Band 6, Heft 1 - The Power of Inaction. Bank Bailouts in Comparison

This Review article discusses the book by Cornelia Woll, titled “The power of Inaction”.

How to best describe and assess the result of a bailout process? The author argues that the power of inaction of banks while relevant, as argued by Cornelia Woll in her book, is not sufficient to characterize the result of a bailout process. As such result should encompass financial stability and business cycle considerations, the power of inaction of banks needs to be viewed in combination with the ability of authorities to learn in action and the quality of the legal and political process that accompanies such learning.

This article examines Cornelia Woll’s book on the “power of collective inaction” in which she argues that banks could extract favorable bailouts in the recent global financial crisis by remaining collectively inactive. Collective inaction forces governments to bear the brunt of the crisis resolutions. While this book provides an illuminating account of banking bailouts in several countries, its argument neglects the power of governments and of individual banks. Governments did not have to wait for banks’ (in)action but could impose punitive conditions on banks. And the resistance by banks did not originate from an incapacity to act collectively but from deliberate actions by individual banks to obstruct government intrusion. Rather than inaction on the part of banks, these interactions between governments and banks involved deliberate action and their outcome depended on more conventional notions of state-business power relations.

This comment presents three arguments. First, that while The Power of Inaction focuses on the role of banks within bailout negotiations, this framework can be gainfully expanded by considering the government side of the bailout negotiations: evidence from the U.S. and German cases suggests that the government, as well as banks, can wield the threat of inaction in a bailout negotiation. Second, that coordinated interventions were implemented in countries where the largest leading banks were weak, and vice versa. As this singularly determines the type of intervention, it leaves little room for making strong inferences on other factors. Third, that Woll’s study indicated that coordinated interventions are more cost-efficient than uncoordinated interventions. An unexplored implication is that government negotiators can gainfully persuade banks to take part in a coordinated intervention.

The North Atlantic Financial Crisis of 2007 did suddenly and massively disrupt the activities of financial markets and financial institutions that were organised under a market-based financial architecture at local and international levels. Both corporate and public policies were at the origin of this financial organisation that was established since the seventies and put at issue by this crisis. Finance and government were then as much complementary as rival actors throughout this market-driven transformation of local and international financial systems. Bank bailouts of 2007–2008 may be situated in this comprehensive and historical pattern, and embedded in the institutional structure that was designed and implemented to organise trans-national financial markets and financialisation.