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Political Bubbles by Keith T. Poole, Howard Rosenthal, Nolan McCarty

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CHAPTER 4

Institutions

[I]n our capital markets—in general, innovation precedes regulation, and that’s generally been good because we grow quicker because of it.

—Henry Paulson, quoted in Todd Purdum, “Henry Paulson’s Longest Night”

THE FINAL PRONG OF OUR EXPLANATION is the shortcomings of America’s policy-making institutions. We have already discussed how interests work to impede adequate and efficient regulation of financial markets. Legislators and regulators are susceptible to special-interest appeals from the financial services industry. Moreover, the industry benefits from information asymmetries with the government. But interests are far from the only roadblocks. Indeed, even if campaigns were publicly financed and all regulators and congressional ...

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