IDEAS home Printed from https://ideas.repec.org/h/nbr/nberch/12450.html
   My bibliography  Save this book chapter

Is Financial Innovation Good For The Economy?

In: Innovation Policy and the Economy, Volume 12

Author

Listed:
  • Simon Johnson
  • James Kwak

Abstract

Executive SummaryThere has been a great deal of financial innovation in recent decades but its social value is unclear. In the run-up to 2008, banks took large amounts of risk relative to the size of the economy. This approach was made possible by and sometimes justified in terms of "innovation." But it also created a great deal of downside risk for the economy--including widespread job losses and a big increase in the fiscal deficit.Innovation is among the most powerful forces that shape human society. The improvements in the material standard of living enjoyed by most (though not all) Americans are largely due to innovation. One of the principal arguments for free-market capitalism is that it is the economic system that most encourages innovation, because it allows innovators to capture a significant part of the benefits of their work.Today, financial innovation stands accused of being complicit in the financial crisis that has created the first global recession in decades. (See, e.g., Johnson and Kwak 2010, 105-9). The very innovations that were celebrated by former Federal Reserve chairman Alan Greenspan earlier this decade--negative-amortization mortgages, collateralized debt obligations (CDOs) and synthetic CDOs, credit default swaps, and so forth--either amplified or caused the crisis, depending on your viewpoint.However, the conventional wisdom is coalescing around the idea that financial innovation is basically good, but just needs to be watched a little more carefully. As Ben Bernanke said in a speech in May 2007: "We should also always keep in view the enormous economic benefits that flow from a healthy and innovative financial sector. The increasing sophistication and depth of financial markets promote economic growth by allocating capital where it can be most productive. The dispersion of risk more broadly across the financial system has, thus far, increased the resilience of the system and the economy to shocks. When proposing or impleme
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Simon Johnson & James Kwak, 2012. "Is Financial Innovation Good For The Economy?," NBER Chapters,in: Innovation Policy and the Economy, Volume 12, pages 1-15 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:12450
    as

    Download full text from publisher

    File URL: http://www.nber.org/chapters/c12450.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Josh Lerner & Antoinette Schoar, 2010. "Introduction to "International Differences in Entrepreneurship"," NBER Chapters,in: International Differences in Entrepreneurship, pages 1-13 National Bureau of Economic Research, Inc.
    2. Josh Lerner & Antoinette Schoar, 2010. "International Differences in Entrepreneurship," NBER Books, National Bureau of Economic Research, Inc, number lern08-2.
    3. Lerner, Josh & Schoar, Antoinette (ed.), 2010. "International Differences in Entrepreneurship," National Bureau of Economic Research Books, University of Chicago Press, number 9780226473093.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:12450. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.