Political Bubble vs Orchestrator

Whenever an economic crisis occurs, public reaction is almost always the same: the market is deemed to have failed, speculators are accused of creating asset bubbles, financial institutions are blamed for excessive risk-taking, and investors are seen as trapped in irrational euphoria.

While these views are not entirely incorrect, history shows that major economic crises rarely stem solely from market failures. Behind every crisis, there is often a more fundamental failure: the failure of politics to perform its corrective and supervisory functions. The 2008 Global Financial Crisis is a clear example. For years, the world enjoyed aggressive credit growth, increasingly complex financial innovations, and leverage expansion that far exceeded risk management capacities. The warning signs were visible, yet regulators, policymakers, financial institutions, and even society collectively chose to believe the system would remain stable. When the bubble finally burst, the impact devastated not only the financial sector but also the real economy, employment, investment, and social welfare. In this context, McCarty, Poole, and Rosenthal (2013) introduced the concept of the ‘Political Bubble’—a situation where the political system fails to control emerging market risks and, unconsciously, actually amplifies them.

In their book, Political Bubbles: Financial Crises and the Failure of American Democracy, the authors explain that modern financial crises cannot be understood through the lens of market failure alone. They argue that crises are also failures of political institutions to read risks and take timely corrective action. They assert that political bubbles are formed through the interaction of three main factors, known as the ‘Three Is’: Ideology, Interest, and Institution. Ideology involves an excessive belief in a particular paradigm, which often leads policymakers to ignore warning signs. During the 2008 crisis, the belief that markets would always self-correct caused regulators to act too late. Interests create further issues, as the impact of economic policies often creates winners and victims; when certain groups reap massive profits, the incentives influencing regulators and policymakers increase. Meanwhile, weak Institutions lead to slow corrective processes, poor coordination, fragmented authority, and limited supervisory capacity, causing the state to lose its ability to read evolving risks. When ideology, interest, and institutions reinforce one another, a political bubble is born—a situation where politics ceases to be a corrective mechanism for market failure and instead becomes a cause of the crisis itself.

While McCarty, Poole, and Rosenthal explain why politics may fail, Paul Krugman explains why markets cannot always save themselves. In The Return of Depression Economics and the Crisis of 2008 and End This Depression Now!, Krugman critiques the assumption that markets always move towards efficient equilibrium. In practice, decisions that are rational for individuals often result in irrational collective outcomes. This phenomenon manifests in various forms, from asset bubbles and liquidity crises to market panic, herding behaviour, excessive debt dependency, and prolonged recessions. Krugman (2022) refers to this condition as ‘coordination failure’. Every actor acts according to their own interest, which may be individually rational, but when all actors act simultaneously, the end result harms the system as a whole. Therefore, the market requires an external corrective mechanism—not to replace the market, but to prevent it from destroying itself. This presents the paradox of modern economics: markets can fail, and states can fail. The question is no longer which is superior, but how to build governance capable of reducing the risk of failure for both.

In The Art of Monetary Policy: Lessons from Sun Tzu for Central Banks, Forbes (201s) offers a different answer, suggesting that the primary challenge of the modern economy is not choosing between the state or the market, but managing increasing uncertainty. According to Forbes, the modern world is increasingly influenced by external shocks beyond the control of any nation, ranging from pandemics and wars to global supply chain disruptions, energy crises, and geopolitical tensions. In such conditions, the success of public policy is determined not by the scale of intervention, but by the ability to build preparedness before a crisis occurs. Forbes identifies six key principles, including pre-crisis planning, accepting that external shocks are unavoidable, building systemic resilience, combining various policy instruments, maintaining flexibility, and understanding short-term versus long-term trade-offs. Here, the state’s role is not merely to eliminate risk, but to build the capacity to anticipate it.