● Political Bubbles: Financial Crises and the Failure of American Democracy
By Nolan McCarty, Keith T. Poole & Howard Rosenthal
Excerpt via publisher, Princeton University Press
By political bubble, we mean a set of policy biases that foster and amplify the market behaviors that generate financial crises. Political bubbles are procyclical. Rather than tilting against risky behavior, the political bubble aids, abets, and amplifies it. During a financial bubble, when regulations should be strengthened, the political bubble relaxes them. When investors should hold more capital and reduce leverage, the political bubble allows the opposite. When monetary policy should tighten, the political bubble promotes easy credit.
