Populism, financial crises and banking policies: Economics and psychology

Abstract

AbstractFinancial crises often seem to be associated with populism, although the populist banking policies introduced to address such crises are far from homogenous. This apparent paradox—a sort of “sight‐unseen consensus”—suggests that specific economic drivers coupled with general psychological components can explain populist consensus. We propose a model of populist consensus, which we term “democratic rioting,” in which individuals' decisions to support or resist a specific populist bailout policy after a financial crisis are heavily influenced by psychological group dynamics. Those dynamics, in turn, are driven by general, non‐banking‐related motivations, such as anti‐elite sentiments. In a multiple equilibria setting, the more individuals are unhappy for general economic and/or psychological reasons, the more likely they are to support myopic and redistributive populist banking policies rather than long‐sighted public interventions.