Political Bubbles: Financial Crises and the Failure of American Democracy

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a divided government, the cost of diffused power includes policy delays and resistance to amending “ineffectual and outdated” programs.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.)