In a refreshing change, Robert Shiller makes the case for financial innovation. Along the way he lists some ideas about where financial innovation could go. I like this one in particular:
I have proposed the idea of “continuous workout mortgages”, motivated by basic principles of risk management. The privately issued mortgage would protect against exigencies such as recessions or drops in home prices. Had such mortgages been offered before this crisis, we would not have the rash of foreclosures. Yet, even after the crisis, regulators seem to be assuming a plain vanilla mortgage is just what we need for the future.Financial innovation may one day actually serve to prevent financial crisis from ever emerging
It is good to see someone defending innovation, even financial innovation. Financial innovation is critical to our modern world, without the financial innovation of the stock market and joint stock limited liability company the US would not exist. Every area of innovation goes through a period of being over hyped with a resulting correction. A major reason why England became a world empire in the 19th century instead of France is how they reacted to the financial innovation of the stock market and the crises of the South Sea Company and the Mississippi Company. Unfortunately, the US has seems to have followed the path of France since the late 90s. See http://hallingblog.com/2009/06/17/sarbanes-oxley-–-the-medicine-is-worse-than-the-disease-part-1-background/ and http://hallingblog.com/2009/06/18/sarbanes-oxley-–-the-medicine-is-worse-than-the-disease-part-2/
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