Here is The Economist, suggesting that regulation strangles innovation.
The gist of this argument is, periodic financial crisis are a must for continued financial innovation. The alternative is slow growth and slumbering economy. While this argument may be rebutted in multiple ways, for each of the point made in the article, lets first focus on the premise and its validity.
How can slicing and dicing an existing financial instrument into other similar instruments be termed innovation? What is “New” about creating a variant of an existing mortgage by picking up various bits and pieces of the projected cash flow from it?
As any intelligent person would say, it depends on the context, and it may or may not be innovation.
Thank you for calling it out. It means that usage of the word “Innovation” is a question of semantics.
The article also makes the point that, a family that will not lend a $1000 to the neighbor is willing to lend it to a remote chaebol in korea. Well it is not the chaebol in korea that iam lending to. I am opening a savings account with the neighborhood bank and i still have my savings in the bank account since the FDIC insures my savings account up to $100,000. What the bank does with accumulated savings of thousands of individuals is immaterial to each of the individual since FDIC, a federal regulatory agency guarantees that each one will get back the full amount till $100,000 even of the bank closes shop over night, since the korean chaebol shut shop.
Consider that even as there is such a turmoil in the financial systems, there is nary a run on a single consumer bank that insures its deposits through FDIC. That is what you get out of good regulation. Argument closed.
While there are many such easy picking in this abysmally argued article, it makes no sense to ponder more over it.
The moral of this article is this. Be Skeptical, be very skeptical about what you hear from others, especially when ideology is dished out supporting an argument.
