The Great Financial Crisis and the role played by certain financial innovations, such as credit default swaps and synthetic securities has made a number of people question the value of financial innovation. A premise of our risk management course is that financial innovation is valuable, both to the individual company and to society at large. But it is always useful to re-examine and question a premise. Here are links to some of the critiques that have recently been made in the public debate precipitated by the Crisis.
Memorably, Former Chairman of the Federal Reserve Paul Volcker quipped that the only really useful financial innovation he’d seen in the past 20 years was the automatic teller machine. A more complete presentation of his thoughts can be found in a give-and-take with bankers and others hosted by the Wall Street Journal. Excerpts from the transcript can be found here.
Princeton Economist, Paul Krugman, has written often in his New York Times column and blog that many forms of financial innovation have been harmful, not helpful. Some of these can be found here, here, here, here, here and here.
MIT economist Simon Johnson and his coauthor James Kwak have also made a strong argument questioning the value of financial innovation in an article in the magazine Democracy, as well as on their blog, Baseline Scenario, which can be found here.