In Defense of Much, But Not All, Financial Innovation
AbstractIn this essay, I take up Volcker’s challenge. I do so by highlighting many, perhaps most, of the key truly “financial” (not mechanical) innovations since the 1960s that have changed the way finance carries out its four economic functions: enabling parties to pay each other; mobilizing society’s savings; channeling those savings toward productive investments; and allocating financial risks to those most willing and able to bear them. Admittedly, my analysis is more qualitative than quantitative, reflecting the difficulty of putting numbers to the impacts (a follow-on project I hope to undertake). But I nonetheless assert that logic and reason can lead to lead to certain meaningful conclusions. My ultimate verdict is that like Johnson and Kwak, I find that there is a mix between good and bad financial innovations, although on balance I find more good ones than bad ones. Individually and collectively, these innovations have improved access to credit, made life more convenient, and in some cases probably allowed the economy to grow faster. But some innovations (notably, CDOs and Structured Investment Vehicles, or SIVs) were poorly designed, while others were misused (CDS, adjustable rate mortgages or ARMs, and home equity lines of credit or HELOCs) and contributed to the financial crisis and/or amplified the downturn in the economy when it started.
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Bibliographic InfoPaper provided by Regulation2point0 in its series Working paper with number 37.
Date of creation: Feb 2010
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- Litan, Robert E., 2010. "In Defense of Much, but Not All, Financial Innovation," Working Papers 10-06, University of Pennsylvania, Wharton School, Weiss Center.
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- Renato Maino, 2012. "Tackling the “Too Big To Fail” conundrum: Integrating market and regulation," FMG Special Papers sp207, Financial Markets Group.
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