Late Last week, James Kwak posted Financial Innovation, Again. Now, here’s what you have to understand. The financial collapse has forced the economics profession to start asking itself some uncomfortable questions about just what value the financial system brings to society.
The financiers themselves argue that they are very valuable to society. The big benefit they point to is financial innovation: new and wonderful financial products that help society, oh, so much.
Before the crash, anyone who dared criticize financial innovation was quickly cast into the outer darkness. These critics obviously did not understand that the U.S. economy was a new, dynamic post-industrial juggernaut, in which financial services were the star performers. That’s what U.S. elites believed. Forget manufacturing industry, which is dirty, grimy, environmentally dangerous, and requires huge suck costs in wasting assets on which you’re doing really well if you see a five percent profit in three or four years. The future is the globalized economy, in which traders at a keyboard can zap tens of billions of dollars from Houston to Hong Kong with a mouse click. Financial innovation is what made the U.S. a world leader; it was because of financial innovation that the U.S. economy enjoyed tech boom, and a real estate boom. Financial innovation is crucial to the U.S. economy. That’s been elites' thinking for three decades now.
But now that the booms have turned to busts (and more and more economists are beginning to grudgingly admit that this is a depression, the latest being (gawd, of all people to have to quote!) Alan Greenspan), the critics have been encouraged to crawl in out of the dark and try again. In response, U.S. elites have been trying to convince themselves that financial innovation is still wonderful with a series of studies, speeches, conferences, and press releases.
Kwak and Baseline Scenario have been doing a fine job critiquing this stream of studies and pontifications, showing how baseless and silly they are. There’s been so many that Kwak was getting tired of having to write pretty much the same critique over and over again – hence, the resigned “Again” in the title. But the latest is notable in that it can serve as a poster child for the refusal of U.S. elites to learn from their follies. It was authored by Robert E. Litan, a leading “liberal” economist at the “liberal” Brookings Institute, and presently vice president for Research and Policy at the Ewing Marion Kauffman Foundation in Kansas City. Under Bill Clinton, Litan served as Deputy Assistant Attorney General of the Antitrust Division, then as Associate Director of the Office of Management and Budget. He is co-author of the 2007 book, Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, which Litan's biography boasts has been translated into ten languages and is used as a college text around the world.
Kwak makes it clear he has little patience left for this bullshit, even when it comes from such a Versailles luminary as Litan. Though too tired of the whole routine to even provide an exact link, Kwak dutifully rolls out the testing apparatus:
More broadly, as Felix Salmon said somewhere (probably many times), financial innovation should show up as lower prices for all the bread-and-butter financial products–equity and debt underwriting, interest rate swaps, etc.–not has higher profit margins for dealers.So, the real fun begins in the comments. My contention is: read these as a commentary on the absurdly (un)dead nature of the American ruling class, and its infatuation with set of economic beliefs and policies that have failed spectacularly.