Masters of the Universe but Slaves of the Market: Bankers and the Great Financial Meltdown
| Author | Stephen Bell,Andrew Hindmoor |
| DOI | 10.1111/1467-856X.12044 |
| Published date | 01 February 2015 |
| Date | 01 February 2015 |
| Subject Matter | Article |
Masters of the Universe but Slaves of
the Market: Bankers and the Great
Financial Meltdown
Stephen Bell and Andrew Hindmoor
Research Highlights and Abstract
• This article focuses on the banking crisis in the US and UK.
• It is essential to understand banker agency and the institutional and structural
contexts which shaped such agency.
• Bankers experienced variegated patters of constraint and opportunity. At one level
institutional theories that emphasise institutional constraint cannot easily account
for the authority and agency enjoyed by key bankers.
• On the other hand, bankers were heavily influenced by institutional change in the
shape of market ‘liberalisation’, which produced intense levels of competition and
pressures to achieve higher profit returns: an exacting form of market discipline.
Bankers and financiers in the US and UK modified institutions and revolutionised the banking
industry prior to the 2007-8 crisis. These agents were however heavily constrained and eventually
overwhelmed by institutional pressures and wider structural forces that encouraged high-risk
leveraged trading and which generated systemic risk. To account for this, institutional theory needs
to incorporate a broader canvas of conditioning contexts, particularly the impact of structural or
systemic forces on agents and the way in which these are actualised as a form of ‘ecosystem power’.
Keywords: banking; financial crisis; historical institutionalism; systemic risk
This article focuses on the banking crisis that peaked in 2008 in the US and UK. It
argues that the interaction between bankers and the institutional and structural
contexts they helped create is central to explaining both the origins and the scale of
the crisis. To explore such interactions between agents and context we use historical
institutional (HI) theory. Recent versions of such theory explain how agent’s
behaviour is shaped (i.e. constrained or enabled) by the contexts in which they
operate. The core explanatory dynamic in this approach is to explore how agents
and wider contexts mutually shape one another over time.
We highlight two arguments. First, we use a comparative approach to show that a
key set of institutional pressures as well as specific profit opportunities embodied in
nationally specific banking markets were central in shaping banker behaviour:
either producing or not producing strong pressures on banks to engage in highly
leveraged mortgage-backed securities trading. In the US and UK, financial markets
imposed strong competitive pressures and placed bankers under intense pressure to
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doi: 10.1111/1467-856X.12044 BJPIR: 2015 VOL 17, 1–22
© 2014 The Authors. British Journal of Politics and International Relations © 2014
Political Studies Association
reengineer their balance sheets in the search for additional profits. The main
opportunities here were in highly leveraged mortgage-backed securities trading. It
was the collapse of these markets that triggered the banking crisis. We show that
such pressures were strong in the US and UK, but weak in the Australian and
Canadian markets, a key factor that explains the very different banking outcomes
in these countries. National market conditions in banking thus emerge as a core
variable that explains the origins or the trigger of the crisis.
Second, we argue that institutional theory needs to move beyond a narrow focus on
institutions and explicitly include structures as a key context that can shape behav-
iour. Empirically, we show that structural forces embodied in so-called ‘systemic
risk’ within financial markets were central in driving the scale of the banking and
credit crisis. Furthermore, we show how institutional theory can be extended to
explore power dynamics as a particular outcome of agent-structure interaction in
this case. We show how agents interacting amidst structural pressures created a
form of ‘ecosystem power’, which agents collectively exerted over each other,
forcing sub-optimal collective outcomes: namely, the collapse of banking and credit
markets.
Our approach allows us to isolate key drivers of the origins and scale of the crisis
from the long list of causal factors produced in many accounts. It is true that
plentiful credit, imprudent mortgage lending, the collapse of the US housing
market, and lax bank regulation were a part of the story. But these were not the
primary factors that actually drove banks and the behaviour of bankers. Regulation,
for example, was largely permissive; but it did not fundamentally drive bankers in
the direction they took, especially in pursuing trading and massive leverage struc-
tures. Market dynamics were far more central in shaping what bankers did. Our
analysis thus distinguishes between more fundamental causal factors such as
market dynamics and those that were merely permissive.
It is ironic that the institutional and structural pressures that were to have such a
devastating impact were largely created prior to the crisis by bankers (and support-
ive state elites) in the heartland financial markets of the US and UK. The key
changes were part of a wider process of ‘financialisation’ and a revolution in
banking in the core economies in the decades prior to the crisis: a period in which
bankers were widely seen as Masters of the Universe.1Once the crisis was triggered
however, bankers were quickly overwhelmed by forces they had not anticipated
and were revealed as almost Slaves of the Markets they had helped create. Market
pressures and opportunities propelled the boom but it was broader structural forces
and associated power dynamics that sealed the fate of our bankers and explain the
scale of the crisis.
Expanding the Envelope of Historical Institutionalism
Institutions are the formal or informal rules, norms, and role expectations that
shape agent’s agendas and preferences and that constrain or enable institutionally-
situated actors. In recent years there have been a number of revisions and improve-
ments to HI theory, shifting it towards a more agency-centred, ‘post-determinist’
(Crouch 2007) form of analysis that recognizes that institutions are not simply
2STEPHEN BELL, ANDREW HINDMOOR
© 2014 The Authors. British Journal of Politics and International Relations © 2014 Political Studies Association
BJPIR, 2015, 17(1)
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