Do We Really Need Financial “Innovation”?
October 5, 2009 by Miranda Marquit
Filed under Finance
One of the reasons that bankers and investors and others in similar fields are lobbying against regulatory reform is that it would stifle “innovation.” Apparently, transparency in reporting practices and requirements to explain to consumers what is happening when they sign the dotted line is something that hinders innovative financial products from taking root in the market. But do we really need all these “innovations”?
Let’s review some of the fabulous financial “innovations” that have provided so many fantastic opportunities for individuals over the last couple of decades:
- Option ARMs
- Interest-only home loans
- Payday loans
- Fee harvester credit cards
- Derivatives
Most of these “innovations” turned out to be little more than creative ways for a few people to make insane amounts of money at the expense of the rest of us. Especially since these “innovations” are not economically sustainable on a widescale over a long period of time — as we have witnessed. The fine print, legalese and sometimes-shady practices employed in order to give people access to these financial products is, in some cases, enough to confuse even those who are financially savvy.
So maybe a little less financial innovation, and a little more adherence to “old-fashioned” principles of solid finance, is in order. Sure, it may provide consumers with “limited borrowing choices” according to the American Financial Services Association, but the choices available will be much better in terms of personal finance. And maybe, just maybe, we’ll get to a point where we aren’t lending money to people who really shouldn’t be borrowing that much of it in the first place.
Yes, the consumer is responsible for due diligence. But at the same time, people in positions of trust, helping consumers make important financial decisions, should also be held to a certain standard. They should be required to be honest and transparent, rather than trying to bury the truth in pages of fine print.
Image source: Gregory F. Maxwell via Wikimedia Commons
Some innovation is good, such as ETFs that drive down the costs that financial intermediaries extract from the system. But the majority of innovations seem to just be another way to extract higher fees from consumers. Or as in the case of derivatives business delude themselves that have bought insurance against negative economic events without worrying about the credit quality of the issuer. KISS always works, and deals that are too good to be true usually are. Just ask all those people who bought more house than they could afford with no-doc loans (liars loans) and had to walk away from their house.
I agree that some innovation is good. I think a good litmus test is looking at who ultimately benefits the most. ETFs make investing less costly for ordinary people, and their low costs do not provide a great deal of wealth for a few. Additionally, ETFs offer a fairly straightforward product that is reasonably easy to understand. Most of the financial “innovation” of the last couple of decades, though, has served mostly a few, and is very difficult to truly understand.