A nice write-up by Alex Pollock of AEI.
He discusses why fin crisis cannot be avoided despite all the wisdom and smart people in finance:
With all of the knowledge and experience collected in financial markets and governments, why are we not able to avoid repeated disastrous mistakes like those that led to the US housing meltdown and the European sovereign debt crisis? It is because financial markets are governed by a recursive system of interconnected decisions, theories, strategies, predictions, actions, and expectations that lead to booms and busts. History shows that the complexity of these interactions makes it nearly impossible to predict accurately which way the markets will go. Regulators like the US Federal Reserve are themselves too enmeshed in the system to avoid its systemic risk. We must recognize the reality of uncertainty and the absence of any godlike regulatory guardians.
In the end he points to this interesting paper. It shows whatever policies were made in the past to avoid future crisis resulted into the current 2008 crisis:
In an insightful essay, Arnold Kling discusses how in the 1990s the regulators carefully, diligently, and reasonably studied the savings and loan disaster to learn from it. They drew three principal lessons: You had to expand the securitization of mortgages. You had to have mark-to-market accounting. And you had to have risk-based capital requirements. These were plausible, though arguable, conclusions. All three lessons were applied and implemented. And all contributed significantly to the inflation of the housing bubble and the subsequent crisis of the 2000s. “Each era of regulation seems to contribute to the next era of euphoria,” Kling concludes. The buildup of systemic risk in the new situation from applying the lessons of the previous crisis was not apparent to most observers.
Finally, crisis are forever:
I am often asked, “Will we learn the lessons of the financial crisis?” “Yes, we will,” I answer. We learn the lessons after every crisis. But it does not stop the next one from happening.
In complex, densely recursive systems, uncertainty is an unavoidable fact of life. Yet those enmeshed in such systems still have to make decisions and act. Mistakes inevitably follow and will continue to do so.