Good and Bad Financial Innovation

Here is an interesting post which compares the positive and negative aspects of financial innovation. Given our crisis I think its a very useful article for those seeking to plan their personal finances. In addition to the original article, I highly recommend reading the review of the article via Naked Capitalism.

Article Introduction/Review (Via Naked Capitalism)

“Steve Waldman has a longish and very useful post in which he seeks to identify some good and bad financial innovation (I very much support Martin Meyer’s observation that, for the most part, what is called financail innovation is finding new technology that makes legal what was illegal under the old technology).”

Article Excerpts (Via Interfluidity)

Rodrik has asked for examples of good innovations. Here are a few on my list:

  • Exchange-traded funds
  • The growth of venture capital and angel investing
  • The democratization of access to financial information (e.g. Yahoo! finance)
  • The democratization of participation in financial markets (e.g. the growth of internet and discount brokerages that offer easy access to a wide variety of stocks, bonds, and exchange-traded derivatives, both domestic and international).

But there are many, many more bad innovations that we have yet to come to terms with:

  • 401-K plans with limited investment menus
  • The conventional wisdom that long-term savings ought by default be placed in passive stock funds
  • The conflation of ordinary saving and financial return seeking
  • The tolerance, advocacy, and subsidy of financial leverage throughout the economy
  • The move towards large-scale, delegated, and professionalized of money management
  • The growth of investment vehicles accessible primarily or solely to professional and institutional investors

Click Here for the original Article via Interfluidity

Click Here for the review of the article from Naked Capitalism

About Miguel Barbosa

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19. October 2008 by Miguel Barbosa
Categories: Curated Readings, Finance & Investing | Leave a comment

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