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Nolan McCarty, Keith T. Poole, and Howard Rosenthal
Princeton University Press, 2013
Behind every financial crisis lies 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 indicate 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 blind regulators to the economic weaknesses that create
the conditions for economic bubbles. The authors recommend simple, focused rules that limit regulatory discretion
and financial products.
The first full accounting of how politics produces financial ruptures, Political Bubbles offers timely lessons that
all sectors would do well to heed.
Elizabeth DeBold. 2010. "Title XIV -- The Mortgage Reform and Anti-
Predatory Lending Act:
The Past, Present, and Future of Anti-Predatory
Lending Protections." Manuscript, New York University.
Justine Chao. 2011. "The Dodd Frank Act: Section 941: Improvements to the Asset-Backed
Securitization Process: Credit Risk Retention." Manuscript, New York University.