In The Power of Inaction: Bank Bailouts in Comparison (Cornell Univ. Press, 2014), Professor Cornelia Woll asks a question of fundamental importance: "What was the nature of power [that] finance wielded over the fate of the economy and the crisis management in 2008, which affected the lives of so many?" To measure the effective power that the financial industry wielded during the crisis, Woll compares the terms of bailout programs that governments adopted in six countries. She contends that financial institutions were more likely to receive larger amounts of public support, and to make minimal contributions to rescue plans, in nations where the financial industry’s influence satisfied three important factors.
The first two factors identified by Woll are "structural power" (the financial industry's influence resulting from the economy's degree of dependence on the industry) and "productive power" (the financial industry's ability to exploit its structural power by wielding political influence to secure favorable public policies). The third factor in Woll's analysis is the power of "collective inaction" -- namely, the financial industry's ability to refuse to contribute to the cost of rescuing failing banks and to force the government to use public funds to accomplish the necessary bailouts. Woll examines government bailout policies in three pairs of case studies (the United States and the United Kingdom, Germany and France, and Denmark and Ireland). She argues that the most important factor in determining whether the financial industry was able to refuse to act collectively (and thereby shift the cost of bailouts to the government) was whether the largest financial institutions were relatively strong and therefore did not need to depend on public support for their survival.
We concur with Professor Woll's three-factor analysis. We also agree that the relative health of leading financial institutions is a significant factor that affects the financial industry's ability to pursue a strategy of "collective inaction" and refuse to contribute to the cost of government bailouts. However, we believe that the financial industry's political clout is the most important factor in determining whether the industry can successfully resist the government's call for collective action. In the United States, United Kingdom, Germany and Ireland, we contend that major financial institutions avoided contributing to government rescue plans primarily because of the political influence they wielded.
GW Paper Series
GWU Law School Public Law Research Paper No. 2016-24; GWU Legal Studies Research Paper No. 2016-24
Barnes, Kelsey M. and Wilmarth, Arthur E., Explaining Variations in Bailout Policies: A Review of Cornelia Woll's the Power of Inaction (May 6, 2016). Accounting, Economics & Law - A Convivium, 6(1), pp. 5-30, 2016, DOI: 10.1515/ael-2015-0012 ; GWU Law School Public Law Research Paper No. 2016-24; GWU Legal Studies Research Paper No. 2016-24. Available at SSRN: http://ssrn.com/abstract=2776668