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Finance and Politics

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Marriott Marquis, Newport Beach
Hosted By: American Economic Association
  • Chair: Karsten Müller, Princeton University

From Finance to Fascism: The Real Effect of Germany’s 1931 Banking Crisis

Sebastian Doerr
Bank for International Settlements
Stefan Gissler
Federal Reserve Board
José-Luis Peydró
ICREA, Pompeu Fabra University, CREI, Barcelona GSE, Imperial College London, and CEPR
Hans-Joachim Voth
University of Zurich and CEPR


Do financial crises radicalize voters? We analyze a canonical case - Germany during the Great Depression. After a severe banking crisis in 1931, caused by foreign shocks and political inaction, radical voting increased sharply in the following year. Democracy collapsed six months later. We collect new data on pre-crisis bank-firm connections and show that banking distress led to markedly more radical voting, both through economic and non-economic channels. Firms linked to two large banks that failed experienced a bank-driven fall in lending, which caused reductions in their wage bill and a fall in city-level incomes. This in turn increased Nazi Party support between 1930 and 1932/33, especially in cities with a history of anti-Semitism. While both failing banks had a large negative economic impact, only exposure to the bank led by a Jewish chairman strongly predicts Nazi voting. Local exposure to the banking crisis simultaneously led to a decline in Jewish-gentile marriages and is associated with more deportations and attacks on synagogues after 1933.

Financial Crisis, Creditor-Debtor Conflict, and Political Extremism

Gyozo Gyöngyösi
Kiel Institute for the World Economy
Emil Verner
Massachusetts Institute of Technology


This paper studies the impact of debtor distress during a financial crisis on support for the populist far right. We use foreign currency borrowing of households in Hungary, combined with a large and unexpected exchange rate depreciation, as a natural experiment to generate a shock to household debt burdens. Exploiting zip code level variation in the prevalence of foreign currency household loans, we show that a 10 percentage point unexpected rise in debt-to-income increases the vote share of the far-right party Jobbik by 3 percentage points. Foreign currency debt exposure accounts for 20 percent of the overall rise in the far-right vote share, and the effect persists across multiple elections. This result is robust to a variety of alternative explanations for increased far-right support and is corroborated by survey data on debtors and far-right supporters. We present evidence that conflict between creditors and debtors over the resolution of the crisis is an important mechanism in the electoral success of the far right.

Electoral Cycles in Macroprudential Regulation

Karsten Müller
Princeton University


Do politics matter for macroprudential policy? I show that changes to macroprudential
regulation exhibit a predictable electoral cycle in the run-up to 221 elections
across 58 countries from 2000 through 2014. Policies restricting mortgages and consumer
credit are systematically less likely to be tightened before elections during
credit booms and economic expansions. Consistent with theories of opportunistic
political cycles, this pattern is stronger when election outcomes are uncertain or in
countries where political interference is more likely. In contrast to monetary policy, I
find limited evidence that central banks are uniquely insulated from political cycles
in macroprudential policy. These results suggest that political pressures may limit
the ability of regulators to “lean against the wind.”

Housing Insecurity, Homelessness and Populism: Evidence from the UK

Thiemo R. Fetzer
University of Warwick and CAGE
Pedro CL Souza
Warwick University
Srinjoy Sen
Warwick University


Homelessness and precarious living conditions are on the rise across much of the Western world. This paper exploits exogenous variation in the affordability of rents due to a cut that substantially lowered housing benefit -- a welfare benefit aimed at helping low income households pay rent. Before April 2011, local housing allowance covered up to the median level of market rents; from April 2011 onwards, only rents lower than the 30th percentile were covered. We exploit that the extent of cuts significantly depend on statistical noise due to estimation of percentiles. We document that the affordability shock caused a significant increase in: evictions; individual bankruptcies; property crimes; share of households living in insecure temporary accommodation; statutory homelessness and actual rough sleeping. The fiscal savings of the cut are much smaller than anticipated. We estimate that for every pound saved by the central government, council spending to meet statutory obligations for homelessness prevention increases by 53 pence. We further document political effects: the housing benefit cut causes lower electoral registration rates and is associated with lower turnout and higher support for Leave in the 2016 EU referendum, most likely driven by its unequal impact on the composition of those that engage with democratic processes.
Francesco D'Acunto
Boston College
Tomasz Piskorski
Columbia University
Luigi Zingales
University of Chicago
Yuriy Gorodnichenko
University of California-Berkeley
JEL Classifications
  • G0 - General
  • D7 - Analysis of Collective Decision-Making