http://www.visioncritical.com/2009/11/innovation-for-innovations-sake-and-the-power-of-no/

Now obviously, you’re not just talking about customers here, but something much bigger. But the principles still apply. Innovation shouldn’t be the aim; GOOD innovation should be the aim.

Obviously, it is impossible for a nation-state to control an entire economy. It’s just not scalable. At the same time, though, there should be laws that protect the average citizen from companies that engage in unethical practices.

Our current economic crisis is a result of BAD innovations. The subprime mortgage fiasco is one such example. Regulation should therefore act as a mechanism to encourage good innovation and discourage bad innovation. In fact, perhaps the government shouldn’t be afraid to say “No!” to more innovations.

I don’t know – what are her noble opponents doing these days again?

This is so predictable and so sad.

We have been here before. “The best legislature money can buy,” and so on. Incremental change is possible. The abuses of the 1870s took more than 20 years to abolish. As for our current situation, we did not get here overnight, and we probably will not reform it overnight. Brooksley Born was not captured, she was squelched. Would that happen today? I doubt it. The politics is different now. The Consumer Financial Protection Agency is a step in the right direction. Institutionally, it is antagonistic to the Fed, which is a good thing. As long as their jurisdictions overlap, it will be hard to capture both.

The subculture of financiers, regulators, and legislators is contained in a larger culture that does not share its values. Witness the popular outrage about executive compensation. Change can come to that subculture quite rapidly, if its protective shell breaks. Just let people get mad as hell, so that they really won’t take it anymore. A prolonged period of high unemployment, foreclosures, and bankruptcies could lead to that. The Pecora hearings galvanized public opinion at the time of the Great Depression. Something similar could happen this time around, too.

The G20 will be meeting in Huntsville Canada in 2010. The top item (?)on their agenda will be regulating the world financial system.

What if they emerged with the following consensus: To reform the global financial system, compensation in investment banking will be limited to 5X national median income.

The aim would be to encourage innovation and responsible risk-taking at the same time. Would 5X be too limiting? If so what should be the multiplier?

What kind of country (and global influence) would America create if there was a gap between high and low income earners of 1:5 or if this is too limiting of 1:10?

While it seems drumming up anger against the gub’mint and taxation is a political instrument used to great effect by the American right-wing.

I am using the phrase “social utility” in as broad
a sense as possible. E.g. I think gambling is
foolish and hurtful. But lots of people don’t and
thus Las Vegas and lotteries serve a social purpose,
bringing enjoyment to millions. Ditto drinking
and smoking.

But how do cred def swaps and derivatives help
our polity? Do they make it easier for me to get
a mortgage, or buy a new car? or do they help
a business, small or medium-sized, get a loan for
expansion? My feeling is: the answer to those
questions is No. But I could be wrong; it has
happened before.

I would like Messrs Johnson and Kwak to give
Bond Girl, who by her moniker and the tone of her
posts seems very qualified to answer my questions,
a guest column.

Finally, I consider these questions to be important
because people trying to change things have got to
be _for_ something, not just a mob uttering cries
of complaint in various voices and various keys.

Best wishes to all,

Alan McConnell in Silver Spring, MD

What if Verizon came up with a cell phone plan that was normally $100/mo, but would give it to you for $50/mo for 2 years, but would have a balloon payment at the end, or the payment would go up to $200/mo for the last 2 years of the contract. Is that an innovation or a trick?

The whole regulation aspect can be mooted if financial institutions explicitly stated they would not accept govt funds during times of crisis. Follow this logic – how would those ‘innovative’ firms cost of capital compare to the ‘less innovative’ but backstopped? Which would end up delivering better products?

I don’t mind innovative unregulated financial firms existing, but they need to be on their own. Their actions also need to be segregated from the regulated firms. But this really wouldn’t work: say Lehman was unregulated, but their bonds still got AAA ratings, people would still buy them, even if they didn’t get Fannie wrappers.

But what happens when the decision-makers of every regulator are captured and actively trying to frustrate regulation? What happens when the legislative overseers are captured? What happens when both parties have been bought, so “political balance” loses its meaning? I would say capture, if not inevitable, is at least powerfully self-perpetuating in our current environment.

It’s not like some cops have been bought off. In our situation, the process of capture has been thoroughly institutionalized. It’s intellectual and cultural, diffuse, not just transactional. This isn’t something we are going to change incrementally by adding more checks and balances here and there.