Even today many people believe that all the banks should have been allowed to fail.
Easy to see how people in 2008 could decide to let one bank fail. Many felt that 'bailout capitalism' was a bad idea in the first place, and that the system should just learn to absorb the shock. Only a small minority had any idea what was coming. People at the top "should have known", but the history of finance has no shortage of examples where foolish economic beliefs overrides common sense.
Here's the evidence I remember, so this is primary information, no citation needed: I used to work for the Federal Reserve Bank. Every fiscal quarter we'd meet with the chair where he would give us the inside straight talk about policy and governance. In 2006 during one of these conferences, the chair mentioned (paraphrasing) "We continue to be very concerned about the rise in subprime mortgages as a percentage of the mortgage industry in general but we have no way from inside the fed to change this trend. We're currently working very hard to figure out some kind of policy measures we can implement to ameliorate this." In 2006 I had no clue about how dangerous this was but as a mere software engineer, I remember distinctly lifting my chin from my screen to mark this utterance, sadly in retrospect, only to wonder what I personally should be doing to help.
And the people that didn't advocate for sane economic policy were most definitely not told to shove their Keynesian beliefs where the sun doesn't shine.
[citation needed]
What measure evidence do you require? Methinks infinite.
