Handbooks of Research on International Political Economy series
Edited by Thomas Oatley and W. Kindred Winecoff
Chapter 19: The Gnomes of Zurich meet the Dogs of War: financial leadership and regulation, 1850-2013
Governments face a trade-off between financial stability and the ability of capital to flow to profitable destinations at home and abroad. Lax financial regulation allows capital to flow to innovative and profitable enterprises. While promoting growth, deregulation exposes institutions to riskier enterprises, amplifies linkages between firms, and enables overextension by financial firms. Thus, finance-driven growth and innovation comes at a cost to financial stability. There has been considerable variance across time and space over where governments position their economies along this trade-off. This chapter contends that global competition for financial leadership is an important driver of this variation: when the leading financial power (that is, the country with the largest global stock exchange, the most foreign assets, and the global reserve currency) is ailing, it takes risks to stave off a serious challenge. Financial deregulation offers a declining lead economy the ability to maintain the rents of leadership, but at the cost of greater risks. To assess the importance of positional motives behind financial deregulation, I conduct a macro-historical account of financial power and regulation since the late nineteenth century. Numerous works consider the role that ideas, domestic politics, interstate competition, and crises play in driving regulatory outcomes.
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