What Do You Mean by "Innovation?"
Justin Fox on financial innovation:
I'd rather have today's financial system, however flawed it is, than the financial system of [the year] 1200. But at the same time, an estimated 97.3% of all financial innovations (I just made that up, but it seems about right) are just new ways to fleece customers or hide risk, and all major financial crises have been associated with some financial innovation or another. So is there any way to still get the long-run evolution of the financial system that is on balance a good thing, while avoiding the blowups and wealth transfers to financial system players from the rest of us?
The answer may be no. But it seems like some sort of slowing and testing mechanism—akin to the FDA approval process for drugs—could bring more stability while still allowing for innovation. And that's what the Consumer Financial Protection Agency would be, right?
The term "financial innovation" is a bit of a weird one. Overdraft fees are a "financial innovation." So too is the noxious practice of universal default. But so are ATMs. And, for that matter, banks. It's all a bit broad.
"Innovation," in most other areas of life, means forward progress of a discrete sort. A new price for the Nintendo Wii, for instance, wouldn't be considered an innovation in video games. But the Nintendo Wii was considered an innovation. "Innovation," in that sector, tends to mean technical progress. Conversely, the financial sector takes a pretty relaxed view of the word "innovation": It seems to denote "new stuff we're doing." That stuff might be ways to eke out more profit or spread risk or hide risk or make it simpler to withdraw money. It would be a lot easier to say whether financial innovation is good or bad, however, if people were a bit more specific on what sort of innovation they were looking for. What I think we can say, with some certainty, is that simply trusting the financial sector's definition of worthwhile innovation hasn't worked out too well.
Posted by: theorajones1 | July 20, 2009 5:08 PM | Report abuse
Posted by: michael16 | July 21, 2009 12:53 AM | Report abuse
Posted by: Aatos | July 21, 2009 9:01 AM | Report abuse
Posted by: Hailmaryyy | July 21, 2009 10:14 AM | Report abuse
The comments to this entry are closed.