Doorstoppers of contracts were signed by Germans without ever requesting a translation all they saw was the immediate cash-flow. On top of that the buyers didn’t have the money in their coffers but took out loans with high interests to finance the deal.

If that thing should blow up the minimum consequence will be that it will keep lawyers well provided for for quite a long time the maximum consequence will be that the cities will have lost ownership of their sewage system and other stuff while having increased their debts at the same time. Maybe the US has bailed out these companies via AIG also …

If half-cooked schemes like that blow up things tend to be a lot worse than they would have been had one stuck to the traditional method.

Therefore I have a consolation for you, it does not matter who will operate your toll booths and own the roads, it can be somebody from Mars the outlook is always equally sinister

However, builders are always substituting lower cost materials. These materials are not healthy, and will off gas toxic chemicals like formaldehyde for years. Natural alternatives exist, but the “cookie cutter” approach to saving money while building houses insures they will never be used. Likewise, any gains in the food production have been at the expense of the environment, and are actually heavily subsidized. Arguably, our current swine flu epidemic has resulted from these innovations.

For instance, head to Kearney, Nebraska and plop one right in the middle of Interstate 80, the major US East/West Interstate.

Like financial innovation, there may initially be some dispersed sqwuaking about the new hassle and fee. But, once in place the new toll booth innovator would simply remind people of the massive value it provides-by opening its gates, it facilitates the countless masses that want to egress from Colorado to do so, and inversely, it facilitates those that want to ingress to Colorado to do so. For a mere $9.95 (each way of course).

Pretty soon, private toll booths start showing up everywhere. And with them come jobs. And taxes. And political contributions. And, McDonalds. And, Super 8s. And T-Ball team sponsorships and shirts. Blighted communities want to partner with US Toll Corp. for economic development, and craft proposals with tax abatements and other concessions to attract a US Toll Corp. toll booth to come to their communities.

Naysayers who question the intrinsic value of private toll booths, and who remember when it was possible to blow through Kearney at 85 mph without stopping, and without paying $5.00, are quickly shouted down and reminded of the stable and good paying jobs and benefits offered local Kearney employees at US Toll Corp. toll booths, US Toll Corp’s altruistic sponsorship of the annual Kearney Days celebration, and that in the worst recession since the depression, the last thing we want to do is eliminate the private U.S. Toll Corp. toll booths, and their attendant jobs….

The first one is the toughest. So how does an innovator pull off erecting the first private toll booth on a public interstate in Kearney? One of three ways:

1) Leverage one’s contacts and influence with the local, state, and national governments, and enter into a partnership with them to kick back a modest amount of revenue to their respective cash strapped treasury coffers, with attendant and obligatory contributions to campaigns of innovation supporting politicians.

2) Or, leverage one’s contacts and influence with the local, state, and national governments, and have legal and regulatory impediments removed to allow for this activity.

3) Or, a hybrid combination of #1 and #2.

This analogy may seem strange. But, I submit that it is exactly on point. We have been allowing private toll booths to be erected on our public financial interstates for years.

And many of us have forgotten that you used to be able to call your credit card company and make a phone payment to them without the hassle, and without a fee. Some laggards like myself question the real value this fee based service facilitates. Like the toll booth company opening its gate, the credit card company answers its phone, thereby removing an impediment it created to facilitate your ability to do what you were going to do.

And, all those fees support all those call centers, and pay all those wages, and buy all those T-shirts…..

I challenge the notion that even traditional financial innovations such as mortgages are a good thing. Why, after all, is it necessary for people to save for decades to buy a house. In part, at least, it is because the availability of mortgages causes people to bid up the price of houses. I once lived in a cooperative apartment building that, initially, did not allow mortgages. The prices for those apartments were far below (about 50%) the prices for comparable apartments in other buildings nearby. When the coop board decided to allow mortgages (but with a 60% down payment required) prices rose, so that they were no only about 25% below comparable ones in conventional mortgage buildings. Finally, the policy was changed to allow mortgaging up to 80% of the purchase–and prices then came into line with the rest of the neighborhood. Nice windfall for those who already owned: but clearly the purchasers with mortgages paid far more than they would have had to otherwise. And that’s without even counting the fact that on top of an inflated price they have to pay interest to the bank! It’s my view that mortgages make housing more expensive and that housing would be far more affordable if mortgages did not exist.

There is another aspect to the adverse effects of mortgages. They probably suppress innovation in construction. In the absence of mortgages, the need to save for a house would have reduced demand for housing, and builders would have had an incentive to find cheaper ways to build good quality homes. But with mortgages pumping money into the housing market and making people willing to pay more than they should for a house, builders have no reason to try to find more efficient approaches to construction.

Contrast that with food. There are no wholesale loans available for the purchase of food; and the “retail” loans carry huge interest rates, so people try to avoid using them for the purpose. While one can argue (and I do) that the quality of the food produced is seriously inferior to what was around 50 years ago, you cannot deny that the quantity produced is grown enormously and the price has fallen dramatically. Food producers had the incentive to do that. If we had “food mortgages,” I would bet that food would be unaffordable for the typical person today and we would have periodic bubbles in the food markets.

Higher education is another area where I think credit has ruined things. Fifty years ago education was, in real terms, much cheaper than it is today. There were essentially no education loans back then. Students didn’t go into hock to get an education: their parents typically could afford to pay for it, and schools provided financial aid for most of those who could not. Then we injected credit into that market and prices have exploded. Now few parents can pay for their children’s college, and the kids graduate already deeply in debt. Those that go on to graduate or professional school are pretty much indentured servants by the time they’re done. Has the education product improved as a result of all this extra money? The basic product is the same, slightly updated. What we’ve gotten is more frills in the student life area, more expensive school athletics, and other additions that are peripheral to the actual educational goals.

Now, I’m no economist, and perhaps there are better explanations for what I’ve observed. But I can’t think of any markets (for consumers, that is) where the introduction of large-scale credit has done more good than harm.

You hit “innovation” head-on with these posts, and “engineered crisis” with the post that follows this one. The public will now consider these issues “talked out” and you will be able to return to your regularly scheduled broadcasts.

Now, where did RortyBomb’s Mike Konczal go to school? Where is he currently employed (is he being compensated for doing the RortyBomb blog?)

The question to be asking is: how can financial innovation be used to enhance the economy – not just maximize the bank accounts of investment bankers?

The truth is – financial innovation over the centuries has been beneficial.

However, the financial innovation we’ve seen in the last decade has been a disaster. Or if I’m wrong on that, please educate me as to the value we’ve seen from recent financial innovations like CDOs and the like.

And the brave, new financial innovators should be prepared for the consequences of their actions – either massive profits if successful or failure unsupported by government if their bid doesn’t pan out.

The socialization of loss resulting from the aftereffects of financial innovation gone awry is not a good business model at all for the nation to continue to follow.

I’m no bank sympathizer, but I’m guessing it’s impossible for banks to make money anymore at a large number of the things they do, like account servicing or interest rates. So they seek other ways to make money.

A note on medieval/early modern history. The innovation of the 12-13th centuries (in Italy) was the concept of limiting liability to the capital invested. Trans-Mediterranean trade had operated on the basis of letters of credit since at least, the 12th century (v. S.D. Goitain) and within Europe, the church was the central transmitter of letters of credit. Trust between co-religionists was also critical to the flow of trade and contracts where transactions might take several years to complete. Markets are never ‘free’ in the sense that the Friedmans and Greenspans claim, they are always culturally constructed and enacted, and thus constrained.