"INNOVATION" AND OBAMA'S NEW FINANCIAL REGULATIONS

I just started reading an article, and I was struck by a quote from a Republican senator who feared feared financial regulation because it may "stifle innovation." I understand that as a concern when regulating most industries (although regulations might stimulate innovation, albeit only in getting around them). However, when regulating the financial industry, you have to be aware of the fact that innovation in the financial industry is what caused the problem in the first place. In fact, I might argue that part of the problem with the financial industry in general is its constant innovation, creating new and interesting ways of moving money and risk around without actually creating anything of value.

That's the key difference: innovation in the financial sector doesn't add value; it just becomes a new tool for banks to play with. People then "created" money on top of this new "innovation," which evaporated like dew on a summer day the moment the sun came out and showed everyone what's going on. Their house of cards, built on the innovation that made everyone enormously wealthy, came tumbling down.

Don't get me wrong: these innovations were designed specifically for the purpose of spreading risk around, not heaping it all in one place, but when money is created and people get wealthy without actually creating anything of value, you have a problem. That's what financial innovation does, essentially; it creates and perpetuates bubbles.

I read about this study, not long ago, in my Finance for Social Theorists class:

Pop Psychology

Some of the things I found interesting were these: first, every time they ran the experiment with the same people and the same conditions, the bubble occurred earlier, until eventually they ran the experiment and no bubbles occurred at all. Second, if they changed the conditions of the experiment, the bubbles reoccurred. What this says to me is that maybe we shouldn't want financial innovation. Maybe regulating the market to stifle financial innovation is not such a bad thing.