Financial Innovation?

As Lawrence noted (if you scroll down), the President’s financial reform package is before Congress.65px-dollar_symbol_goldsvg Who knows what it will look like when it emerges from the legislative process, but there is an issue that I’d like to raise now.

The focus of the proposal appears to be on the regulation of exotic financial products rather than on their existence.  Maybe that is the right approach, but I wonder whether a more sweeping question should be asked.  Was the financial innovation of the last two decades a good thing?  There is an argument that we need a return to “bankers’ hours,” which was shorthand for the idea that financial products should be dull due to the tendency (described by Minsky) for the banking system to run off the rails.

I mention this because it may be a subtext (or actual text) of the Supreme Court’s consideration of Bilski.  Since financial instruments are a significant subset of “business method patents,” I can imagine some of the briefs making the argument that these incentives for innovation were actually pretty harmful.  When the Justices hear the case in the Fall, the atmospherics may not be so great for those who want a broad reading of patentable subject matter.

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3 Responses

  1. Adam says:

    I think you’re comparing apples and oranges. Bankers hours came from the fact that bankers spent a lot of time in the community, and made their money over time as the community prospered.

    There’s no reason to think that innovative products are at odds with that. Farm futures were an innovation, as were reverse mortgages.

    The key is for compensation to be tied to the period of risk plus a little for margin of error. Align bankers interests with a stable banking system. If they’d then like to work long hours, go ahead.

  2. Frank Pasquale says:

    Two thoughts:

    Before the 1970s, “Trading in options and futures had been met with “instinctual hostility” for generations by the Securities and Exchange Commission (SEC). Speculation on stock options, in particular, had been held responsible for the Wall Street Crash of 1929; such derivatives markets were held by many regulators to be the moral equivalent of gambling. (One SEC chairman “compared options to ‘marijuana and thalidomide’.”)” [Joel Isaac’s description of Donald MacKenzie’s findings in An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press, 2006).]

    But even if we accept this older view of financial innovation, we run into Juicy Whip and moral utility issues, eh?

  3. bill says:

    To be fair, Juicy Whip was not actually hurting anyone. Your beverage apparently tasted just as good, it just wasn’t coming from the reservoir that was displayed.

    Financial “innovation” of the past two decades that is harmful to end users might be more like Massengill’s Elixir Sulfanilamide.