Working Paper

When Wolves Cry “Wolf”: Systemic Financial Crises and the Myth of the Danaid Jar

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Financial crises are staggeringly costly. Only major wars rival them in the burdens they place on public finances.

Taxpayers typically transfer enormous resources to banks, their stockholders, and creditors, while public debt explodes and the economy runs below full employment for years.

This paper compares how relatively large, developed countries have handled bailouts over time. It analyzes why some have done better than others at containing costs and protecting taxpayers. The paper argues that political variables – the nature of competition within party systems and voting turnout – help explain why some countries do more than others to limit the moral hazards of bailouts.

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