Knowledge and Governance: Can Systemic Risk in Financial Markets Be Managed? The Case of the Euro Crisis

Abstract

The crystallization of systemic risk in financial markets occurs when financial actors collectively (if unwillingly) bring on a major financial crisis through the withholding of credit and asset fire sales. The management and prevention of such calamities is our focus. We introduce the tools of political science, especially governance and institutional analysis, to help us probe the key dynamics at work. We then show that where appropriate knowledge and governance arrangements can be put in place, collective action may be arranged to help prevent the crystallization of systemic risk. We use the euro crisis to help illustrate our arguments.