Slowing Financial Innovation

21Oct08

Via Planet Money, Edward Hadas Writes:

[G]o slow on innovation. A new pharmaceutical can’t be sold until it is demonstrated to be both safe and effective. New financial products should be put through roughly similar paces — consideration of the possible economic advantage, analysis of what could go wrong, small trials to see whether the theoretical analysis works in the real world.

I think this is one option to solving the problems we face, and likely a good one. I for one would be willing to limit the growth of Wall St. a few percentage points if it meant keeping us from the occasional collapse.

However, there’s another side of this equation… Shouldn’t educated investors be able to understand the products they sell and buy? Does the herd mentality of keeping up with the bank next door blind investors’ reason and investigation to that degree? I think that’s the problem that needs to be addressed, even though culture is always difficult to “fix.” Otherwise, Wall St. will simply innovate our way into a similar collapse given enough time.

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