Robert Litan’s working paper on what financial innovation hath wrought is a must read. [Download Here] He set out to determine whether the radical changes in the way financial markets function over the past half-century deserve the bad rap they’ve gotten – for example, from Paul Volcker – since mortgage-backed securities hit the fan in 2008.
Litan scored individual innovations on whether they have: (a) expanded consumers’ access, (b) improved convenience, and (c) increased GDP. And not surprisingly (to us, anyway), he finds that the bag is mixed. While some financial innovations have been unambiguously beneficial to society – think ATMs, debit cards and foreign currency swaps – others have been questionable or even damaging – think collateralized debt obligations (CDOs) and structured investment vehicles (SIVs).
On balance, though, Litan concludes that financial innovation has done a lot more good than harm. Accordingly, there is a real danger that new regulation could prove counterproductive.