Affiliation:
1. Harvard Kennedy School, Cambridge, USA
Abstract
Abstract
Why does the Federal Reserve bail banks out in violation of a core principle of free-market capitalism: private gain–private loss? This article argues the Fed rescues banks not because it is captured by financial interests, but because it is captured by the paradigm of ‘systemic risk’. Systemic risk emerged in the 1960s out of a jurisdictional struggle over the Fed between two expert groups, ‘monetary substantivists’ and ‘monetary formalists’. The latter’s triumph transformed the Fed into a macroeconomic institution, responsible for managing growth. It also led to the institutionalization of ‘systemic risk’—a conception of the financial system as a vital and yet vulnerable economic system and of the Fed’s responsibility for protecting it. In this process, policymakers grew to fear bank failures as they began to see financial disasters through the lens of systemic risk.
Funder
Gerald R. Ford Presidential Foundation Research Travel Grant and History of Economics Society Early-Career Scholars Research Grant
Publisher
Oxford University Press (OUP)
Subject
General Economics, Econometrics and Finance,Sociology and Political Science
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