In Defense of Much, But Not All, Financial Innovation

After decades of being celebrated as one of the hallmarks and virtues of American-style capitalism, "financial innovation" has come onto hard times. Soon after the financial crisis began in 2007 and 2008, certain instruments of recent high finance - the collateralized debt obligation (CDO) and the credit default swap (CDS), as leading examples - were blamed by the media, the public, many policymakers, and even by some top economists for nearly bringing the U.S. and global financial systems and their economies to their knees. It didn't take long for financial innovation more broadly to be condemned.