Buttonwood in the Economic writes:  An important issue for academics to consider is that the financial sector is not static. Each crisis induces changes in behaviour and new regulations that prompt market participants to adjust (and to find new ways to game the system). In any case, regulators cannot eliminate risk altogether. In terms of consumer protection, regulators cannot set a standard for the right product that should be sold in all circumstances. Investors’ attitude towards risk may differ (indeed their ex ante willingness to take risk may differ from their ex post feelings when bad things happen.) And even if the salesman and the clients were equally well informed, the correct asset allocation (between, say, equities and bonds or America and Japan) cannot be known in advance.

Indeed, the attempt to create a riskless world may be counter-productive. Cliff Asness of AQR says that “Making people understand that there is a risk (and a separate issue, making them bear that risk) is far more important, and indeed far more possible than making a riskless world. And if I may go further, trying to create and worse, giving the impression you have created, a riskless world makes things much more dangerous.”

There will never be an “answer” that eliminates all crises; that is not in the nature of finance and economics. But for too long economists ignored the role that debt and asset bubbles play in exacerbating economic booms and busts; it needs to be much more closely studied. Even if the market is efficient most of the time, we need to worry about the times when it is not. Academics and economists need to deal with the world as it is, not the world that is easily modelled.  The Trouble with Theory