Financial Innovation Boosts Global Growth! Or Does It?

Friday, October 23, 2009

Last week, a large majority of the audience members at the Economist’s Buttonwood Gathering: Fixing Finance at Pace University in New York all agreed that financial innovation is a good thing. Following the Oxford-style debate between Myron Scholes and Robert Reynolds, arguing for financial innovation, and Richard Bookstaber and Jeremy Grantham, arguing against financial innovation, the majority of the audience agreed that financial innovation is not a good thing!

Some of the Pros: Financial innovation facilitates transaction processing, funding large scale investments, risk management- transfer and reduction, and reducing information asymmetry.

Some of the Cons: Opaque, complex, customized products that are difficult to price create risk – they do not mitigate it. “The products ideas are terrific, but for who? For those that made ‘obscene’ amounts of money!”

All of which raises an interesting question: is there an achievable middle ground that retains the benefits of financial innovation without threatening the entire financial system?

Kathryn Wilkens-Christopher, Ph.D., CAIA
Director of Curriculum

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