Losing Credit The Politics of Liberalisation and Macro-Economic Regime Change in Norway 1980-92 (99) Bent Sofus Tranøy Doctoral thesis Department of Political Science University of Oslo Table of Contents PREFACE ..............................................................................................................................................................5 LIST OF ACRONYMS.......................................................................................................................................10 CHAPTER 1: INTRODUCTION.......................................................................................................................11 1.1 THE ARGUMENT IN BRIEF .............................................................................................................................11 1.2 THE ARGUMENT IN CONTEXT .......................................................................................................................18 1.2.1 Theoretical context..............................................................................................................................18 1.2.2 Banking crisis research.......................................................................................................................22 1.2.3 Credit market liberalisation................................................................................................................30 1.2.4 Potential significances ........................................................................................................................33 1.3 NOTES ON METHODOLOGY: WHAT IS A POLICY FIASCO AND HOW DO WE STUDY THEM? .............................34 1.3.1 Definitions: From failure to fiasco .....................................................................................................34 1.3.2 Constructing an explanation from counterfactuals.............................................................................37 1.3.3 Sources and their interpretation .........................................................................................................44 1.4 HOW THE THESIS IS ORGANISED ...................................................................................................................47 CHAPTER 2: CONCEPTUAL AND THEORETICAL BUILDING BLOCKS ............................................50 2.1 ROUTINES, REGIMES, STABILITY AND ORDER ...............................................................................................50 2.1.1 Functional interdependencies and compatibility ................................................................................52 2.1.2 The Norwegian Regime.......................................................................................................................55 2.1.3 Micro-foundations...............................................................................................................................58 2.2 DISPARATE POLICY PATHS AS SOURCES OF CO-ORDINATION FAILURE...........................................................60 2.2.1 Asymmetrical degrees of stickiness.....................................................................................................63 2.2.1.1 Pluralist versus statist theories...................................................................................................................... 64 2.2.1.2 Actors and policy content............................................................................................................................. 67 2.2.1.3 Political stickiness – six propositions........................................................................................................... 74 2.2.2 Selective learning................................................................................................................................75 2.2.2.1 General technocratic biases .......................................................................................................................... 77 2.2.2.2 Biases in economic knowledge production................................................................................................... 80 2.2.3 Imported dynamics..............................................................................................................................82 2.2.3.1 Imported dynamics and policy timing .......................................................................................................... 84 2.2.3.2 Imported dynamics and policy content......................................................................................................... 88 2.2.3.3 Imported dynamics and policy rigidity......................................................................................................... 92 2.2.4 Summary .............................................................................................................................................95 CHAPTER 3: THE BOOM YEARS – UNFORTUNATE SEQUENCING AS A FUNCTION OF ASYMMETRICAL DEGREES OF STICKINESS ..........................................................................................97 2 3.1 CREDIT LIBERALISATION: THE BACKGROUND...............................................................................................98 3.1.1 Historical preamble ............................................................................................................................98 3.1.2 Liberalisation – by decision or did it just happen?...........................................................................104 3.2 CASCADES OF CREDIT – REPEAL OF VOLUME CONTROLS............................................................................106 3.3 BOOM DYNAMICS ......................................................................................................................................112 3.3.1 Asset price inflation ..........................................................................................................................112 3.3.2 The share market – policy and market trends...................................................................................116 3.3.3 The property market – policy and market trends ..............................................................................118 3.4 THE STICKY PRICE OF CREDIT – NOMINAL INTEREST RATES AND TAX BREAKS ...........................................122 3.4.1 Tax reform and the deductibility issue ..............................................................................................124 3.4.2 Interest rate controls.........................................................................................................................128 3.5 SUSTAINING THE BOOM: FISCAL AND INCOMES POLICY ..............................................................................135 CHAPTER 4: THE BOOM YEARS – PERVASIVE UNDERESTIMATION AS A FUNCTION OF SELECTIVE LEARNING ................................................................................................................................140 4.1 UNDERESTIMATING SYSTEM LEVEL RISK....................................................................................................141 4.2 UNDERESTIMATING INSTITUTION LEVEL RISK.............................................................................................144 4.2.1 Risk management in a risk seeking culture - changed banking behaviour .......................................145 4.2.2 Insufficient precautionary policies - the weakness of the supervisory body ....................................152 4.2.3 Insufficient precautionary policies - dilution of capital standards ..................................................158 4.3 UNDERESTIMATING THE STRENGTH OF THE UPSWING - INADEQUATE STATISTICS AND THEORY DRIVEN INTERPRETATION .............................................................................................................................................164 4.4 UNDERESTIMATING THE WILLINGNESS TO GROW - PARADOXICAL EFFECTS AND ATTEMPTS AT CONTROLLING THE BOOM........................................................................................................................................................169 CHAPTER 5: THE BUST YEARS – TOO MUCH TOO LATE ..................................................................173 5.1 FIXING THE EXCHANGE RATE – RIGID AUSTERITY ......................................................................................177 5.1.1 Preamble: Digesting the reverse oil price shock ..............................................................................177 5.1.2 Hard currency and high interest rates..............................................................................................181 5.2 THE REST OF THE POLICY PACKAGE ...........................................................................................................186 5.2.1 Fiscal and incomes policy – moderate moderation ..........................................................................186 5.2.2 Tax reform – real interest rate shock................................................................................................188 5.3 EUROPE TAKES CENTRE STAGE ..................................................................................................................191 5.3.1 Changing the anchor – importing European interest rates ..............................................................192 5.3.2 Liberalising capital controls - an internal market for money ...........................................................199 5.4 TWIN CRISES: BANKING AND CURRENCY....................................................................................................202