Professor Terrence McDonough:

The neo-liberal approach sees the economy as fundamentally sound, with basically free markets.

If you see the economy as fundamentally sound and you have basically free markets you have a theory called the efficient markets hypothesis. It argues that markets consistently use the maximum amount of the best information to come to valuations which reflect the best information at the time. This could therefore always be trusted to form the basis of further action. Governments could not really compete with markets in gathering this information and felt themselves to be at a disadvantage. Governments felt the best thing to do was reinforce wherever the markets were going.

When the banks came to the Government and explained they did not have a solvency crisis but simply a temporary liquidity crisis which could be addressed through a guarantee to get over the hump, I believe the Government can be partially forgiven for believing this. Not because it was correct, clearly it was not, but that was the conventional wisdom of the time. The conventional wisdom of the time led us to the depressed situation still facing us today. The conventional wisdom of the time needs not to be reinstated but broken with.