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

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CHAPTER 7

The Pop of 2008

Introduction

We have seen that, historically, responses to pops have been limited and delayed. This pattern continued in the recent crisis. Housing prices began to slide in 2006 and market bubbles began popping in 2007 but serious government intervention through legislation was delayed until American International Group (AIG) collapsed the day after Lehman Brothers fell in September 2008. In April of that year Treasury officials Neel Kashkari and Phillip Swagel had developed a plan to recapitalize the banks in the event of a meltdown.1 Before AIG collapsed, giving the force of legislation to such a plan was unthinkable. Congress was populated not only by free market conservatives but also by liberals opposed to any sort ...

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