Their response was no.
According to the economists, what failed was relying on the idea of a mechanistic rational market in the presence of imperfect knowledge. According to the political scientists, what failed were the institutions that were suppose to oversee the market.
While both the economists and political scientists are on the right track, neither appears to understand the FDR Framework which combines the philosophy of disclosure with the principle of caveat emptor (buyer beware) and on which most of the global financial system is based.
As a result, their recommendations for how to prevent future crisis are unlikely to work.
Economist Roman Frydman said in his keynote address to the European Financial Congress
“I would like to pin a significant share of the blame on economists,” Frydman said. “It was their ideas concerning the role and functioning of financial markets in capitalist economies that provided the supposedly scientific underpinning for policy decisions and financial innovations that made the crisis much more likely, if not inevitable.”...
These theories created a faith in the mechanistic rational market that was a key cause of the crisis, Frydman suggested, deriding the ”unsuccessful – and largely American – experiment in viewing the macroeconomy and financial markets as machines.”
This view failed because it doesn’t account for imperfect knowledge...This conclusion as to the cause of the financial crisis resulting from imperfect knowledge would lead a reader to think that Mr. Frydman would champion the need to bring transparency to all the opaque corners of the financial system.
However, this was not his conclusion.
Instead, he offered up the theory of imperfect knowledge economics. This theory
relates risk to participants’ perceptions of the gap between an asset price and its range of historical benchmark levels: as asset prices rise well above or fall well below most participants’ perceptions of these levels, those who are betting on further movement away from the benchmark should perceive an increased risk in doing so.Despite its name, this is a theory of reversion to the mean in pricing of financial assets that makes the government responsible for limiting how far an asset's price can vary from its historic mean so that when price does revert to the mean there isn't a systemic financial crisis.
But is the government up to this task?
Political scientists Nolan McCarty and Keith Poole would say no.
In their book, Political Bubbles: Financial Crises and the Failure of American Democracy, they explain why government is not up to the task.
Three I’s: ideology, institutions and interests.... the effects of ideology, interests and institutions are pro-cyclical.
By political bubble, they mean a set of policy biases that foster and amplify the market behaviors that generate financial crises. Rather than counteract the actions of private economic actors, these factors complement and exacerbate their effects. The political bubble is an intrinsic part of answering what went wrong....
Political will to do the right thing has to swim against an onrushing tide of Wall Street contributions and the ever-present temptation to “monetize” public service.
Where does belief in ideology end and the effect of green-colored glasses begin? Using former Senator Phil Gramm (who went on to make millions of dollars at UBS) as an example, the authors confess that, “Somewhat sadly, it can be difficult to disentangle the political influence of ideology from the influence of venality and greed.”
What happened after the 2008 crisis?
Widespread illegality was left unpunished.
Congress passed the Dodd-Frank Act, but that legislation only tinkered at the margins of the existing banking regulatory framework, left Wall Street banks structurally all-but-untouched, and for the most part kicked the can back to the very regulators who had failed to prevent the crisis in the first place.Regular readers will recall that this is exactly the same conclusion as the Nyberg Report on the Irish Financial Crisis reached.