Projecting from a Fiction: The Case of Denmark and the Financial Crisis

Abstract

Institutional and ideational crises are characterised by fundamental uncertainty about the world, and at the same time require swift action on part of decision makers. How do political actors overcome uncertainty to enable collective action? The paper argues that actors use the ideas of the pre-crisis regime and through processes of bricolage seek to fit them to radically different circumstances. This enables action, but it also privileges the actors that benefited from these ideas before the crisis. This helps explain why so relatively few changes to financial regulation are appearing from the recent crisis. The argument is illustrated through the case of financial crisis in Denmark, demonstrating that the Danish authorities used ideas developed since the banking crisis of the 1980s concurring on the discourse that the best solution to the crisis would be a further ‘consolidation' of the sector, that is, fewer small banks and stronger large banks. This shows both the strength and weakness of using old ideas for radically new problems: it enables actors to act in concert, but changes are incremental and the weaknesses of the previous regime may thus live on in the new regime.

Keywords:

• incrementalism
• ideational change
• financial crisis
• uncertainty

Notes

Earlier versions of this paper were presented at the 19th International Conference of Europeanists, March 2012, Boston, USA, and in the ECPR workshop ‘Economic Ideas and the Political Construction of Financial Crisis and Reform’ at the 40th ECPR Joint Sessions Workshop, Antwerp, Belgium. The author wishes to gratefully acknowledge the comments received in these settings. Thanks also go to Jørgen Goul Andersen, Andrew Baker, John L. Campbell, Poul Thøis Madsen, Manuela Moschella, Vivien A. Schmidt and Eleni Tsingou as well as three anonymous reviewers for commenting on the paper. All remaining errors are mine.

The word ‘authorities’ is used as a shorthand for government and opposition (except when differences are explicitly mentioned) and the most important public agencies in Danish financial regulatory governance, namely the Ministry of Economic and Business Affairs, the Danish central bank (Nationalbanken) and the Danish FSA (Finanstilsynet). In Denmark, responsibility for and oversight of financial stability is shared between the Danish central bank and the Danish FSA with the Ministry as the primary coordinating and policy-preparing actor.

This is the case for rational choice and historical institutionalists alike, see Blyth (2010).

Recent work by Streeck and Thelen (2005) and Mahoney and Thelen (2010) put even greater explanatory emphasis on the ambiguity and complexity of institutions. However, these theories focus on how significant change might occur in periods of relative stability, and so they are less helpful in explaining how things change during tumultuous times like the financial crisis.

Note that Blyth (2009), in arguing that actors sample past outcomes, refers to the time before a crisis. It is my argument that the same basic modes of reasoning also apply in the handling of the crisis.

Though Beckert (2011) concentrates on the importance of fictionality in market decisions, a topic that has also been dealt with extensively within organisational sociology (see, for example, Schoenberger 1996), I would argue that his argument is just as relevant in decision making by political actors in relation to the economy, and perhaps even to political decision making in general.

Note that the bricoleur works neither illogically nor irrationally. Rather, he works like a skilled practitioner, adept at making perceptive use of a limited universe of materials. As noted by Engelen et al. (2010) bricolage should not be viewed as a poor substitute for (more) rational ways of knowing. Thus, in Levi-Strauss' conception of bricolage ‘there is no implied negative value judgement of or inferred inferiority in bricolage compared with “science”’ (Engelen et al. 2010: 54).

As pointed out by Hay (2011), crisis and change is intrinsically related, since crisis, in the etymological sense of the term, is understood as ‘moments of decisive intervention'.

For example, as noted by Pagliari and Young (2011), the financial crisis has created conditions that are more favourable to a broader mobilisation of corporate actors, an important, albeit often overlooked, set of actors. Moreover, politicians obviously also have to take into consideration the frustrations of their voters, which may easily, but not necessarily, work against the interests of the financial sector.

This argument is more fully developed in Carstensen (2011a).

The commission – that was set up by the Social Democratic government in 1997 – comprised civil servants, academics and interest group representatives and was tasked to ‘analyse and evaluate the technological and market-related developments in the financial sector, including identifying required adjustment facing the financial sector'. As argued by Wendt (2008), the commission constituted the most comprehensive mapping of the Danish financial sector to date, and the work laid the ground for a comprehensive reform of Danish financial regulation at the beginning of the 2000s.

In certain ways, the two crises resemble each other in that, in both cases, crisis originated in great optimism and strong expansion in lending – especially to the building sector – subsequently accompanied by an international economic downturn that severely threatened the capital base of the banking sector. There are, however, also important differences between the crises (Abildgren and Thomsen 2011). To mention just three: the crisis of the 1980s developed at much slower pace than the current crisis, primarily because it was not systemic in scope. Second, the policies enacted to remedy the crises were worlds apart: the first only to a relatively small degree demanded public intervention, whereas the second led to the issuance of the biggest state guarantee in Danish economic history. Third, the second crisis was more clearly international in scope, both because it originated in the freeze-up of the international money markets following the fall of Lehman Brothers in September 2008, but also because the international buy-ups of especially Danske Bank (in the Irish and Finnish banking sector) made the Danish banking sector much more vulnerable to international developments than it had been in the early 1990s.

Even more explicit in intention was the name of the new dowry-scheme introduced in 2011 (see Section 6), which the authorities named ‘the consolidation package'.

The troubles of Danske Bank were once again hinted at when recent news paper reports told that the American hedge fund Luxor Capital was buying credit default swaps for Danish government debt, betting that a strained Danske Bank would bring down the Danish economy leading to government default (Politiken.dk 2011). Even though this might be too pessimistic it tells of the havoc a bail-out of Danske Bank would wreak.

One does not need to be a constructivist to see that the complexity of the crisis makes it impossible to agree on a single interpretation of the crisis. As argued by Lo (2012) ‘no single account of this vast and complicated calamity is sufficient to describe it’ (p. 3). Obviously, setting the parameters for evaluating the crisis becomes an important political power.

Though limits on space do not allow a full analysis, it might be added that the Danish central bank still took on a very central position in the handling of the crisis, primarily in loaning liquidity to the Danish banks on favourable terms and in supporting the Danish krone, for example, when it came under strong pressure in September and October 2008 (Bernstein 2010).

Senior creditors of Fjordbank Mors were expected to suffer haircuts of around 26 per cent on their principal and about 450 of the bank's 73,000 customers facing a similar loss on deposits above the EUR 100,000 threshold guaranteed by Danish deposit insurance rules.

It might very well have been important for the authorities that after an exchange of the hybrid core capital received as part of Bankpackage II into equity capital, the state took up around 80 per cent of ownership in VestjyskBANK and 40 per cent in Aarhus Lokalbank.

Bankpackage V also contained other policies, notably the establishing of an initiative to support ailing farmers that had ended up in the state's liquidation company, Financial Stability, and a number of initiatives to enhance existing loan schemes aimed at supporting export oriented initiatives.