Abstract
The rise of self-responsibility as practiced in many public policy areas was part of the more general rise of neoliberalism. A case in point is the corporate social responsibility movement. This led in the world of finance to the 2008 financial crisis thanks to various deregulatory moves beginning in the early 1980s. As such, the crisis was the product of a series of incremental institutional changes that enabled corporate self-responsibility in finance to go terribly wrong. Once the crisis hit, a number of more radical institutional changes were pursued in order to reverse the movement toward self-responsibility. This was an institutional rebalancing. This article offers some ideas about how to think about institutional change in the context of this particular corporate self-responsibility movement. It focuses first on the institutional changes that caused the crisis and then on the institutional changes that followed in an effort to minimize the severity of the crisis and reduce the possibility that another one might happen again. The basic argument is that self-responsibility is not a phenomenon that can be reduced to individual action; it cannot work properly without that action being embedded in an appropriate institutional environment. This is an argument at odds with neoliberal theory.
Introduction
This article is about how the turn toward self-responsibility in the financial sector contributed to the 2008 financial crisis. 1 Self-responsibility, as it is treated in many of the articles in this special issue (e.g., Eggers et al.; Frericks and Höppner), refers to changes in public policies designed to encourage individuals to take more responsibility for their own well-being. Examples include reducing government spending for programs that provide support for old age security, housing, education, income maintenance, food security, and job training. In the United States, with the stroke of a pen, Bill Clinton signed into law the Temporary Assistance for Needy Families (TANF) program, which soon limited welfare benefits over a person’s lifetime and established workfare activation requirements. The idea was to bring the individual and the pursuit of individual self-interest to the forefront and create opportunities and incentives for individuals to pursue their interests in ways that would enable them to fend for themselves more and rely on the state less for assistance, aid, and support. The underlying assumption was that by becoming more self-responsible good things would happen—individual initiative, innovation, and productivity would be unleashed, and both the individual and society would prosper (Campbell, 2018a). As Robert Maier puts it in this issue, self-responsibility is a matter of acting autonomously with the hope that people will do what is appropriate and beneficial for themselves and others.
The turn to self-responsibility was part of a more general neoliberal turn in politics, which, among other things, was a movement to reduce state spending and business regulation. There was also a neoliberal turn toward self-responsibility in the U.S. financial sector, but it took decades to unfold and, therefore, was much less obvious than the TANF change. It involved the regulatory reform of capital markets, banking, and mortgage lending. Under the law corporations were viewed as being equivalent to individuals. And the assumption here was that if they could get out from under the burden of government regulation, they would enjoy the autonomy and freedom to innovate in self-responsible ways that would enable them to flourish in ways that would also benefit the rest of society. Notably, they would avoid undue risk or investments that they did not understand, because they knew that if things turned out badly, investors would desert them, their stock price would fall, and those left owning shares—including managers whose compensation included stock options in the banks, hedge funds, and mortgage companies for which they worked—would suffer the financial consequences. This was all part of an overarching rationale for regulatory reform referred to by economists as the Efficient Market Hypothesis (Davis, 2011). In effect, if the state got out of the way, the market would facilitate self-responsible behavior.
The turn toward self-responsibility in finance and welfare policy entailed big institutional changes. In both cases, the move toward self-responsibility was a two-sided coin. One side was the individual or organization taking responsibility for themselves. The other side was the institutional context within which the individual or organization was embedded. Individuals and organizations are always embedded in some sort of institutional environment. Altering the institutions around them can increase or decrease their opportunities for acting in ways that are self-responsible and beneficial for themselves and society. Put differently, the rise of self-responsibility and neoliberalism more broadly is a story of institutional change. 2
Let me be clear about how I am using the term self-responsibility in the context of neoliberalism and the financial crisis. Self-responsibility refers to an organization or an individual in an organization acting without someone looking over their shoulder to make sure that they do the right thing for themselves and society. 3 The underlying assumption is that the market’s discipline will lead them to do the right thing. However, there are two problems with this assumption. First, while institutional change may create the possibility for self-responsible behavior, it does not guarantee such an outcome. Institutional environments do not determine behavior in an absolute sense; they only affect the probabilities that people will act in certain ways. We are talking about tendencies not inevitabilities.
Second, it follows that trying to facilitate self-responsibility can have either good or bad outcomes. If individuals have responsibility for themselves it can be an impetus for them to work harder, be more innovative, seek to help others, and do lots of good for themselves and society. But it can also be an impetus to exploit others, lie and cheat, and generally do things that may be beneficial for themselves but detrimental for society. The more a society turns toward self-responsibility the greater the opportunity—although, again, not the inevitability—that things will go wrong with unfortunate consequences. As we will see, neoliberalism failed to recognize that encouraging financial firms to be more self-responsible often did not lead to self-responsible behavior with socially beneficial outcomes. Indeed, what was sometimes good for the financial services industry in the short run ended up being disastrous for it and society in the long run.
Let me put the neoliberal assumption into perspective. The idea that the more individuals are encouraged to be self-responsible, the better will be the outcomes stems from neoclassical economics in its purest form where it is argued that unfettered markets yield the most efficient allocation of resources—Pareto optimality—in the long run. Certainly not all advocates of neoliberalism, and I presume self-responsibility, would accept this hard position, preferring instead a softer position recognizing that at least some minimal level of constraint on individual behavior is necessary. Indeed, early advocates of neoliberalism believed in the virtues of a relatively strong state as a necessary condition for the protection and enforcement of property rights and other basic conditions necessary for markets to function properly (Mirowski & Plehwe, 2009). Others would agree with this softer view. Emile Durkheim, for instance, recognized long ago that the pursuit of unbridled self-interest leads to the breakdown of social trust, the deterioration of exchange relations, and utter chaos. 4 Similarly, Karl Polanyi noted a double movement during the industrial revolution as the development of markets was paralleled by the development of state institutions designed to mitigate the most egregious sins of capitalist development. Had that not happened, he argued, capitalism would have destroyed itself from within (Polanyi, 1944). Even the paragon of orthodox economics, Adam Smith, recognized that for markets to operate well the pursuit of individual self-interest had to be tempered by the “moral sentiments” of society (Smith, 1759/2016). Since the early 1970s, the harder version of neoliberalism—so-called market fundamentalism—has come to influence, if not dominate, much policy making in many advanced capitalist countries (Campbell & Pedersen, 2001; Crouch, 2011).
To substantiate my arguments, this article offers an analysis of the financial crisis. Focusing on the crisis to explore self-responsibility might seem surprising and perhaps out of place to readers familiar with the literature on self-responsibility. After all, as noted earlier, much of the work on self-responsibility has focused on social policy, notably reductions in state welfare spending, more stringent activation requirements, and tighter eligibility criteria that people must meet to receive various social benefits. The financial crisis has not been addressed in the self-responsibility literature but is worth considering for two reasons. First, it had vast repercussions for welfare reform throughout Europe and North America—largely as a result of the adoption of austerity policies, which have put a premium on self-responsibility (Blyth, 2013; Campbell, 2011; Campbell & Hall, 2018). For instance, it appears that since the crisis began governments have largely stopped increasing levels of investment in labor market policies that were geared toward upskilling the labor force and providing employment assistance for unemployed workers, thus making it harder for workers to effectively take responsibility for themselves in the labor market (Benntsson, de la Porte, & Jacobsson, 2016). In other words, the turn toward self-responsibility in the world of banking and finance created the financial crisis whose shock waves reverberated through the welfare state self-responsibility movement. However, the second and more important reason why the financial crisis is relevant for the self-responsibility discussion is that it is a vivid example of how the move toward self-responsibility can go terribly wrong.
The basic insights of this article are twofold. First, institutions are typically an important precondition for self-responsibility. Note my use of the qualifier “typically” in this last sentence. Some scholars have assumed that institutional constraints and incentives are so overwhelmingly powerful that people subjected to them are in effect nothing more than “institutional dopes” blindly and automatically conforming to their institutional surroundings (Hirsch, 1997). But institutions do not come with a set of instructions—people must interpret their institutional surroundings and figure out how to respond to them (Blyth, 2004). That is, institutions involve both structure and agency. People have the power to craft, interpret, implement, and either conform to or deviate from institutions. For example, one can imagine situations where people act in self-responsible ways even when the prevailing institutions create incentives for them to do otherwise. A whistleblower, for instance, is someone who acts in responsible ways that run against the institutional grain of the organizations in which they work. Conversely, even if someone wants to follow the institutional edicts and incentives around them, they may misread or misunderstand them and, therefore, deviate from them. Whistleblowers deviate intentionally but others may deviate unintentionally. So, there is a certain tension between institutions and individuals. Institutions constrain and enable individuals by creating incentives that tend to tilt behavior in one direction rather than another, but individuals do not necessarily have to conform to the institutions—they sometimes violate those constraints, often putting themselves at risk for being ridiculed, fired, or worse. This is why, as I said earlier, institutions set the probabilities that people will act in certain ways, but they do not determine with absolute certainty how people will act.
The second insight of this article is that some institutions are better at facilitating self-responsibility than others. Insofar as the financial crisis is concerned, countries with “thick” institutions did so better than those with “thin” institutions. Thick and thin institutions are like what Max Weber had in mind when he distinguished between bureaucratic and patrimonial systems, respectively. Thick institutions involve clear, stable rules and regulations, formulated and implemented by people recruited on the basis of merit, expertise, and professionalism. Thin institutions comprise vague, arbitrary rules and regulations, formulated and implemented by people recruited on the basis of tradition, patronage, and clientelism (Campbell & Hall, 2018). The implication of this distinction for the analysis that follows is that if we are interested in establishing institutions that facilitate self-responsibility, then we should aspire to thicker rather than thinner institutions.
The article proceeds as follows. First, I discuss the general nature of institutional change to offer some conceptual and methodological tools for understanding the origins and management of the financial crisis. Next, I turn to the financial crisis itself and show how institutional changes stretching back decades created a perfect storm whereby the move toward self-responsibility in the financial services industry led to disaster. Once the crisis hit, however, efforts to avoid another one in the future caused a reversal of the institutional trend toward self-responsibility. I conclude by addressing some implications of the analysis.
A few clarifications are immediately important. To begin with, we need to be careful when it comes to thinking about individuals in this context. The self-responsibility literature generally takes people to be the key individuals who are encouraged to exercise self-responsibility. Welfare recipients, for instance, may be encouraged to take responsibility for themselves by the local welfare agency that imposes activation requirements on its clients. However, we can also think of organizations as individuals operating in self-responsible ways. For instance, according to the TANF legislation in the United States, state-level welfare agencies were instructed to devise their own activation policies in ways that would reduce welfare dependency—they were told to be self-responsible organizations and do whatever they thought would work best. Similarly, one can imagine that national governments might take it upon themselves to be self-responsible by developing activation legislation in the first place, perhaps according to models, protocols, and standards deemed appropriate by the international community as represented by the OECD or the European Union (Meyer, Boli, Thomas, & Ramirez, 1997; Meyer, Frank, Hironaka, Schofer, & Tuma, 1997). The point is that “individuals” can be conceived of at the micro, meso, or macro levels of analysis.
Note as well the important distinction between institutions and organizations. Institutions are formal and informal rules and the monitoring and enforcement procedures associated with them. Organizations contain institutions of their own, such as informal norms specifying when coffee breaks are permitted or formal rules governing hiring and firing, but they are also embedded in institutions outside the organization like national constitutions and regulations governing what they can or cannot do. Of course, organizations also have technologies and resources that people inside them use to achieve various organizational goals. In this sense, organizations are actors—that is, individuals—but institutions are not.
The General Nature of Institutional Change
Understanding institutional change is not always straightforward. To begin with, there has been much debate about the conditions that trigger episodes of institutional change in the first place. Some attribute it to inefficiencies in existing institutions that can no longer be ignored, such as exorbitant transaction costs that can lead to changes in antitrust law. Others attribute it to inconsistencies and contradictions between institutions leading to conflicting incentives or other problems that actors try to resolve through institutional change. Similarly, institutions are often vaguely specified and, therefore, open to interpretation such that new interpretations can trigger change, as is the case, for example, when courts are asked to adjudicate competing readings of the law. What all these perspectives imply but rarely acknowledge is that institutions change when actors try to increase their power and resources. Insofar as institutional arrangements have advantages for some and disadvantages for others when the disadvantaged spot an opportunity to alter the institutionalized balance of power, they seize it in the hope that doing so will lead to a new institutional arrangement better serving their interests. To the extent that the underdogs win the struggle institutions change; to the extent that they lose institutions are reproduced. 5 We will see that the power perspective is especially relevant for understanding the turn toward self-responsibility in the financial services sector that led to the financial crisis as well as the responses to it.
Second, all of this assumes to varying degree that institutional change is a matter of careful planning and that the consequences are as intended. This is not always so. Sometimes institutional change is done in haste, less carefully planned, and, as a result, has unintended consequences of considerable magnitude (Campbell, 2004; Streeck & Thelen, 2005). The financial crisis exhibits important examples of both.
A third area of complexity involves measuring institutional change. Part of the challenge is to recognize that institutions are formal and informal rules and the monitoring and enforcement mechanisms associated with them but that they also involve meaning systems taken for granted by the people embedded in them. So, by many accounts, an institution involves regulative, normative, and cognitive dimensions (Scott, 2001). Determining how much change occurs involves tracking change in the relevant dimensions over time (Campbell, 2004). Scholars have noted that there are several types of change and that we should be alert to these types in our research. One type is evolutionary or incremental change. The other type is revolutionary or radical change. The more dimensions of a phenomenon that change at once, the more revolutionary is the change taking place. What I have in mind here is not a dichotomy but a continuum. On one end is no change—none of the relevant dimensions change over time. On the other end is revolutionary change where all the dimensions change rapidly. More toward the middle is evolutionary change where a few dimensions change, then a few more, and so on over a longer period of time (Campbell, 2004).
A fourth clarification is in order about the temporal direction of change. Change is not always progressive—that is, forward moving. Sometimes it is regressive in the sense that changes implemented at one moment may later be reversed. Such was the case with early welfare reforms in post-communist Poland, which elicited enough of a political backlash that the government eventually rolled back some of the initial changes (Campbell, 2003). 6 Something similar occurred as well, as we shall see, after the financial crisis.
Finally, the complexity of all this is compounded by the fact that if we are talking about policy change—that is, changes in guidelines, rules, and regulations—then we need to differentiate as well between policy formation and policy implementation. 7 As is well known, formal legislative changes do not necessarily lead to equivalent changes at the moment of implementation. To the extent that there is a significant gap between formation and implementation, it depends on all sorts of political, bureaucratic, and resource factors (Lipsky, 1983; Pressman & Wildavsky, 1984). In the European Union, for instance, although Brussels may issue directives about environmental or labor market policy, translating them into national legislation and then putting them into practice is frequently an uneven process. Some countries may adopt and implement quickly, some may do so slowly, and some may start out either quickly or slowly and then change pace (Duina, 1999).
The Financial Crisis
With all this in mind, we can now turn our attention to the financial crisis. I focus first on the institutional changes that caused the crisis and then the institutional changes that followed as policy makers tried to minimize its severity and reduce the possibility that another similar crisis might happen again someday. In the first instance, this is a story about decades-long, unplanned, incremental neoliberal regulatory reforms that facilitated a turn toward self-responsibility with disastrous unintended consequences. In the second instance, this is a story about a comparatively rapid, planned, radical retreat from neoliberalism and self-responsibility through regulatory reforms that intentionally reduced the possibility for risky behavior in the financial sector. I draw heavily on my previously published work on the financial crisis in the United States, where the crisis originated, and Denmark, Ireland, and Switzerland, three European countries with very different institutional legacies, that, as a result, took rather different steps to manage the crisis once it affected them. 8
Institutional Causes: Self-Responsibility Gone Bad
Ground zero for the onset of the crisis was a meltdown in the U.S. subprime housing market whose effects quickly spread to other countries around the world. The precipitating factors were a series of institutional changes in the United States spanning several decades under both Republican and Democratic administrations and legislatures. This was a story of incremental change with largely unintended consequences. These included changes in monetary policy; the emergence of adjustable rate mortgages; allowing banking across state lines; the repeal of the Glass-Steagall Act, which was the firewall between commercial and investment banking; and the decline of the partnership model and the rise of the shareholder model in banking. All these changes created the opportunity for riskier behavior in the financial services industry. Of particular note was legislation putting the derivatives market off-limits to regulators, the emergence of securitization of mortgage debt, and the rise of subprime mortgages as a result. Securitization involves a bank or other financial intermediary buying lots of mortgages from the firms first issuing them, slicing the mortgages up into pieces, combining different pieces with different levels of risk into bonds, and then selling the bonds to investors. The bond is called a derivative because the money earned by the investor is derived from the monthly mortgage payments associated with the pieces of mortgages making up the bond. Subprime mortgages are those particularly at risk of default.
All these institutional changes were driven by politics, lobbing, and power struggles. A case in point was the move to exempt the market for derivatives from being regulated. Calls for their regulation grew on President Clinton’s watch as Brooksley Born, chair of the Commodity Futures Trading Commission, voiced strong concern over the dangers of unregulated derivative trading. However, Federal Reserve chairman Alan Greenspan, Securities and Exchange Commission chairman Arthur Levitt, and Treasury Secretary Robert Rubin all argued and lobbied successfully against regulation, which they believed would undermine the efficiency with which these new and lucrative markets were presumably operating. So, in 2000 Clinton signed the Commodities Futures Modernization Act, which explicitly preempted these markets from government regulation. Born resigned in disgust but was vindicated when the crisis hit, and people realized that a big part of the problem lay in the unregulated market for mortgage-based derivatives.
The broader point, however, is that a variety of institutional opportunities and incentives emerged for bankers and mortgage lenders to operate in unscrupulous ways driven by self-interest with guile. Much of this was driven by belief in the Efficient Market Hypothesis, the neoliberal idea, noted above, which postulated that the best way to set prices and ensure market efficiency was through unbridled market competition and that the market would discipline people so that they acted in self-responsible ways. Unfortunately, it did not turn out that way. It turned out to be a disaster. Why?
First, lenders failed to act self-responsibly because the institutions in place failed to prevent them from exploiting borrowers in dodgy ways, notably selling them subprime mortgages for which they were barely qualified and did not understand. Second, borrowers failed to act self-responsibly because the institutions in place did not resolve the information asymmetry problem that left them in the dark about whether they could really afford the mortgages they were buying. Third, investors who bought the securitized subprime mortgages failed to act self-responsibly because they too suffered from institutionalized information asymmetries as a result of the government not adequately regulating the credit rating agencies responsible for signaling whether the securitized mortgages that investors were buying were risky or not. In other words, the institutions that were created to facilitate more self-responsible behavior, failed to do so. Increased individual freedom and autonomy went awry. The behavior of lenders was intentional; the behavior of borrowers and investors was unintentional. One might say, then, that the financial crisis boiled down to a massive institutionally induced failure of self-responsibility!
Something similar happened in other countries. In Ireland, for instance, the financial regulators had long operated with a very light regulatory touch, thanks again to the political forces in play. As a result, banks invested in all sorts of commercial real estate schemes, driven partly by patronage and crony capitalism. They were so overexposed in the real estate markets at home and abroad, especially in Britain, that when international credit markets froze after the collapse of Lehman Brothers in September 2008—triggered by Lehman’s deep exposure in the U.S. subprime market—all the big Irish banks suddenly faced insolvency. Something similar happened in Iceland although on a much grander scale relative to the size of the country’s economy. And in Switzerland, another lightly regulated economy, UBS and Credit Suisse, Switzerland’s two huge international banks, became heavily invested in the U.S. subprime mortgage markets and nearly went bankrupt when the crisis hit. In all of these countries, institutional conditions developed incrementally and without any sort of grand plan. The result was that the banks and others failed to act in self-responsible ways.
Things were a bit different in Denmark. Like Ireland, the Danes experienced a housing bubble so that when the crisis hit some of the banks were in trouble. But the Danish banking crisis was far less dramatic than the Irish or Icelandic crises. In part, this was for institutional reasons. First, given the traditional Danish politics involved, banking and financial services were more heavily regulated than in these other countries. Second, many of the big Danish banks refused to get involved with the derivatives markets whereas banks in other countries had invested billions of dollars in them—and made billions in profits. Why? Danish bankers did not want to invest in things they did not fully understand. They felt that subprime derivatives were too complex and too opaque. Put differently, the institutional conditions—both regulative and cognitive—were such that Danish bankers acted in considerably more self-responsible ways than their compatriots in other countries. They took responsibility upon themselves for avoiding risk and protecting the interests of their banks, investors, and customers more so than their counterparts in these other countries.
This last point requires elaboration. Institutions are often nested within each other. National institutions, such as financial regulations, are nested within international institutions, such as the Basel International Banking Guidelines. But the same is also true of other levels. Institutions within organizations are nested within national and international institutions. Of particular importance here were the incentive systems within banks and mortgage firms, which varied considerably across countries. In some countries like the United States, these organizations had compensation rules that encouraged staff to ignore long-term risks and go for short-term gains. For instance, the big Wall Street banks like Goldman Sachs and Lehman Brothers rewarded their staff for securitizing mortgages regardless of their quality and selling them to investors, thus laying off the risks of default and reaping the profits—and hefty individual commissions—for doing so. This was often done in extremely deceitful and opaque ways, a practice for which the banks were later fined billions of dollars by the federal government. And these incentives existed because, as noted, by federal law the market for these derivatives was put off-limits to regulators. In other words, organization-level institutions were made possible by being embedded in a particular set of national-level institutions. Things were different in some other countries, such as Denmark, that, as a result, did not face the devastating consequences incurred by banks and other lenders in the United States (Bell & Hindimoor, 2015).
Institutional Responses: Retreating From Self-Responsibility
If the causes of the crisis were slowly developing, incremental and unplanned with unintended consequences, the responses were different—they were comparatively more rapid, radical, and carefully planned, and the outcomes were more or less as intended by those in charge, including regulators, central bankers, politicians, and investigative commissions. 9 In many respects they reversed course after decades of neoliberal regulatory reforms. And they were highly politicized, especially in the United States where they entailed intense power struggles.
In the United States, a massive piece of legislation was passed—the Dodd–Frank Act—which established a whole new regulatory regime for the financial services industry. The scope and depth of the legislation was frightening for the industry, which is why it mounted one of the most expensive lobbying campaigns Washington had ever seen to kill it. They failed for the most part and so mounted a second equally strident campaign to affect the rule-writing phase, the first step in implementation. Two areas where the industry won were effectively resisting the reinstatement of the firewall between commercial and investment banking, and avoiding having the too-big-to-fail banks broken up into smaller pieces. As such, the legislation was not one hundred percent revolutionary, but it came surprisingly close.
Similarly, in Ireland a massive state-funded bank guarantee was issued very quickly to bailout the five big banks that had gotten into trouble in the housing market. The presumption was that the banks simply faced serious but short-term liquidity problems so all depositors and bond holders were covered by the guarantee. The decision was made in a secretive meeting with a few top politicians, regulators, and staff members and with occasional input from two of the banks but with virtually no advice from outside experts versed in macro-prudential regulation—an omission that in hindsight proved to be another failure of self-responsibility. Only an international accounting firm was consulted, mostly to help review the banks’ books. It turned out later that one of the most distressed banks knowingly misled this group about how serious its problems were, thereby continuing to act irresponsibly even in the moment of crisis. Neither the European Central Bank (ECB) nor European Commission were consulted either, which elicited a sharp rebuke from Jean Claude Trichet, president of the ECB, when the guarantee was announced. It turned out, however, that the banks were actually suffering an insolvency crisis, which meant that the government had to deliver on its guarantee. In turn, this created a severe fiscal crisis of the state. By 2010, Dublin was forced to turn to the ECB, European Commission, and International Monetary Fund for help. The so-called Troika moved in with a quid pro quo demanding that in exchange for help the government would pursue an austerity program perhaps as severe as that adopted by any other European country during the crisis. So, both the guarantee and the Troika bailout were instances of radical change and a sharp curtailment of self-responsibility for both the banks and the state itself, which was now under the Troika’s thumb. However, the guarantee was much less carefully planned than the bailout and had devastating unintended consequences—nearly bankrupting the state.
The Danish response was also planned but more incremental. When the crisis hit, Denmark actually had rudimentary plans for how to handle a bank failure. Having experienced the failure of another bank a few years earlier—for reasons that had nothing to do with the financial crisis—the regulatory authorities decided that preparations should be made in the event that something similar might happen in the future. As a result, when the crisis arrived, they were prepared to issue a government guarantee too. But unlike Ireland, the Danish guarantee would be financed privately through an insurance fund to which virtually all Danish banks contributed. Only after that money ran out, would the state open its coffers. This was the first of six so-called bank packages developed and implemented over the next 4 years. To a considerable extent each package helped compensate for problems or other features of preceding packages. In this case, a variety of outside experts were involved in the decision-making process. Despite the occasional adjustments the outcomes were more or less as intended.
The Swiss case resembled the Danish one insofar as the reaction to the crisis was incremental, planned, and had the intended results. When Credit Suisse ran into trouble the Swiss National Bank (SNB) stepped in very fast to arrange a capital injection from private investors to rescue it. But because the liquidity problem for UBS was much bigger, private investment could not be attracted and so the SNB had to do the job itself, borrowing funds from the U.S. Federal Reserve through its swap line. In addition, two expert commissions were set up after the bailouts were concluded. First was the so-called Too Big to Fail Commission (TBTF) whose mandate was to track events going forward and make recommendations to the government about how to restructure the banks, revise regulations, and take other steps as necessary to help prevent a similar crisis going forward. The government eventually adopted virtually all of the TBTF Commission’s recommendations. Second was the Brunetti Group, another team of experts set up after the TBTF Commission, whose job it was in part to track the implementation of the TBTF Commission recommendations, see if they were working, make sure that they were not hurting the international competitiveness of the Swiss banks, and again make recommendations to the government for regulatory and other adjustments as necessary. Both the TBTF and Brunetti Commissions were also charged with keeping an eye on how well changes in Swiss banking regulation conformed to or contradicted broader EU rules, not to mention those from the Basel group. So, as in Denmark, carefully conceived and well-planned institutional changes were adopted in incremental fashion.
It is important to note that the decisions taken by each government were very much influenced by the institutional context within which they were made. Some institutions were thicker than others. Recall that thick institutions resemble the Weberian bureaucratic ideal—clear, stable rules and regulations formulated and implemented by people recruited on the basis of merit, expertise, and professionalism. Thin institutions resemble the Weberian patrimonial ideal—vague, arbitrary rules and regulations formulated and implemented by people recruited on the basis of tradition, patronage, and clientelism. Switzerland and Denmark had thick institutions so decision making there was run largely by experts with input from various interested parties in varying degree. Ireland had thin institutions marked, on the one hand, by people recruited to positions of important regulatory authority—including the head of the Central Bank and Department of Finance—through a tradition of patronage rather than merit and expertise, and, on the other hand, by outright corruption between government officials, banks, and real estate developers. The United States, arguably, falls somewhere in between. Experts as well as politicians were involved in writing the Dodd–Frank legislation but, as mentioned, there was intense lobbying around both the formulation and implementation of the legislation in ways that perhaps resemble patronage and clientelism. After all, there has long been a revolving door between Congress and the lobbying firms, including those responsible for regulating the banking and financial services industry, not to mention vast sums contributed to politicians’ electoral campaigns by the financial services industry. Arguably, institutional thinness contributed to the onset of the crisis too, especially in the United States and Ireland where regulation of the financial services industry was comparatively weak.
The point about the importance of institutions and crisis response is threefold. First, beyond simply saving the financial system, many of the regulatory reforms initiated after the crisis were designed to resolve problems created by earlier institutional reforms that had been based on the assumption that encouraging self-responsibility would necessarily lead to good outcomes for everyone concerned. Instead, they ended up facilitating excessively risky, deceitful, and ill-informed practices. In other words, in response to the crisis, governments pulled back from relying so heavily on self-responsibility, which for the most part had gone bad. Second, both the causes of and responses to the financial crisis were path-dependent in the sense that they were very much influenced by the long histories of institutional development in each country—political institutions, institutionalization of expertise, organization and power of the banking and financial services industry, and so on. Put differently, in order to understand how self-responsibility comes and goes, we need a comparative and historical analysis of institutions. Third, in countries with thicker institutions (Denmark and Switzerland), the tensions among actors struggling to reform institutions were considerably less than in countries with thinner institutions (the United States and Ireland). Expert-oriented decision-making largely devoid of lobbying and political influence was associated with more consensual institutional changes in Denmark and Switzerland. Naked politics were more prevalent in the United States where tensions and conflicts ran high between actors pursuing diametrically opposed interests and institutional reforms. In Ireland, the lack of expertise and absence of widespread input was disastrous at first but did not incur this sort of tension. Only later when the Troika intervened did such tensions emerge, but by then it was too late for the Irish to do much about it.
Lessons Learned and Broader Implications
What are the lessons of all this for the study of self-responsibility more generally? Of course, generalizing from a small number of cases—four in this article—presents obvious methodological difficulties (Lieberson, 1991). Nevertheless, there are well-known benefits from the fine-grained analysis that a small number of cases can offer, including offering new insights into well-known phenomenon like self-responsibility (Mahoney & Rueschemeyer, 2003). With these caveats in mind, let me explain what I think my four cases reveal.
First, and most important, those countries that made it more incumbent on organizations and individuals to act in self-responsible ways due to regulatory reform or a light regulatory touch (the United States and Ireland) were more likely to run into trouble than those countries that relied more heavily on regulation (Denmark). Contrary to the Efficient Markey Hypothesis, instead of facilitating self-responsibility, unbridled market forces led to disaster. One partial exception was the Swiss banking system, which relied to a considerable extent on industry self-regulation, as do many Swiss industries. However, Swiss financial self-regulation is well organized, relies heavily, although not exclusively, on the Swiss Banking Association to formulate rules of conduct and best practice for its members, and so is an institutional guard against malfeasant behavior in banking. To my knowledge there is nothing comparable in the United States or Ireland.
Second, institutional change in these cases took different forms. Sometimes it was incremental; sometimes it was more radical. Sometimes it was carefully planned; sometimes it was done in haste. Sometimes the consequences were intended; sometimes they were unintended. Nevertheless, institutional change in all these cases involved struggle, conflict, negotiation, and power games. It was never automatic, even in the moment of crisis. The implication is that any move either toward or away from self-responsibility involves politics and power. There is nothing natural or inevitable about it.
Third, institutional change can be either progressive or regressive in the temporal sense. Many of the regulatory changes that created the conditions for the crisis to occur were rolled back after the crisis when politicians, regulators, and others recognized that they had gone too far in promoting self-responsibility. Again, self-responsibility is a political phenomenon.
Fourth, insofar as unbridled opportunity for self-responsibility can lead to disastrous self-interested behavior, the lesson is that for self-responsibility to occur with positive, socially beneficial outcomes it must have proper institutional support. It cannot occur in an institutional vacuum. What that context is certainly varies across countries. But as Durkheim, Polanyi, and even Adam Smith would warn, those institutions are necessary for society to remain on an even keel. At least insofar as self-responsibility in the financial services industry is concerned, the thicker the institutions, the better.
Fifth, the institutions involved were nested in layers. Organization-level institutions, which created incentives for excessive risk taking, were enabled by the fact that they were nested in a particular set of national regulatory institutions. And in the Swiss case, if not others as well, moves to transform national regulations were also undertaken with an eye on transnational regulatory guidelines.
Finally, institutions are uneven. Some are thicker than others. Even countries like Denmark, which generally have thick institutions, succumbed to the crisis in part because there were thin spots here and there in critical places. And efforts to reform the system after the crisis hit—an integral part of the crisis management process—were intended to thicken those parts. In a sense, then, the rather banal observation among institutionalists that change is path dependent is germane here again. More important, however, if we favor self-responsibility, we must be vigilant in watching for institutional thin spots and correct them when we find them.
What are the implications of all this for welfare state reform, the primary focus of the self-responsibility scholarship? There are vast literatures on both welfare reform and social investment. The former came of age during the late 1970s and 1980s with comparative studies of welfare state development. 10 The latter is more recent and examines among other things the impact that social investment policies have on society, families, and individuals, such as how they affect employment, economic growth, inequality, and poverty (Kvist, 2014). Social investment policies include many things, such as parental leave support, child care, education, vocational training, active labor market policies, pensions, and health care. What has become clear in both literatures is that there has been a move beginning in the 1980s in many countries toward neoliberal reforms such that more emphasis has been placed on encouraging, if not forcing, individuals to become more self-responsible and, therefore, to become less dependent on welfare and social investment policies.
However, it appears that the multidimensionality of social investment policy has been neglected to a considerable extent by policy makers in many countries. Much of their effort has focused on activation policies—encouraging people to move into the labor market and become responsible for themselves—at the expense of the necessary additional social investment supports that make it work as intended. The results have not necessarily been good—particularly in the wake of the financial crisis. As one recent study concluded,
Without that [additional support], social investment cannot be properly differentiated from the neoliberal paradigm. The overriding focus on activation without proper attention to quality and to adequate protection in most countries has opened the door for the critique that the social investment approach forgets about social inclusion and poverty alleviation and—worse—that it has in fact reinforced poverty and social exclusion. (Morel, Palier, & Palme, 2012, p. 359)
The major exceptions are the Nordic countries and the Netherlands that seem to have been the most successful in terms of the types of returns on social investment—including activation—because they have proceeded with a full complement of social investment policies, not just activation.
The point is that for self-responsibility to work it cannot occur in an institutional vacuum; it cannot be equated with hard-core neoliberalism. It requires a range of institutional supports, such as those in the Danish flexicurity system, which combine activation with social welfare programs, training, and institutional support for labor market flexibility. Put differently, the policies involved should be crafted so as to yield the greatest institutional complementarity (Campbell & Pedersen 2007). If self-responsibility is equated with contemporary neoliberalism and the appropriate institutional supports are stripped away, then the unintended consequences can be disastrous just as they were when self-responsibility was pursued through a neoliberal approach in the banking and financial services industry.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.