In last Friday's Financial Times, Jagdish Bhagwati wrote about the dangers of financial innovation in "We need to guard against destructive creation":
In each case, the assumption was that financial innovation was like non-financial innovation. When the personal computer was invented, the economy profited without upheaval. The typewriter became obsolete – an example of what Joseph Schumpeter famously called “creative destruction”. But with financial innovation, the downside can be lethal – it is “destructive creation”. We have to work hard at defining the downside scenarios.
The failure to think about the downside results from what I call the “Wall Street-Treasury Complex”. Robert Rubin went from Goldman Sachs to the Treasury and back to Citigroup. Hank Paulson went from Goldman Sachs to the Treasury and will doubtless return also to Wall Street. This network shares the optimistic scenarios that Wall Street spins. Mr Rubin was in charge of the Treasury during the Asian financial crisis, whereas Mr Paulson was among the five major investment banking chief executives who persuaded the Securities and Exchange Commission not to extend prudential reserve requirements to their companies.
We therefore need a truly independent commission of experts to look closely at each financial innovation and work out its potential downside. Keynes once wrote that the inevitable never happens, it is always the unexpected. This commission would be charged with trying to narrow the range of the unexpected. We do not have to be blindsided by downsides just because we lazily surrender to the euphoria of the Complex.
I guess I don't know whether to laugh or cry. First of all, that Professor Bhagwati blithely assumes that technological change is not disruptive, always positive and always beneficial betrays a woeful ignorance of both history and a huge body of knowledge. True that most technological change works slowly, so there is not the cataclysmic disruption that happens in financial panics. But to say that technological change happens “without upheaval” is either naïve or uninformed.
The second point is about re-inventing the wheel. Maybe a group of "wisemen" vetting financial innovation would be helpful. But again, the idea of analyzing the pluses and minus of innovation has a long history -- which has fallen out of favor. It is called "technology assessment".
In fact, for 23 years until 1995, Congress had its own Office of Technology Assessment (where I once worked). It was closed by the new GOP Congressional majority who, I guess, felt such activities were not needed. Over the past decade, a number of people have called for the re-creation of this function, if not the actual organization. Maybe Professor Bhagwati, once he studies the history of innovation, might want to also join in this call.
Because of the issues of the forthcoming election, US economy are in great threat. People mainly focus on how they will choose the right candidate who sometimes, in the end, manipulate the government revenues which threaten the economy.
Is the United States better now than in 1932? In 1932, Franklin Delano Roosevelt began his first term as president, and the U.S. was plummeting into a brutal recession. FDR’s “New Deal” economic policies reconfigured the way the U.S. economy operated; the government became more involved in the economy than it had ever been before. Roosevelt's policies gave the American economy a much-needed boost, but some believe these policies caused irreparable, long-term damage to the economy. In this Wall Street Journal article, Paul Rubin suggests that while the current U.S. economy is not in the exact same state as in 1932, there are many similarities: the stock market is struggling, credit markets are locking down, and a popular Democratic presidential candidate – Barack Obama – is promoting increased government regulations into problem areas such as the economy. With Obama as president and the potential for a 60-seat, filibuster-proof democratic majority in the Senate, the U.S. will be as close to a pure liberalist agenda as it has ever been. Proponents of a “laissez-faire” economy are worried that Obama’s “hands-on” policies will deprive the American economy of the long-term direction it truly needs. Those who support the ideals of capitalism wouldn’t say that we’re better off today than in 1932. Instead, they’d probably tell you that America’s in for more of the same – a “New, New Deal.”
Post Courtesy of Personal Money Store
Professional Blogging Team
Feed Back: 1-866-641-3406
Home: http://personalmoneystore.com/NoFaxPaydayLoans.html
Blog: http://personalmoneystore.com/moneyblog/