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

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PART I

THE POLITICAL BUBBLE

Why Washington Allows Financial Crises to Occur

Introduction

At first glance, the financial crisis of 2008 appears to be the result of egregious, greedy actions in the private economy. The miscreants include the top management of financial firms, including Countrywide Financial, Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, American International Group, and Fannie Mae and of credit rating firms such as Moody’s, Fitch, and Standard & Poor’s. The scandalous behavior involved the misuse of innovations such as “sliced and diced” collateralized debt obligations, credit default swaps, and financially “engineered” strategies embedded in mathematical models. At the same time credit agencies with conflicts of ...

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