Comments on: Financial Innovation for Beginners

By: Josh

Josh — Wed, 29 Apr 2009 19:22:59 +0000

fyi:

unless it has appeared somewhere else, the discussion of someone who had made a fortune inventing the plastic thing at the end of shoelaces was from the movie “cocktail”, with tom cruise and elizabeth shue (who have the discussion).

By: Becky

Becky — Mon, 27 Apr 2009 06:32:39 +0000

Until recently I understood virtually nothing about the environment- just knew the economy was going down the toilet! I just finished reading a great book titled, "The 21st Century Economy—A Beginner’s Guide" written by Randy Charles Epping and now have the mentality to make clear choices about what to do with my money- which is really all I can do to make a difference in the world right now. I have enjoyed a lot of the posts, it helps me understand things a lot better- thanks.

By: D. Christopher Leonard

D. Christopher Leonard — Sat, 25 Apr 2009 23:21:25 +0000

I very much enjoy (and find instructive) the posts by Kwak & Johnson as well as the commentary it engenders. Innovation be it financial or other is an important source of debate in economic history (sometimes more heat than light). One might note that a distinction can be drawn between invention and innovation. Every time someone (let’s say your child for the purposes of argument) says, ‘wouldn’t it be great to have a machine on the street corner that dispenses currency’, you have an invention (whether it ever becomes corporeal or not). Indeed, people invent things and even construct physical objects that do something (or, to spread the net wider, ‘are’ something) and are often ignored. There are also plenty of examples of near simultaneous ‘invention’ (archeologically, it appears that agriculture was ‘invented’ in several places highly unlikely to have been in communication at about the same time ditto pottery). Sometimes things lay about as it were, and then are appropriated, sometimes re-purposed, and then rapidly diffuse. To return to the cash machine (ATM) and the debit card, I don’t know who ‘invented’ it (i.e. patented it, given the primacy of concerns about property rights) but it appears to have been in fairly widespread use in EU countries before the U.S. (when I resided in Northern Italy in the mid- and latter 80s, debit cards were already ubiquitous as were ATMs) but even in NYC, they were available but more restrictive in use than in Italy or France). In any case, invention is distinct from innovation (much less their diffusion). It’s perhaps, not the best example but there are many others. The point is, innovation is not ‘innocent’ invention. It’s (socially) ‘embedded, to use Granovetter’s term.
Schumpeter talked about innovation as ,’new combinations’ of capital, labour, and technology emphasizing the dynamic effects of these combinatory processes, many of them unintended (and unanticipatable) consequences of entrepreneurial activity (Marshall may well have in the Organization of industry). So Bond Girl has a good point to the extent she pursues it; that innovation is something like a tool – used for good or ill (responsibly or not). The folk idiom has a useful proviso, the law of the hammer: give a baby a hammer, and it will not only hit nails, but everything else within sight (or reach). But we ought to be careful about the supposed morality (and ethicalness) of tools. Designing a device to waterboard prisoners more efficiently is unlikely to pass scrutiny. It’s not likely to be easily re-purposed as for example, an ironing board.
So perhaps, we should think about ‘financial innovation’ – what little there actually was since 1970 (per contra Bernancke as a number of commentators have noted) – in a wider social and political economic context.
Because invention doesn’t lead ineluctably to innovation nor innovation ineluctably to its diffusion we have at least in this case, a problem that ought to be amenable to historical analysis. One doesn’t even have to assume a crude folk psychology of interesting-maximising actors; it’s surely more complex. There are undoubtedly young economic historians busy writing dissertations on this. Ileave it to others more adept to specify to what we should pay attention but it does begin around 1980, under an ethos of anti-governent ideology combined with a religious orthodoxy of ‘free markets’ that are always efficient if left alone, manifested in Congressional action that loosens existing regulatory regimes and inhibits or prohibits the regulation of other (‘innovative’) activity. It’s accompanied by a dramatic rise in income inequality, while at the same time, as C. Maier has shown, de-industrialization in the U.S. and the other changes in global trade and capital flows that now leave China as the largest holder of sovereign debt. During the same period, educational attainment began a precipitous decline in the U.S. and (amongst other UNDP indicators) infant mortaility increased. The U.S. outspent the next 25 national states in military spending. We now export more military ‘goods’ than the next 15-20 states combined as well as primary agricultural commodities. And in a habit of long-standing, dis-investd in infrastructure (as well as human capital). One doesn’t have to be a nietzchean Fukuyama or a declinist (e.g. Kennedy) to acknowledge this. Which factors are critical to an explanation is an historical problem. The point is, ‘financial innovation’ doesn’t occur in a vacuum. It’s not its novelty (invention) but the circumstances of its adoption and exfoliation.

By: Glenis Devereux

Glenis Devereux — Sat, 25 Apr 2009 22:55:44 +0000

If you want some Financial Innovation try NEFS : Net Export Financial Simulation – see at http://www.worldnews.blog-city.com. In a one-liner it says that the present financial system is a pre-machine age 15th Century Venetian invention that only seems to work during it’s periodic financial bubbles. NEFS is a first attempt to design financial system that suites the computerised production age that we now live in.
Thought experiment : If Aliens in outer space had automated and robotised all their production, if they used are old fashioned financial system then they would all be unemployed, on the dole and hungry. Assuming they are not, they must have some other financial system. What ever it is, given our present level of automation, we need half of it. NEFS is a guess as to what the half might be.

By: Anna

Anna — Wed, 22 Apr 2009 18:25:21 +0000

I think this is not so much a lot of money chasing too few spots, as the absence of a prohibitive limit on price.

increasing prices before loans would mean some students would be priced out,
now students can always cover the price with more debt

students now “can” “afford” to pay ridiculous amounts, that they would not be able to afford to pay before

By: Improvisations » Analysis of the financial crisis — and financial innovation « MIT Sloan Management Review

Tue, 21 Apr 2009 22:10:17 +0000

[...] Kwak, who blogs with Simon Johnson at The Baseline Scenario website, draws a distinction between two different types of financial innovations: those that make consumers’ lives easier — such as ATMs — and those that [...]

By: StatsGuy

StatsGuy — Tue, 21 Apr 2009 15:55:19 +0000

True, but without tranching, what is the point?

Simple diversification is already achieved by owning bank stock and bank bonds.

The effect of non-tranched CDOs would simply be de-integration of the banking function, in which the loan servicing component is separated loan ownership component. The model, perhaps, is akin to the de-integration of electricity production from electricity delivery…

What are the efficiency benefits of this model for mortgage financing?

We clearly know the problems with eliminating vertical integration of mortgage finance:

CDO buyers may have worse information than professional banks, and if things go bad who gets to renegotiate???

Currently, many loans go into default simply because the loan servicing agency has neither the incentive, nor the capability, to secure agreements from debt owners to renegotiate.

By: q

Tue, 21 Apr 2009 01:45:39 +0000

that education was very expensive though.

the cdo and cds markets will become safer simply because people will have to stress test against the past year’s data.

By: q

Tue, 21 Apr 2009 01:44:18 +0000

@statsguy

you could do securitization without tranching — just pool the loans.

that way you get diversification (a good thing, especially for small investors who don’t have the ability to diversify independently) but you don’t have the problems with valuation and tranches.

By: Patrick

Patrick — Mon, 20 Apr 2009 23:11:06 +0000

This I guy I know has a great financial innovation. It will earn you a consistent 10% return every year, but you need to know someone to get in, and it is sooo innovative that you can’t spend a lot of time asking Bernie too many questions, ’cause you just wouldn’t understand the answers.

;-)

By: the know-alls

the know-alls — Mon, 20 Apr 2009 20:27:12 +0000

Innovation is designed to deliver benefit to an intended audience(the user). Intimately this implies that the innovator is familiar with the intended audience’s needs. But this does not imply that the innovator has the intended audience’s best interest in mind. The value of the innovation is not defined by the inventor but by the user and the value is not for the user but for the inventor. It just turns out that the user is seduced to believe that the innovation is of value to him. This is called brand-washing. Do we really need the super-super expensive iPods? I am a member of the iPod-crazy generation but I couldn’t care less about one.

Healthcare which was established to be of value to the sick is no longer that hopeful field. Healthcare in America is an empire of greed in which the personal health is not a concern-it is a commodity for trade.
The evil scheme FDA regulators-Pharmaceutical Empires-Greedy Insurance companies and Stuck-Medical professionals spells misery for the average american.
The FDA is tasked with regulating the incessant innovative output from the pharma labs-for legitimate and not-so-legitimate conditions; and with demand for drugs so high from aging population, the FDA has been reducing its admittance principles for decades. Pharma companies in turn have become the legal drug traffickers in America as today they are allowed by the FDA to incite the consumers to demand and consume the innovative output which the consumer may or may not need. The insurance companies incite doctors to prescribe the pharma output, based on the pressumption that it’s better to prevent what’s-not-there than to deal with a law suit if the thing- -that- is- not- there would be eventually detected to be there. The pharma companies incite the doctors to prescribe left and right (just think of the variety of contraception pills that are available and highly prescribed by ob/gyns) by rewarding them with increased rankings on the pharma websites(surgeons) or by a form of royalty payments. The doctors are stuck prescribing drugs they don’t know very well, or feel that needs not be prescribed necessarily. The american audience is stuck with being drug-and-brand-washed and stuck in the cult only-the-drug-would-make-me-better.The pharma companies produce more whatever-it-is to satisfy the american-sick-beast. The FDA goes on to allow stuff-that-will-be-recalled-in-2yrs-because-it-would-kill-10 million-folks and on the cycle persists.

If the FDA were to establish consistent high standards across the board and recognize that the population in this country doesn’t need as many drugs as are there on the market, the cost for producing these drugs and marketing them would be higher, which would mean that people would think a whole lot more before demanding these drugs and maybe would be more willing to not be drug-addicts and rely on early preventative measures for their conditions rather that relying on the pill to fix it all. With demand reduced the pharma companies would have less professionals and lay people to harass. If the insureance companies and the pharma companies stopped pressuring the doctors, maybe the doctors would indeed start treating and advising the patients. Needless to say, the average meeting with a doctor is 5-10 minutes. You probably spend more time enjoying the murals in the doctor’s office that in an actual 1-in-1 with your primary care provider. Doctors are afraid of telling you too much. They do unneccessary tests that drive costs for fear of law suits.

While innovation is very important in the medical field (and I give thanks for the epidural) there is the flavor of greed and the disconnect from the final consumer that has driven healthcare to a shameful and unreliable field.

In today’s world, we all should be just like the ancient greeks-we should all know a little bit of all, or maybe all. Maybe instead of wasting the kids’ time in school over meeting stupid state and fed requirements, they should concentrate on teaching kids how to meet their life requirements- understand money, undertstand health, understand personal relations, understand professional relations, understand the law, understand what the plumber does, what the garbage guy does, understand the risks and privileges in all professional fields. Kids should be getting vocational trainings and should go through rotations much as are the medical rotations to ensure that they are ready for life and have a plan on how to pay for a particular education and understand the value and future implications of the Women’s History degree that they so desire.
.

By: mark halsey

mark halsey — Mon, 20 Apr 2009 19:54:53 +0000

PBS did a great newstory recently, regarding how the start (or demise if you will), began with the advent of the car. In order to finance something you couldn’t afford, credit was extended. Quite a good story if you’re interested in learning more about this.

By the way, well written article. Enjoy the depth of knowledge in each and every post.

By: Russ

Russ — Mon, 20 Apr 2009 13:05:58 +0000

Well, America can relocalize at will. It’s purely a matter of sanity and political will.

By: Swap Story | Refinancing

Swap Story | Refinancing — Mon, 20 Apr 2009 05:03:48 +0000

[...] and online banking were some mighty fine innovations, and I’m inclined to agree. James Kwak makes a similar point, attempting a classification of innovation into those that make our lives easier [...]

By: wally

wally — Mon, 20 Apr 2009 02:14:49 +0000

The difference between a banker lending money and the loan shark on the street who hires leg-breakers for enforcement is simply a matter of degree.
You can innovate all you want with the frills and the images and the packaging, but when you forget the basics is isn’t “innovation”. It is a “blunder”.