In talking about the financial crisis with a friend at work, we argued about the merits of financial innovation. Obviously the finance sector does come out with some good new things; the original 30 year mortgage seems to have been a good practical idea. But a lot of the recent innovations, like adjustable rate mortgages and credit default swaps seem to produce short term benefits for long term destabilization.
Of course, the success of New York as the financial capital of the world did require financial innovation. If we limited leverage to ten times and made derivatives publicly traded or the like we might have lost lead status to London or Singapore or the like. That would mean job losses here and possibly some rather bright people immigrating away.
That observation made me realize we can weaponize financial innovation. Send some our best and brightest to Moscow, Shanghai, or some rich emirate. Give them ten, maybe twenty years and soon enough those countries may have their economy collapse and be borrowing from us instead of vice versa.
More seriously, there are good things that come from the finance sector. We certainly want one of a reasonable size, we need to get credit flowing again all the more in a downturn. But unless people who need and can use credit aren’t getting it (e.g. the positive innovation of micro-financing) then financial innovation is not producing anything but profits for the traders by moving money around.
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