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

How governmental failure led to the 2008 financial crisis-and what needs to be done to avoid another similar event
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.

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.