Political Bubbles: Financial Crises and the Failure of American Democracy

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Overview

Behind every financial crisis lurks a "political bubble"--policy biases that foster market behaviors leading to financial instability. Rather than tilting against risky behavior, political bubbles--arising from a potent combination of beliefs, institutions, and interests--aid, abet, and amplify risk. Demonstrating how political bubbles helped create the real estate-generated financial bubble and the 2008 financial crisis, this book argues that similar government oversights in the aftermath of the crisis ...

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Political Bubbles: Financial Crises and the Failure of American Democracy

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Overview

Behind every financial crisis lurks a "political bubble"--policy biases that foster market behaviors leading to financial instability. Rather than tilting against risky behavior, political bubbles--arising from a potent combination of beliefs, institutions, and interests--aid, abet, and amplify risk. Demonstrating how political bubbles helped create the real estate-generated financial bubble and the 2008 financial crisis, this book argues that similar government oversights in the aftermath of the crisis undermined Washington's response to the "popped" financial bubble, and shows how such patterns have occurred repeatedly throughout US history.

The authors show that just as financial bubbles are an unfortunate mix of mistaken beliefs, market imperfections, and greed, political bubbles are the product of rigid ideologies, unresponsive and ineffective government institutions, and special interests. Financial market innovations--including adjustable-rate mortgages, mortgage-backed securities, and credit default swaps--become subject to legislated leniency and regulatory failure, increasing hazardous practices. The authors shed important light on the politics that blinds regulators to the economic weaknesses that create the conditions for economic bubbles and recommend simple, focused rules that should help avoid such crises in the future.

The first full accounting of how politics produces financial ruptures, Political Bubbles offers timely lessons that all sectors would do well to heed.

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Editorial Reviews

Publishers Weekly
As pundits debate the causes of the 2008 economic crisis, the authors contend that financial crises have inherently political dimensions. McCarty, Poole, and Rosenthal (political scientists at Princeton University, the University of Georgia, and New York University, respectively) argue persuasively that political bubbles (“policy biases that foster market behaviors leading to financial instability”) and market bubbles are highly similar, with policy biases contributing to and amplifying market behavior. Even if Americans prefer a divided government, the cost of diffused power includes policy delays and resistance to amending “ineffectual and outdated” programs. The authors provide an exhaustive review of structural problems that they believe impede effective government response to new catastrophic economic developments. Their arguments transcend the academic to include historical precedents and specifics on Wall Street machinations. While Wall Street is the main culprit in the crisis, no player is exempt. The authors criticize conservatives and liberals for drawing self-serving lessons from the crisis, and the administration for failing to pursue systemic reforms. Meanwhile, the “too big to fail” firms have become even bigger. The authors call for a “strong set of simple rules.” While this is a justified addition to literature about the recent crash, readers may balk at the assertion that, amid the crisis, American democracy failed the citizenry. (Jun.)
From the Publisher

"As pundits debate the causes of the 2008 economic crisis, the authors contend that financial crises have inherently political dimensions. McCarty, Poole, and Rosenthal argue persuasively that political bubbles and market bubbles are highly similar, with policy biases contributing to and amplifying market behavior. . . . The authors provide an exhaustive review of structural problems that they believe impede effective government response to new catastrophic economic developments. Their arguments transcend the academic to include historical precedents and specifics on Wall Street machinations."--Publishers Weekly

"McCarty, Poole, and Rosenthal have crafted a masterful analysis of the 2008 financial crisis. Their central thesis is that the underlying cause of the Great Recession was the 'political bubble'. . . . The warnings for the U.S. political system are dire, and the authors make the case for political courage in dealing with wealth inequalities. This book would be an excellent addition to the library of any student of political economy and an excellent start in generating policy proposals on how to deal with future crises."--Choice

"Greatly expanding upon and enriching prior work on political polarization, Political Bubbles persuasively shows that the 2008 financial crisis was the product of potent political forces."--Philip Rocco, Public Administration

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Product Details

  • ISBN-13: 9780691145013
  • Publisher: Princeton University Press
  • Publication date: 5/26/2013
  • Edition description: New Edition
  • Pages: 336
  • Sales rank: 792,007
  • Product dimensions: 6.40 (w) x 9.30 (h) x 1.20 (d)

Meet the Author


Nolan McCarty is the Susan Dod Brown Professor of Politics and Public Affairs and chair of the Department of Politics at Princeton University. Keith T. Poole is the Philip H. Alston Jr. Distinguished Professor in the Department of Political Science at the University of Georgia. Howard Rosenthal is professor of politics at New York University and the Roger Williams Straus Professor of Social Sciences, Emeritus, at Princeton University.
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Table of Contents


Acknowledgments vii
Introduction 1
Part I: The Political Bubble - Why Washington Allows Financial Crises to Occur
Chapter 1 Bubble Expectations 31
Chapter 2 Ideology 38
Chapter 3 Interests 71
Chapter 4 Institutions 90
Chapter 5 The Political Bubble of the Crisis of 2008 117
Part II: Pops - Why Washington Delays in Solving Financial Crises
Chapter 6 Historical Lessons of the Responses to Pops 153
Chapter 7 The Pop of 2008 184
Chapter 8 "Pop"ulism 228
Chapter 9 How to Waste a Crisis 251
Epilogue 275
Notes 283
Bibliography 305
Name Index 327
Subject Index 333
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Sort by: Showing 1 Customer Reviews
  • Anonymous

    Posted June 26, 2013

    Moriah to bw

    Hey im going home soo i wont have wifi..... byezer;-)

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