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The Political Quarterly, Vol. 85, No. 4, October–December 2014
DOI: 10.1111/j.1467-923X.2014.00000.x
Crises and Paradigm Shift
Crises can force leaders and technocrats together, highlight failures and, more rarely,
precipitate changes in ideological worldview and the prevailing consensus. In 2007–8, the
worst financial and economic crises since the Great Depression of 1929 caused a paradigm shift
in financial and regulatory ideology. G20 leaders and central bankers reasserted collective
power and authority over financial markets and global banks to an extent and in a manner not
seen since the collapse of the Bretton Woods system in 1971. The retreat of state authority
reversed direction. The spell of the ‘mystical Anglo-Saxon model of liberalisation and
deregulation’ was broken. In 2014 the paradigm shift is still underway and still under attack
by recalcitrant bank CEOs and their lobbyists, but the shift may be durable—signalling a major
change in international regulation of the world’s largest financial markets and firms.
Keywords: financial crisis, paradigm shift, international re-regulation, state power
In 1543 an obscure Polish canon lay dying in
his bed. As he slipped from the world he was
concerned about the imminent publication of
a book on which he had laboured for decades.
This work, the ramifications of which had so
disturbed him that he had for a long time
refused to publish it, despite the urging of his
small circle of friends and admirers, had just
been printed and first copy lay by his bedside.
Shortly after his death, the book—On the
Revolutions of Heavenly Spheres,1 by Nicolaus
Copernicus—would lead to the replacement
of a geocentric view of the universe, with the
earth static at the centre and the planets
revolving around the globe, with a heliocentric view, in which the earth and planets
revolved around the sun. Copernican theory,
confirmed by observations by Brahe, Kepler
and Galileo, was what Thomas Kuhn2 identified as a paradigm shift in worldview. But the
full significance of the new theory was not
immediately apparent. The true magnitude of
Copernicus’s observations only gradually
became clear with the passage of time, when
ultimately there was a total rejection of the
prior, erroneous Aristotelian view. Just as in
science, economic, ideological and regulatory
paradigm shifts are comparatively rare
events, with long periods of small incremental
adjustments to the status quo interrupted by
gradually increasing numbers of unexplainable anomalies, and ultimately a sudden crisis
and disruptive jump in the consensus as a
new theory and practices takes hold.
Today, six years after the worst financial
and economic crises since the Great Depression of 1929, I detect that a paradigm shift in
financial and regulatory ideology is underway. States are reasserting their collective
power and authority over financial markets
and global firms to an extent and in a manner
not seen since the collapse of the Bretton
Woods system in 1971 and the closure of the
gold window by President Nixon. The retreat
of the state authority that Susan Strange3
described in the 1990s has reversed direction.
The spell of the ‘mystical Anglo-Saxon model
of liberalization and deregulation’ 4 has been
broken. As the late Tommaso Padoa-Schioppa
observed: ‘If the years before the crisis were
years of over-reliance on markets and mistrust
in government—or, more simply put, too
much market and too little government—
what we have seen in 2008 and 2009 has
been a spectacular comeback of government.’ 5
Changing paradigms is never easy
In 2014 a shift in worldview and policies is
underway—is being constructed, strengthened, and defended. As such, the shift is not
necessarily equally strong in all aspects, or
equally visible to every observer of the financial crisis and its aftermath. That is to be
# The Author 2014. The Political Quarterly # The Political Quarterly Publishing Co. Ltd. 2014
Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA
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expected, for paradigm shifts take time to
become solid, durable, and widely recognized
as such. What is underway is a major change
in the balance of power between states and
financial markets, and this process has parallels to Margaret Thatcher’s victory and the
ideological and policy response begun in
Margaret Thatcher came to power during
an economic crisis of stagflation, which coincided with a fracturing within the Labour
party. The economic crisis and failures of the
Labour party government helped precipitate
regime change in the Conservative party and
in the House of Commons. But at the outset,
and indeed even some years later, relatively
few observers suggested that Thatcher’s
ideology and approach would fundamentally
change the politics, economics and civic culture of Britain—yet, with the benefit of greater
temporal distance, the Thatcherite revolution
is now widely recognised and is seen a key
lasting shift in the politics and governance of
Britain. Just such a process is becoming visible
in the reforms in response to the financial
crisis, with major policy changes underway—but perhaps, at least upon a first cursory glance, they do not appear as dramatic as
is the case when viewed from a greater distance and taken as a whole.
As in other previous ideological and economic cycles, the existing worldview blotted
out economic historical memory amongst leaders and technocrats prior to 2008. The
Thatcherite (and Blairite) mantra of deregulation and self-regulation was the norm, and the
supposed benefits of these (for the City of
London and Britain more generally) were
lauded and stressed. During the decades
from the 1970s onwards, the frequency of
national boom and bust cycles grew and the
number and severity of national banking
crises rose, but few paid attention. The
Anglo-Saxon deregulatory market fundamentalist narrative worshipped by Keith Joseph,
Tony Blair and even Gordon Brown precluded actors from seeing the ‘black swan’,
the extreme exogenous event or economic
crisis coming. Instead a great moderation
was said to be underway.
In this manner, deregulatory tropes provided ideological justification for the boom
of the 1990s and 2000s. These beliefs allowed
the withering of state power, creation of
massive interconnected unregulated markets,
huge, global, but unmanageable firms and
complex, difficult-to-understand instruments
that would in 2007 rapidly transmit price
declines in houses and condos in Nevada
and Florida sold to poor, credit-challenged
Americans to banks in the UK and Germany,
and then around the globe. As the credit
crunch and economic contagion spread, tens
of millions of workers lost their jobs and
savings, and trade and commerce risked
grinding to a halt. The panic grew, and
leaders faced the most significant economic
and financial crises since 1929.
Crises and opportunity
Confronted by an economic catastrophe of
historic proportions, old solutions proved
insufficient. A break point occurred. But the
US could not fashion the solution alone or
solely with its G7 colleagues and allies, as it
had in the past. Instead, pushed by events, in
November 2008 President George W Bush
turned the G20 into a new leaders’ forum;
this would be mirrored in 2009 by a technical
forum, the Financial Stability Board, to secure
advanced and emerging states’ solutions and
World leaders present at these key early
summits use the same language. They talk of
being on a cliff, of looking into the abyss, of
having no alternative and needing to step
back. The leaders knew they had to act, even
though they differed on the rhetoric, with a
lame-duck US president eschewing attacks on
the market system while Gordon Brown,
Nicolas Sarkozy and Angela Merkel painted
a much broader picture of the reforms
required. Central bankers present at this pivotal juncture talk about seizing a new consensus, of a convergence, of a new regime, using
language evocative of the ideological jump
they would all collectively make together.
These were the same central bankers who
were bailing out the system, taking over firms,
acting in concert with governments to arrest
the crisis. In a real sense, these actors at this
point of maximal crisis had the same experience and, as a result, a common new consensus view of what was needed to halt it and
to ensure it did not happen again.
What the leaders and their technocrats
agreed to in 2008–9 amounted to a massive
Crises and Paradigm Shift
# The Author 2014. The Political Quarterly # The Political Quarterly Publishing Co. Ltd. 2014
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commitment to the reassertion of state power
over financial markets, firms, actors and
investors. State authority would be extended
collectively by the G20 and their central bankers. Reregulation was in and deregulation was
banished from the lexicon. Leaving the markets to reach equilibrium by themselves alone
was recognised as foolish. Irrational actors
and the mania of market panic had to be
replaced by the strong steadying hand of the
state and re-regulation. Going forward, these
leading states would take back authority over
markets and firms and responsibility for
financial stability. To do this, leaders adopted
an aggressive interventionist regulatory
approach—one that, without a crisis, could
not have been agreed upon. The new ideological accord was not to be a wholesale
rejection of market economics, but it was a
repudiation of the worst elements of economic neoliberalism and undue deference to
markets. State authority was back in vogue.
If a paradigm shift is to be made real, to
have solidity and permanence, ideological
jumps in beliefs and narratives are insufficient: what also matters is action. What
made Thatcher formidable, after all, was not
just her ideological sharpness and rigour; it
was her strength and determination to change
policy, often radically and suddenly. Thus she
challenged and crushed the miners and
unions. She sold off council housing for a
pittance and stopped building public housing. She clashed repeatedly and publically
with her allies in the European Economic
Community, unwilling to bend or turn away.
G20 leaders and their proxies acted similarly decisively in the immediate period after
the crisis erupted in 2008 and 2009, with real
and potentially lasting policy shifts via G20
summitry. In 2008 at the Washington summit,
and in 2009 at the London summit in particular (Gordon Brown’s finest diplomatic performance) and, to a lesser degree, at the
Pittsburgh summit, a political and policy
agenda was laid out which signalled that a
paradigm shift in the global regulation of
financial markets and firms would occur.
In making that leap, political leaders looked
to their technocrats and experts to specify the
reforms required. The central banking community led by Mario Draghi, now president of
the European Central Bank, and Mark Carney, now governor of the Bank of England
and chairman of the Financial Stability Board,
offered up a series of detailed architectural
plans for the future regulation of global markets, the scope of which had not previously
been ever seriously contemplated. Without
the dynamic of the crisis, vested national
interests would have blocked action.
The elements of the new
The plans laid out in 2008 and 2009 are still
being used today in the collective application
of state power over markets and the world’s
biggest banks. The crisis created room for
manoeuvre, negotiating space and a broader
consensus for reform. When you are in a crisis
all together—advanced and emerging, east
and west, north and south—matters are clarified and difficult solutions are easier to reach.
So what are the tangible facets of the new
policy framework?
Institutions are created
First, the G20 leaders’ forum permanently
supplanted the G7 grouping as the top negotiating forum for world leaders advanced and
emerging, signalling that the old days of
North Americans and Europeans telling the
rest of the world what to do is now at an end;
the leaders needed the buy-in, political and
fiscal, of China, India and other rising powers,
and henceforth these players would always be
at the top table. This is a major change in
international summitry—a recognition of the
change in the balance of power, the rise of
China, Brazil and, to a lesser extent, India and
Russia. These emerging country leaders are
much less leery of asserting state prerogatives
over markets; they stood behind the G20
move to take back authority over major financial markets.
Second, the G20 backed the creation of a
new body, the Financial Stability Board (FSB),
and gave Mario Draghi and Mark Carney
leadership roles. From 2009 this international
institution provided a top-down overview of
global risks to financial stability, and today it
acts as the coordinating body for the financial
reforms which its own, hardline leadership
demands and oversees. The forum lacks formal power but is strongly backed by leading
European and North American central bank-
408 Stuart P. M. Mackintosh
The Political Quarterly, Vol. 85, No. 4
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ers, and is also financed by them. It is this
community and this forum that is the principal agent in the concrete shift in the way in
which global markets would be regulated by
states from 2009 onwards.
Taxing banking and risk-taking
Third, the same central bankers leading the
FSB thrashed out a new deal on the oversight
of the world’s biggest banks. The G20 goal
was to constrain the excesses of the largest
banks in the world and help ensure future
individual institutional and broader financial
stability. Going forward, governments and
regulators would focus on ensuring the stability of the economy as a whole and more
closely overseeing the world’s largest international banks, which pose the largest risk in
economic crises when they confront possible
failure. To achieve this dual goal the G20 and
FSB agreed higher bank capital and other
international rules (called Basel III) in the
space of twelve months in 2009–10. This is
incredibly fast for such a complex negotiation;
the central bankers seized the space created
by the crisis to speed the reforms, well aware
that opponents of reform would be quiescent
for only a short while.
The accord required that the biggest banks
hold risk-adjusted capital of at least 10 per
cent, an order-of-magnitude increase over the
previous woefully inadequate levels (one
major bank in Europe, for instance, was found
by regulators in 2008 to be leveraged by over
400 times). Risk-taking major banks are
required to hold even higher levels of capital.
The world’s largest banks also face additional
requirements designed to lean against excess
risk-taking and the economic cycle, with
banks building up buffers in the good times
that can be drawn down when economic
troubles stress firms and undermine their
These rules—on capital, on leverage, on
liquidity of bank capital—are all designed to
make the cost or tax associated with being a
large and systemically important bank much
higher, to restrict and punish risk-taking and
(a not unimportant aspect) to cut banks’
return on equity, from 20-plus per cent precrisis to high single digits post-crisis. Banks
have rushed to prove they will comply, with
most banks already exceeding the Basel III
minimums well before the 2019 implementation deadline. This is the reason why readers
see almost daily accounts of major banks
raising capital, retaining earnings, and lowering profit forecasts; there is a rush to prove
each bank’s institutional fortitude, because if
they wait for the market or the European
Central Bank to find otherwise, the consequences for their business will be dire.
In the post-crisis climate the pressure on big
banks is not just international; it is also national. National bank regulators are buttressing and strengthening domestic regimes by
further tightening national laws, regulations
and costs for bankers taking risk that could
fall on the public purse. Thus, rather than a
race to the bottom, I see a race to add further
strength to the international Basel III minimums. In America, in the UK, in Switzerland,
in China, the central bank defenders of the
new consensus are demanding yet more capital, yet more barriers against failure of the
largest, most risk-taking firms, on top of Basel
III. A race to the top is underway, making it
more costly to take badly judged risks as
bankers, not less.
Some policies are strong, others less so
Individually, each policy adjustment may be
more or less strong. Basel III is substantial and
significant, if we are to believe not only the
regulators but the wails of anguish from the
bankers themselves. But other areas of reform
have different impacts.
In the financial derivatives space, concerning the products which transmitted mortgage
risk from US home owners to investors
around the globe while obscuring and multiplying the interconnected risk, the G20 and
national regulators have created an entirely
new regulatory system to standardise a
majority of these products, to lower costs, to
allow comparison and price discovery and,
where necessary, to also increase prices in line
with actual risk. New laws are going on the
statute books in all major markets and will
apply to global markets worth trillions of US
dollars per day. Entire markets that were
completely unregulated before 2008 are now
being overseen by the FSB and national regulators. Once again, without a crisis, this
breakthrough would not have occurred. Past
efforts by Timothy Geithner (when he was a
Crises and Paradigm Shift
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central banker) came to naught; post-crisis,
these products are being regulated.
On bankers’ bonuses the news is less consistent, more mixed. The US administration
has steadfastly refused to regulate bankers’
bonuses, agreeing to weak codes of conduct
and then not applying them properly. In the
European Union, in contrast, the regulation of
bankers’ pay is on the table and being
changed. The FSB too has go in on the act,
creating a new dispute settlement system for
banks that believe their competitors are not
applying agreed standards.
Finally, on the most difficult issue of all, ‘too
big to fail’, there has been least progress. The
biggest banks have been forced to plan their
own funerals, with so-called living wills, and
efforts have been underway to work out how
to dismantle a banking giant were it to fail
(called resolution). But the truth of the matter
is that in 2014, if a major international bank
once again teeters on the brink of collapse, no
one in finance believes they would be allowed
to fail. States would have to step in yet again.
Hence the biggest banks still have a valuable
(in terms of cost to borrow) implicit guarantee
worth many tens of billions of US dollars.
Thus the policy adjustments that make the
ideological shift real and possibly long-lasting
vary from strong to weak. But this is the
nature of major ideological and policy shifts:
not every individual facet is equally robust.
However, if these changes are taking place
within a new paradigm—and I maintain they
are—the totality of the regulatory reforms can
be seen as more significant. This is because
once policy-makers, and in this case the central bankers at the core of the regulatory
system, make a jump in their consensus
worldview, they are more resistant to attacks
from outsiders (such as global banks and their
myriad of lobbyists).
Once again there are parallels with Margaret Thatcher’s government. She had many
neoliberal successes (against the unions, for
example). But in some areas she achieved
much less (failing in her attempts to radically
reduce spending on the welfare state, for
instance). But weakness in one area over
another does not deny the nature of the overall shift, even though in the mid-1980s it was
not fully visible to all observers. Underlying
the policy shifts in the 1980s were cultural
currents that began to support the shift. I
detect these in this financial regulatory case
as well.
Banking in the new normal
Evidence of the new reality can be seen in the
actions of the banks themselves. State assertiveness is affecting bank business models—
as it should if the shift is becoming real. The
smarter bank CEOs see the regulatory writing
on the wall, and are making major adjustments; they can see this is no temporary,
ephemeral movement. It is notable that those
banks which performed worst have new
CEOs most willing and most able to make
the conceptual and business model jumps. So
RBS is abandoning investment banking,
drawing back to its retail roots and shrinking
its American footprint. UBS has slashed its
investment bank activities, as has Credit
Suisse. Proprietary trading is off-limits in the
US (thanks to former Federal Reserve Chairman Paul Volcker). In this way the more
forward-looking CEOs are recognising a
world in which banking may become a little
more boring and less lucrative. Thank goodness for all of us.
Finance in disrepute
Broader cultural shifts have also begun. The
Occupy Wall Street movement, although now
past, played an important role, for it helped
spark the debate on the growth of inequality
and wealth represented by the excesses of
international finance in London and New
York. As Andy Haldane of the Bank of England noted, Occupy was a transformative
movement. It helped change and impact the
wider debate, even as the protests’ anarchic
and disorganised nature blunted their
broader effectiveness. The research in Thomas
Piketty’s On Capital builds on and in a sense
relies on (by being released at just the right
cultural moment) the critical foundation that
Occupy laid.6
Post-crisis, among the public, bankers are
looked at very unfavourably indeed. A 2012
Mori poll found only 24 per cent of the public
trusted bankers to tell the truth, third from the
bottom, only just above real estate agents and
politicians. Gone is the time is when the giants
of finance could deliver their sometimes
dubious pearls of wisdom without derision
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or criticism. This reputation damage is significant and lasting and feeds into the wider
public view of the finance profession and
This cultural change to one more critical of
finance and of banks is reflected in a falling
desire to work in the financial markets. For
example, in 2014 only 16 per cent of MIT
MBAs went into finance—a drop from 27
per cent the year before. In the US graduates
are opting for technology firms over finance;
at Stanford 32 per cent of the class of 2014
accepted tech jobs and just 26 per cent headed
into finance, while two years ago those figures
were 13 per cent and 36 per cent, respectively.
Central bankers have the
With this apparent cultural shift underway,
G20 and the FSB, state authorities and central
bankers retain the upper hand. At present
there are few signs key players, such as
Mark Carney of the Bank of England, or Janet
Yellen, or Stan Fischer—the latter two chair
and vice-chair, respectively, of the Federal
Reserve System (America’s central bank)—
are backing off from defence of the new
reality they have helped lead and construct.
Expectations to the contrary are wrong.
Mark Carney came to the Old Lady of
Threadneedle Street lauded by a city establishment fooled by their own dreams and
fantasies, in which they projected their desires
and wishes onto the new governor. They
hoped Mr Carney would be softer on the
City than Mervyn King, who had, post-crisis,
taken a highly critical view of bankers and
banking. The UK financial sector’s view of the
new governor was wrongheaded. Instead, Mr
Carney (who was in fact quite tough as governor of the central bank of Canada) is defending his construction, the FSB, as the new
normal, with its emphasis on the aggressive
re-regulation of the world’s largest banks, of
higher capital, of lower leverage, of taxation
of excessive risk-taking by banks.
Recent comments by Carney on inclusive
capitalism in London only serve notice that he
will continue a tough line. Governor Carney
asked: ‘Who does finance serve? Itself? The
real economy? Society? And to whom is the
financier responsible? Herself? His business?
Their system? The answers start from recog-
nising that financial capitalism is not an end
in itself, but a means to promote investment,
innovation, growth and prosperity.’7 These
rhetorical questions demonstrate the governor is well aware of societal demand for
finance and banks which are socially responsible rather than ‘socially worthless’ (in Adair
Turner’s memorable phrase).
Indeed, a continued assertion of state authority by regulators over markets and firms
is being seen. Banks have been punished and
some CEOs removed (such as Bob Diamond
of Barclays or Vikram Pandit of Citigroup). As
of June 2014, the world’s largest banks have
paid fines totalling more than $115bn, with
JPMorgan Chase paying in excess of $20bn.
Still others, such as RBS and UBS (in Japan)
and BNP Paribas and Credit Suisse (in America), are for the first time in decades admitting
to serious criminal acts.
While critics complain that too few bankers
have been made to spend time in the custody
of HM Prisons (and they are probably correct
in that complaint), it is also true that the scale
of the fines, admissions of criminal guilt and
ongoing enforcement actions would never
have been conceivable absent the financial
crisis and the galvanising effect it has had
among the G20 and central bankers acting as
the states’ regulatory guardians. So the shift
toward greater state power and authority
over markets and firms and away from the
fetishised financial markets of the 1970s–
2000s continues. With the LIBOR, FOREX
and commodity scandals (and who knows
what else) still unfolding, the probability of
further criminal charges and revelations is
high. If that happens, those banks with rotten
cultures at their core will face further infamy,
reputational damage and worse, and the cultural shift will grow stronger, not weaker.
In 2008–9 the financial and economic crises
forced political leaders and their central bankers to abandon the old worldview and jump to
a new ideological and policy consensus: a
reassertion of state power and authority over
global financial markets, the world’s largest
banks and financial firms. Today we are living
through the creation of a new normal. It is still
being built, and it is still a work in progress.
Scientific, ideological and, indeed, economic
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paradigm shifts are rare events, and are not
instantaneous but take years to become fully
visible and durable. Copernican theory only
became accepted very gradually. Margaret
Thatcher’s full impact took time to be recognised. Similarly, observers will have to wait
and watch to see if this new paradigm is longlasting, but the initial indicators appear positive and suggestive of a meaningful, durable,
international ideological and financial regulatory policy shift.
1 N. Copernicus, On Revolutions of Heavenly
Spheres, New York, Prometheus, 1995.
2 T. Kuhn, The Structure of Scientific Revolutions,
Chicago, University of Chicago, 1996.
3 S. Strange, The Retreat of the State: The Diffusion of
Power in the World Economy, Cambridge, Cambridge University Press, 1996.
4 M. El-Erian, ‘Market fatigue: The Anglo-Saxon
model has taken a knock’, The Economist, 1
October 2009.
5 T. Padoa-Schioppa, ‘Markets and government
before, during and after the 2007-20xx Crisis’,
Per Jacobsen Lecture, Basel, Switzerland, 27 June
6 T. Piketty, Capital in the Twenty-First Century,
Cambridge, Harvard University Press, 2014.
7 M. Carney, ‘Inclusive capitalism: Creating a
sense of the systemic’, Bank of England, 27
May 2014.
412 Stuart P. M. Mackintosh
The Political Quarterly, Vol. 85, No. 4
# The Author 2014. The Political Quarterly # The Political Quarterly Publishing Co. Ltd. 2014