Wednesday, 8 April 2009

Financial innovation and simplicity can go hand in hand

There is an article at SeekingAlpha entitled In Defense of Financial Innovation which is worth looking at.

The author makes the case for continuing to favor financial innovation as opposed to some loosely defined simplistic view of banking which he also describes as financial Luddism.

The author claims that this simple approach "would relegate the US financial institutions to a dumbed-down version of finance completely at odds with a globalized world and economic system (not to mention the unintended consequences of assets flowing to other, more forward-thinking markets)."

Apart from a pretty crude characterization of the positions of the Luddites which seems to include Paul Krugman and Meredith Whitney among others, he also conflates two different strands into a false polarization.

My comment to his post was as follows
You seem to be setting up two separate polarities - simplicity versus complexity and traditional versus innovative. But then you align the simple and the traditional and suggest that, it logically flows from this that innovation would no longer be an available option for a simpler financial system. It's a non-sequitur.
One can certainly have, in the future, financial derivatives that are innovative but they do not need to be complex and outside the scope of more established rules of risk management and financial prudence.

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