Populism, Group Thinking and Banking Policy

Abstract

This paper builds a model of populism called Democratic Rioting in which citizens – i.e. the poor and the rich - are assumed to be heavily influenced by psychological group dynamics that result from banking shocks. We highlight a display of anger that is channelled through an election instead of in the streets. In turn the anger – a self-serving bias – can be influenced by non-financial news about immigration, welfare plans and housing plans. Therefore after a banking shock the consensus on a myopic populist policy can depend on many issues that have nothing to do with the bailout decision itself. We describe a mechanism that can be applied to the aftermath of both the Great Recession and the Great Depression.