist politics, is worthy of further research.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article. Funding

The authors disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The support of the Economic and Social Research Council (ESRC) in funding the Systemic Risk Centre is gratefully acknowledged (Grant Number ES/K002309/1). The authors also acknowledge financial support from Chwieroth’s Mid-Career Fellowship from the British Academy for the Humanities and the Social Sciences [MD130026], from Chwieroth’s AXA Award from the AXA Research Fund, from Chwieroth and Walter’s Discovery Project award from the Australian Research Council [DP140101877], and from seed fund grants by the Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) and the Department of International Relations at the London School of Economics, and the Melbourne School of Government. ORCID iD

Jeffrey M. Chwieroth https://orcid.org/0000-0001-8965-0621 Supplemental Material

Supplemental material for this article is available online at the CPS website http://journals.sagepub.com/doi/suppl/10.1177/0010414019897418