financial innovation

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better
by Andrew Palmer
Published 13 Apr 2015

For more on the role of technology in propelling financial innovation, see Stelios Michalopoulos, Luc Laeven, and Ross Levine, “Financial Innovation and Endogenous Growth” (NBER Working Paper 51356, September 2009). 16. Richard Sylla, “A Historical Primer on the Business of Credit Ratings” (paper prepared for a conference of the World Bank, Washington, DC, March 2001). 17. Andrew Odlyzko, “Collective Hallucinations and Inefficient Markets: The British Railway Mania of the 1840s,” SSRN Electronic Journal (2010). 18. Peter Tufano, “Business Failure, Judicial Intervention and Financial Innovation: Restructuring US Railroads in the Nineteenth Century,” Business History Review (1997). 19.

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Oscar Gelderblom and Joost Jonker, “Completing a Financial Revolution: The Finance of the Dutch East India Trade and the Rise of the Amsterdam Capital Market, 1595–1612,” Journal of Economic History (2004). 4. Peter Tufano, “Financial Innovation and First-Mover Advantages,” Journal of Financial Economics (1989); Peter Tufano, “Financial Innovation,” Handbook of the Economics of Finance (2003). 5. “The Dojima Rice Market and the Origins of Futures Trading” (Harvard Business School Case Study, November 2010). 6. Minos Zombanakis, “The Life and Good Times of Libor,” Financial World (June 2012). 7. Nicola Gennaioli, Andrei Shleifer, and Robert Vishny, “Neglected Risks, Financial Innovation and Financial Fragility,” Journal of Financial Economics (2012). 8.

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The thread running through the financial crisis of 2007–2008 was bad information—about the quality of borrowers, about who had exposure to whom, about how a default in one place would affect other loans—and it brought down every type of institution, simple and complex.2 The second misconception concerns the benefits of financial creativity. Few areas of human activity now have a worse image than “financial innovation.” The financial crisis of 2007–2008 brought a host of arcane financial processes and products to wider attention. Paul Volcker, one former chairman of the Federal Reserve whose postcrisis reputation remains intact, has implied that no financial innovation of the past twenty-five years matches up to the automatic teller machine in terms of usefulness. Paul Krugman, a Nobel Prize–winning economist-cum-polemicist, has written that it is hard to think of any major recent financial breakthroughs that aided society.3 A conference held by the Economist in New York in late 2013 debated whether talented graduates should head to Google or Goldman Sachs.

Money Changes Everything: How Finance Made Civilization Possible
by William N. Goetzmann
Published 11 Apr 2016

Geert Rouwenhorst (eds.), The Origins of Value: The Financial Innovations That Created Modern Capital Markets. Oxford: Oxford University Press, pp. 56–64. 4. Goetzmann, William N., and K. Geert Rouwenhorst. 2005. The Origins of Value: The Financial Innovations That Created Modern Capital Markets. Oxford: Oxford University Press, p. 62. 5. Elman, Benjamin A. 2013. Civil Examinations and Meritocracy in Late Imperial China. Cambridge, MA: Harvard University Press, p. 176. 6. Von Glahn, Richard, “The Origins of Paper Money in China,” in William N. Goetzmann and K. Geert Rouwenhorst (eds.), The Origins of Value: The Financial Innovations That Created Modern Capital Markets.

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Left to its own, without the incursion of Western powers in the nineteenth century, would China ever have become a capitalist power? China has a long history of financial innovation. The Chinese invented metallic coinage, paper money, bills of exchange, transferable rights certificates, sophisticated accounting and management systems, and securitized lending. Examples of wealthy entrepreneurs, financial institutions, private partnerships, and business organizations can be found throughout China’s history. Given all these financial innovations, why were the first global corporations European in origin, not Chinese? I argue in Part II of this book that the answer is rooted fundamentally in the relationship between government and private enterprise in Chinese history.

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Song mulberry bark paper—developed and perfected in Sichuan, where mulberry trees were used in the silk industry—became the first durable medium for bills that could be passed from hand to hand and could circulate for years. Financial innovation relies on the technology of documentation, recording, and contracting. Along with the Mesopotamian invention of clay tablets and the apparently simultaneous Eurasian discovery of metallic coinage, the Chinese development of metal-plate printing on durable paper is one of the most enduring legacies of financial innovation. HEAVY CASH Despite being a golden age of Chinese culture, the Song was also a period during which the country fought a constant and ultimately losing battle against rival states, particularly the steppe peoples to the north and west—the Mongols and related groups.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

Eventually even Greenspan was forced to admit his mistake in a congressional hearing.55 The recent orgy of financial innovation turned out so badly because financial innovation is not like technological innovation. There are financial innovations that do benefit society, such as the debit card. And derivatives, as discussed earlier, can be useful tools to help companies hedge their operational risks. But there is no law of physics or economics that dictates that all financial innovations are beneficial, simply because someone can be convinced to buy them. The core function of finance is financial intermediation—moving money from a place where it is not currently needed to a place where it is needed.

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Even Summers, a brilliant and notoriously skeptical academic economist (later to become treasury secretary and eventually President Obama’s chief economic counselor), was won over by the siren song of financial innovation and deregulation. By 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America. The aftermath is well known. Although Born’s concept paper did not cause a financial crisis, the failure to regulate not only derivatives, but many other financial innovations, made possible a decade-long financial frenzy that ultimately created the worst financial crisis and deepest recession the world has endured since World War II.

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Particularly severe episodes of wrongdoing often lead to the implementation of new rules that at least close the particular barn door that had been left open in the past; the most important example was the new regulatory scheme created during the Great Depression. The failures and scandals of the late 1980s and 1990s were closely linked to recent deregulatory policies or financial innovations: expansion of savings and loans into new businesses; junk bonds and leveraged buyouts; quantitative arbitrage trading; and over-the-counter derivatives. Someone familiar with the history of the financial system might have expected this record of disaster to lead to greater skepticism of financial innovation and closer oversight of the industry. Instead, the 1990s witnessed the final dismantling of the regulatory system constructed in the 1930s.

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

Commonly known as the paradox of aggregation,30 the phenomenon has many facets, with a direct implication for our understanding of the role of financial innovation. First, new financial products and processes tend to be shrouded in complexity, meaning that the full spectrum of information about them may never be available to buyer, client or the regulator.31 Second, always and everywhere, financial innovations are transactions in futurity. This means that buyers often discover an unwanted or risky element far too late, and it may be impossible to correct the outcome due to the conditions of the contract. Third, financial innovations increasingly span several markets, making oversight and regulation of the process extremely challenging.

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A combination of the three tactics, according to John Tuld, would probably constitute the Holy Grail of truly big money in finance. Alas, it appears that such a Holy Grail does exist, and it is linked to the phenomenon of financial innovation. ‘Innovation’ has a nice ring to it. ‘New’ is probably the most popular word in advertising campaigns. Innovation has long defined human progress. The innovation of the internal-combustion engine changed human life beyond recognition. So did the innovation of the personal computer and the smartphone, and most medical innovations. We know comparatively little about financial innovation: in fact, there is only a thin academic literature on the concept, with most studies published after 2009.

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A wide definition comes from the regulators, who describe financial innovation as the introduction of ‘something new that reduces costs, reduces risks or provides an improved product/service/instrument that better satisfies participants’ demands’ within a financial system.2 Who can object to that? What could possibly be wrong with improving services to clients? Alas, somehow innovation, at least in finance, often leaves a bitter aftertaste, not least among the many who have been sabotaged by the ‘innovation’. One sceptic recently described financial innovation as, simply, regulatory arbitrage.3 Or, put differently, a technique for sabotaging the public welfare and the government.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by Carlota Pérez
Published 1 Jan 2002

The same variety will appear in relation to the nature of innovations. Table 13.1 proposes a typology of financial innovations, classifying them according to their main purposes and ranking them from the most useful for the ‘real’ economy to the least useful. The top ones provide the life-blood for entrepreneurship and production; the lowest ones take blood out of the economy through manipulating paper wealth. 138 The Changing Nature of Financial and Institutional Innovations Table 13.1 139 A tentative typology of financial innovations Type and purpose of financial innovations A Instruments to provide capital for new products or services For radical innovations (bank loans, venture capital and others) To enable large investments and/or spread risks (joint stocks, bank syndicates and so on) To accommodate the financial requirements of new infrastructures (for both construction and operation) To facilitate investment or trade in novel goods or services B Instruments to help growth or expansion For incremental innovations or production expansion (like bonds) To facilitate government funding in different circumstances (war, colonial conquest, infrastructural investment, welfare spending) For moving (or creating) production capacity abroad C Modernization of the financial services themselves Incorporation of new technologies (communications, transport, security, printing and so on) Development of better forms of organization and service to clients (from telegraph transfers, through personal checking accounts and high street banking to automatic tellers and E-banking) Introduction of new financial instruments or methods (from checks to virtual money, local, national and international services and various types of loans and mortgages) D Profit-taking and spreading investment and risk Instruments to attract small investors (various forms of mutual funds, certificates of deposit, bonds, IPOs, ‘junk bonds’) New instruments to encourage and facilitate big risk taking (derivatives, hedge funds and similar) E Instruments to refinance obligations or mobilize assets To reschedule debts or restructure existing obligations (re-engineering, Brady Bonds, swaps and others) To buy active production assets (acquisitions, incorporations, mergers, takeovers, junk bonds) To acquire and mobilize ‘rent’-type assets (real estate, valuables, futures and similar) F Questionable innovations Discovering and taking advantage of legal loopholes (fiscal havens, off-the-record deals and so on) Discovering and taking advantage of incomplete information: ‘making money from money’ (foreign exchange arbitrage, leads and lags and similar) Making money without money (from pyramid schemes to insider trading and outright swindles) 140 Technological Revolutions and Financial Capital Type A and B innovations are those related to the basic role of finance as an intermediary in relation to production investment, either to initiate activities (A), or for growth, expansion and extension (B).

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Yet, the irruption phase is also a time when the revolution is still only a minor part of the economy, while the bulk of the industries of the old paradigm are mature and offer few good investment opportunities, so idle money piles up and fosters innovations of types D, E and F. So Irruption witnesses the maximum variety and intensity in financial innovation. Table 13.2 Phase The shifting behavior of financial capital from phase to phase of each surge Prevalent types of innovation A B C D E Prevalent characteristics of finance during the phase F Irruption ❐ ❐ ❐ ❐ ❐ ❐ Maximum intensity of real financial innovation ❐ ❐ ❐ Escape control, attract funds, speculate, inflate assets Synergy ❐ ❐ ❐ Adaptive innovations to accompany growth Maturity ❐ ❐ ❐ Accompany outspreading, escape control and manipulate Frenzy In fact, the whole of the installation period is one of intense experimentation and innovation not only in technology but also in financial practices.

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Among the consequences was the Glass–Owen Act, creating a timid forerunner of the Federal Reserve System, as another attempt to create a sort of central bank in the United States.224 Many of those manipulative practices will overflow into the irruption phase, after the next big-bang, as parts of the rationalization and the survival tactics of the existing production structure that continues battling for profits and markets behind the astounding economic success of the technological revolution. B. Financial Innovations from Paradigm to Paradigm As financial innovations change in nature and purpose, following the life cycle of each revolution, they are deeply molded by the nature of the specific technoeconomic paradigm being deployed. This involves not just the adaptation of financial instruments and services to the specific changes in the production sphere, but also the application of the paradigm as a generic technology and as new organizational and operational principles in the financial firms themselves.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

Then as now, speculative bubbles in real estate and stocks, minimal financial regulation, and a flurry of financial innovation conspired to create a bubble that, when it burst, set the stage for the near collapse of the financial system on Wall Street, a brutal economic downturn on Main Street, and a worldwide bust. That the recent crisis bears so many eerie similarities to a catastrophe that unfolded decades ago is not a coincidence: the same forces that gave rise to the Great Depression were at work in the years leading up to our very own Great Recession. Even more striking, the irrational euphoria, the pyramids of leverage, the financial innovations, the asset price bubbles, the panics, and the runs on banks and other financial institutions shared by these two episodes are common to many other financial disasters as well.

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Alan Greenspan, perhaps the most visible advocate of letting the financial system regulate itself, claimed that markets would sort things out, warning in 1997 that when it came to financial innovation, “we should be quite cautious in enacting legislation or creating regulations that unnecessarily fetter market development.” Greenspan even defended the rise of subprime lending, claiming in 2005 that “lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately.” In retrospect, these remarks seem laughable. In fact, financial innovations rendered irrelevant the question of whether lenders bothered to assess risk: rather than make loans and hold them on their books, banks and other financial institutions made loans regardless of the applicants’ creditworthiness, then proceeded to funnel the loans—mortgages, auto loans, student loans, and even credit card debt—to Wall Street, where they were turned into increasingly complex and esoteric securities and sold around the world to credulous investors incapable of assessing the risk inherent in the original loans.

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In fact, there was plenty of innovation—that’s the good news. The bad news is that most of it percolated in one sector of the economy, the financial services industry. In itself, this was not a problem. After all, plenty of financial innovations in centuries past—insurance, for example, and commodity options—have proved their value again and again, enabling market participants to manage and contain risk. At first that same spirit animated the current crop of financial innovations. Indeed, they were attempts to improve on the older model of making loans. Several decades ago banks that made home loans followed the “originate and hold” model. A prospective homeowner would apply for a mortgage, and the bank would lend the money, then sit back and collect payments on the principal and interest.

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown
by Philip Mirowski
Published 24 Jun 2013

Of course, MacKenzie realized that the narrative of “technological error” seems on its face implausible (pp. 1830–32); but by focusing so intently upon the narrowly confined world of the low-level analysts and traders, he misses most of the action surveyed in this volume. 43 Shiller, Finance and the Good Society, p. 13. 44 In Norris, “The Crisis Is Over, but Where’s the Fix?” 45 See Litan, “In Defense of Much, but Not All, Financial Innovation” and The Derivatives Dealer’s Club and Derivates Markets Reform; Litan and Wallison, Competitive Equity; Eichengreen, “The Crisis in Financial Innovation”; Shiller, “Radical Financial Innovation,” “In Defense of Financial Innovation,” and Finance and the Good Society. 46 Shiller, “Radical Financial Innovation” and “In Defense of Financial Innovation.” 47 Shiller, Interview on Finance and the Good Society. 48 Ibid. 49 Ibid. 50 The fact that Shiller has a conflict of interest in promoting the Case-Shiller index and his other financial contraptions is revealed by the mission statement of his company, at www.macromarkets.com/index.shtml.

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39 See MacKenzie and Demos, “Credit Default Swap Trading Drops.” This estimate may be limited in its geographic range, and is probably too low. 40 Miller, “Financial Innovation.” 41 Some examples of the “social studies of finance” are MacKenzie, An Engine, Not a Camera; MacKenzie et al., Do Economists Make Markets?; and Preda and Knorr-Cetina, Handbook of the Sociology of Finance. The critique of the role of science studies in helping reify this interpretation of financial innovation can be found in Engelen et al., “Reconceptualizing Financial Innovation.” 42 I refer here to a paper by Donald MacKenzie (“The Credit Crisis as a Problem in the Sociology of Knowledge”), who argues that a shift in cultures of evaluation within the ratings agencies, from older corporate collateralized debt obligations to the newer CDOs composed of mortgage-backed securities, accounted for a number of “slips” when it came to evaluation of the dangers posed by the latter.

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The prospect of the government serving as market-maker of last resort presumably cannot be extended indefinitely, which brings us to the final long-game component of the full-spectrum brace of policies: the crisis analogue of geoengineering for neoliberals is the equally science-fiction prospect of financial innovation as the mode of ultimate deliverance from economic stagnation. Just as with geoengineering, the policy consists more of insubstantial promise than in demonstrated capabilities; but it plays an important pivotal political role nonetheless. The prophets of financial innovation are at pains to portray the invention of new pecuniary instruments, practices, and products as on a par with the science-based innovation of new physical technologies; in other words, it is the very apotheosis of the market coming to terms with an evolving nature.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again
by Nicholas Dunbar
Published 11 Jul 2011

Little did he know that he was about to be a guinea pig for the latest tricks of love-to-win investment bankers and their ratings agency accomplices. Driven by short-term gains, they found in people like Smith the ultimate twist in a challenge that had spurred financial innovation for centuries. The assurance of liquidity that Extine and Smith craved—the idea that their investments could be redeemed, dollar for dollar, whenever cash was needed—was nothing new. It was behind one of the oldest financial innovations of all, the invention of banking. How do banks get away with taking depositors’ cash and lending it out to borrowers who won’t pay the money back for years? Like the Cowardly Lion, the Scarecrow, and the Tin Man getting green spectacles from the Wizard of Oz, the depositors happily walk around thinking their cash is available whenever they want it.

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Next came their easy seduction of traditional bankers and consumers, which led to a corruption of the ratings agencies, all of which was encouraged—either openly or through benign neglect—by the regulatory agencies charged with monitoring these people. Add several trillion dollars, and you have a recipe for disaster. It took a final, crucial ingredient—a catalyst, an ingenious and insidious financial innovation that made it all possible. A helpful tool that upended the distinction between banking and markets. An enabler of a massive shift of power toward love-to-win traders that traditionalists barely understood despite their insistence that they too were “sophisticated.” A mechanism for replicating reality and synthesizing financial robots that allowed complexity to go viral.

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There was the pressure on senior bankers such as Chase’s Marc Shapiro and J.P. Morgan’s Peter Hancock to shift credit risk off their balance sheets, and the pressure on investment banks to respond to the threat of commercial banks’ breaking into the securities business. But what really rocked both of these worlds was a radical financial innovation: credit derivatives. Imagine a bank looking to make corporate loans or to own bonds—but without the credit risk. How does it strip out the risk? Easy: think of the loan as two separate parts. Pretend the loan is made to a borrower as safe as the government, which will repay the money without fail, and pays a “risk-free” rate of interest in compensation.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

As soon as both banks and Wall Street realized that the securitization ‘‘financial sausage machine’’ could be tweaked to manufacture marketable debt securities out of almost any type of loan, a wholesale migration of credit from bank balance sheets into the financial 57 58 FINANCIAL MARKET MELTDOWN markets was set off. In the late twentieth century, the big brains in finance all thought that financial market intermediation had permanently gained the upper hand on bank balance sheet intermediation through the ‘‘financial innovation’’ that started with mortgages. They were wrong. It turns out that the asset securitization model provided the explosives to blow up the global economy. 3 t FINANCIAL INNOVATION MADE EASY ‘‘The business of banking ought to be simple; if it is hard it is wrong. The only securities which a banker, using money that he may be asked at short notice to repay, ought to touch, are those which are easily saleable and easily intelligible.’’

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Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America To my wife Judy, who has always patiently supported my writing ventures and both typed the handwritten drafts of the text and suggested important changes in direction and tone throughout the project, and to my historian daughter Elizabeth who offered great encouragement and good advice to her dad. CONTENTS t INTRODUCTION: Money, Markets, Manias, and You ix CHAPTER 1: A Tour of the Financial World and Its Inhabitants CHAPTER 2: The Financial Market Made Simple 29 CHAPTER 3: Financial Innovation Made Easy 59 CHAPTER 4: How We Got Here 75 CHAPTER 5: The Fed Demystified 101 CHAPTER 6: The Limits of Financial Regulation 117 CHAPTER 7: The Natural History of Financial Folly 135 CHAPTER 8: What Should Be Done? 161 Conclusion 179 Index 191 vii 1 INTRODUCTION Money, Markets, Manias, and You t The purpose of this book is to help you understand what is happening in the global financial economy, why it is happening, and what can be done about it.

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If things turn out as badly as it looks like they might, people will also wonder why somebody didn’t stop it in its tracks. The answer is, in part, because ‘‘innovation’’ is genuinely viewed as a good thing in our culture— change is a good word. The other answer is that this was a quarter century of remarkably benign financial circumstances. Above all, it was a great party, and lots of people got very rich. Financial Innovation Made Easy BANKS DISCOVER CONSUMER LENDING The early 1980s witnessed something that has been called the retail banking revolution. This started in the United States and spread to the United Kingdom and other rich countries. Traditionally, banks only looked to consumers like you and me for deposits.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
by Eswar S. Prasad
Published 27 Sep 2021

And, while the mysteries of this technology have fascinated the public, other imminent changes in the world of finance herald the arrival of a more significant if less glitzy revolution. The recent and ongoing innovations in financial technologies have come to be encapsulated by the portmanteau term Fintech. Later, we will see how the Fintech revolution is touching different aspects of finance. Financial innovation is nothing new, of course, and it is worth bearing in mind that revolutions have dark sides as well. When Innovation Ended in a Crash During the early 2000s, financial markets in advanced economies experienced major developments that were ostensibly going to make finance safer and more efficient.

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And because banks could package their loans into securities and sell them off to investors, they would be more willing to relax eligibility requirements for loans, giving borrowers easier access to credit for purchasing houses and automobiles. Updated and less stringent regulatory standards were expected to encourage financial innovations by unshackling the sector from onerous oversight. Regulators could take a more hands-off approach because the private sector would now have more effective ways of managing risk by itself, without the government’s involvement and supervision. After all, who knew better than private banks, corporations, and households themselves about the sorts of risks they faced and were willing to tolerate?

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Regulatory agencies will struggle to keep up with the coming rapid changes in financial markets as new and nontraditional financial platforms rise in importance, threatening banks and other existing financial institutions. How governments respond to these developments, especially in how they assess and address the potential benefits and risks of financial innovations, will have a pronounced impact on the risk / benefit balance. Taking Stock of Looming Changes Recent Fintech innovations—including those underpinning cryptocurrencies such as Bitcoin—herald broader access to the financial system, quicker and more easily verifiable settlement of transactions and payments, and lower transaction costs.

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
by Greg Ip
Published 12 Oct 2015

Attendees included Ben Bernanke and Mervyn King, future heads of the Fed and Bank of England, respectively, and Paul Krugman, future Nobel laureate. None needed convincing that finance had become more treacherous. The puzzle was why the economy kept humming. Larry Summers, who would later serve as Treasury secretary to Bill Clinton and adviser to Barack Obama, had a theory. Technological and financial innovation, he told the group, had indeed made finance more bubble-prone. He sketched out a scenario of how a crisis and deep recession could recur. Still, he concluded, since the Great Depression, the federal government had erected firewalls between the financial system and the real economy where ordinary people worked and invested: the vast federal budget, deposit insurance, and, most important, an activist Federal Reserve: “It is now nearly inconceivable that there would be no active lender of last resort in time of crisis.”

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Minsky agreed with Keynes that the economy needed a big, active government to avoid depressions. But he also thought Keynesian models gave short shrift to the financial system. They assumed that the central bank had full control of the money supply, credit, and interest rates. Minsky argued that the volume of money and credit didn’t depend just on the central bank but on financial innovation. If, to control inflation, the Fed restricted the growth of lending by banks, then Wall Street’s innovators would come up with mechanisms to go around banks and get credit to those who wanted to borrow. Innovation, he predicted, proceeded through three stages: the first, “hedge” stage, when it served business’s legitimate need to manage risk; the second, “speculative” phase, when it served mostly to finance rising asset prices; and a final, “Ponzi” stage, when investors had to borrow more simply to pay the interest on past borrowings.

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In 2008 lenders were nervous enough about AAA-rated MBSs to refuse to refinance repo loans that used them. Bear Stearns collapsed in 2008 largely because it couldn’t refinance its maturing repo loans, which, given the lessons learned from Drexel, simply wasn’t supposed to happen. Drexel’s experience amply illustrated how a financial innovation that seemed at the time to reduce risk once it became widespread enough, did the opposite, and raised risk throughout the system. Another example was the use of mortgage-backed securities. Because American banks tended to be regional, they were acutely vulnerable to localized housing busts.

Taming the Sun: Innovations to Harness Solar Energy and Power the Planet
by Varun Sivaram
Published 2 Mar 2018

Stavins, “Technological Change and the Environment,” in K-G Maler and J. R. Vincent (eds.), Handbook of Environmental Economics, Volume 1 (Amsterdam, Netherlands: Elsevier Science B.V., 2003): 461–516. b. This is based on the Financial Times Lexicon definition of financial innovation, http://lexicon.ft.com/Term?term=financial-innovation. c. See Karan Girotra and Serguei Netessine, “Four Paths to Business Model Innovation,” Harvard Business Review (July/August 2014): https://hbr.org/2014/07/four-paths-to-business-model-innovation. d. See Theocharis D. Tsoutsos and Yeoryios A. Stamboulis, “The Sustainable Diffusion of Renewable Energy Technologies as an Example of an Innovation-Focused Policy,” Technovation 25 (2005): doi:10.1016/j.technovation.2003.12.003.

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All of this suggests that it is only a matter of time before new approaches dramatically expand the pool of capital available to fund solar power. The financial innovation needed to expand this pool of capital does not require reinventing the wheel. Under Schumpeter’s paradigm (see box 3.1 in chapter 3), an innovation is an invention that has been brought to market. So adapting novel financial instruments from other sectors and popularizing them for the first time in the solar sector exemplifies financial innovation. According to New York’s energy czar, Richard Kauffman, there is plenty of inspiration to be drawn from other sectors of the economy to augment funding sources for solar projects: Projects in the [United States] rely upon an old-fashioned and anachronistic form of financing that is different than how other parts of the U.S. economy are financed.

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But the drop makes it harder for emerging technologies that might not be cost-competitive before economies of scale kick in at mass production to break into the market in the long run. What’s more, the financial innovation discussed in chapters 4 and 5 could aid this lock-in. Silicon solar projects might soon be able to tap into public capital markets and access cheap finance, thanks to the existence of decades of performance data and thirty-year manufacturer warranties. That ability would add another cost advantage to silicon over emerging technology competitors that public investors, having just gotten comfortable with silicon technology, would be loath to bet on. As a result, financial innovation could act as a barrier, rather than a bridge, to technological innovation.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

Morgan management was resisting strongly, and Hancock sketched out its alternative vision for revitalizing the bank, maintaining its hallowed role as an independent player. Morgan would continue harnessing the power of financial innovation, such as derivatives, to make itself into a sharp, focused investment bank that could continually serve its clients with new products. His listeners were unmoved. At the end of the meeting, another electronic vote was conducted, and the proportion in the crowd who believed in the bank’s strategy had not risen at all. Most of the staff—the junior staff at least—shared Hancock’s belief in the power of financial innovation. But they also knew that the rest of Wall Street was making much higher returns from the internet and financial merger boom than J.P.

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It would be the second feature that would come to dominate the business a decade later, eventually leading to a worldwide financial catastrophe. [ TWO ] DANCING AROUND THE REGULATORS There was a critical juncture, around the time that Peter Hancock’s team seized on the idea of credit derivatives, when financial innovation might have followed a subtly different path. In the few years leading up to Hancock’s Boca off-site, regulators and many prominent banking experts grew concerned about the boom in derivatives and the proliferation of exotic new types. They fiercely debated whether regulations should be imposed.

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Events would have turned out quite differently. They felt as if the fates were laughing at them. But even as they reeled from the carnage, the innovation cycle was about to heat up again, and with the wonders of dot-coms soundly repudiated, attention would turn anew to the marvelous potential of credit derivatives and other forms of financial innovation. On January 3, 2001, the US Federal Reserve suddenly announced a 50-basis-point cut in interest rates, reducing them to 6 percent. That news stunned the markets almost as much as the internet collapse. In the prior eight years, Alan Greenspan had made a virtue out of running monetary policy in a calm, controlled manner, decreasing rates steadily but slowly at just 25 basis points a shot.

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

To adapt a phrase from Jacob Bronowski (whose marvellous television history of scientific progress I watched avidly as a schoolboy), the ascent of money has been essential to the ascent of man. Far from being the work of mere leeches intent on sucking the life’s blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that so many people know today. The evolution of credit and debt was as important as any technological innovation in the rise of civilization, from ancient Babylon to present-day Hong Kong.

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Emerging market bonds also rose strongly and real estate markets, especially in the English-speaking world, saw remarkable capital appreciation. Whether they put their money into commodities, works of art, vintage wine or exotic asset-backed securities, investors made money. How were these wonders to be explained? According to one school of thought, the latest financial innovations had brought about a fundamental improvement in the efficiency of the global capital market, allowing risk to be allocated to those best able to bear it. Enthusiasts spoke of the death of volatility. Self-satisfied bankers held conferences with titles like ‘The Evolution of Excellence’. In November 2006 I found myself at one such conference in the characteristically luxurious venue of Lyford Cay in the Bahamas.

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And by engaging in currency trading as well as lending, they reduced their vulnerability to defaults. The Italian banking system became the model for those North European nations that would achieve the greatest commercial success in the coming centuries, notably the Dutch and the English, but also the Swedes. It was in Amsterdam, London and Stockholm that the next decisive wave of financial innovation occurred, as the forerunners of modern central banks made their first appearance. The seventeenth century saw the foundation of three distinctly novel institutions that, in their different ways, were intended to serve a public as well as a private financial function. The Amsterdam Exchange Bank (Wisselbank) was set up in 1609 to resolve the practical problems created for merchants by the circulation of multiple currencies in the United Provinces, where there were no fewer than fourteen different mints and copious quantities of foreign coins.

Why Wall Street Matters
by William D. Cohan
Published 27 Feb 2017

If a banker or trader creates and sells a squirrelly financial product or makes a terrible and risky bet knowing full well when he or she did it that it was likely to go wrong, then there is little question, if convicted, that the expensive art should be sold off the walls in his or her home and that the home itself should be sold and the proceeds given to the victims. There should be no equivocating on this point. But then, we also must reward Wall Street for financial innovation because it is financial innovation that has led to what I call the “democratization of capital,” the ability of more and more people to get access to capital at a fair price—whether in the form of a mortgage, an auto loan, or a credit card. These are important innovations that Wall Street has pioneered. They have given us the country and way of life that if it were suddenly stripped away, we would demand back.

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What we need on Wall Street is smart regulation, not political, retaliatory regulation. What Tarullo is doing in trying to prevent another financial crisis is unwinding decades of financial innovations that have actually benefited the American people by allowing them access to capital at lower prices than would otherwise have been possible. Tarullo is no doubt sincere in his mission to make financial markets safer, but at what cost? We need a way to reward bankers, traders, and executives for taking prudent financial risks and developing new financial innovations while also holding them accountable for their bad behavior. The days of socializing the risks and privatizing the gains, which should have come to an end after the 2008 financial crisis, have to be stopped.

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The anonymous person would pay annual premiums to an insurance company—money out the door every year—and the only way the bet would pay off would be if your house burned to the ground. Talk about a perverse set of incentives. What could possibly go wrong? The combination on Wall Street of a relative explosion of financial innovation, firms flush with new capital from outside investors, and a revamped incentive system that rewarded bankers, traders, and executives for the first time to take big risks with other people’s money led quickly—and perhaps not unsurprisingly, especially in retrospect—to a rapid and virulent increase in the number and frequency of financial crises.

The Globalization Paradox: Democracy and the Future of the World Economy
by Dani Rodrik
Published 23 Dec 2010

Indeed, the mortal blow to the “collateral benefits” argument was struck by the subprime mortgage meltdown, which demonstrated finance’s remarkable ability to undermine governance—and to do so in the richest and oldest democracy in the world. In its wake, it would be very difficult to argue that banking interests contribute to better institutions. The Seductions of Financial Innovation In the aftermath of the subprime mortgage meltdown no one has to break a sweat to be a finance skeptic. But we should give hedgehog economists their due. To most of us, their narrative on the financial innovation that led to the crisis seemed quite compelling when we first heard it. Everyone wanted credit markets to serve the cause of home ownership, so we started by introducing real competition into the mortgage lending business.

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And just in case anyone was still nervous, we created derivatives that allowed investors to purchase insurance against default by issuers of those securities. If we had wanted to showcase the benefits of financial innovation, we could not have devised a better set of arrangements. Thanks to them, millions of poorer and hitherto excluded families were made homeowners, investors made high returns, and financial intermediaries pocketed the fees and commissions. It might have worked like a dream—and until the crisis struck, many financiers, economists, and policy makers thought that it did. The narrative they all relied on was appealing. Financial innovation can allow people to access credit in ways they could not before by pooling risk and passing it on to those in the best position to bear it.

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Treasury and Federal Reserve had to mount makes emerging market crises look like footnotes by comparison. And the benefits of financial innovation? They were hard to see amidst the rubble. As Paul Volcker would say afterwards in all seriousness, the automated teller machine had brought far more gains to most people than any asset-backed bond.19 Or as Ben Bernanke put it, much more diplomatically, “One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be.”20 Where exactly did it all go wrong? The subprime mortgage crisis demonstrated once again how difficult it is to tame finance, an industry which is both the lifeline of all modern economies and the gravest threat to their stability.

Other People's Money: Masters of the Universe or Servants of the People?
by John Kay
Published 2 Sep 2015

A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be. It is possible to have too much of a good thing. Financial innovation was critical to the creation of an industrial society; it does not follow that every modern financial innovation contributes to economic growth. Many good ideas become bad ideas when pursued to excess. And so it is with finance. The finance sector today plays a major role in politics: it is the most powerful industrial lobby and a major provider of campaign finance.

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Fourth, finance helps both individuals and businesses to manage the risks inevitably associated with everyday life and economic activity. These four functions – the payments system, the matching of borrowers and lenders, the management of our household financial affairs and the control of risk – are the services that finance does, or at least can, provide. The utility of financial innovation is measured by the degree to which it advances the goals of making payments, allocating capital, managing personal finances and handling risk. The economic significance of the finance industry is often described in other ways: by the number of jobs it provides, the incomes that are earned from it, even the tax revenue derived from it.

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There has always been a need for a parallel investment channel, to facilitate the deployment of longer-term savings. In 1812, with Britain at war with both Napoleon and the USA, some public-spirited Edinburgh gentlemen founded the Scottish Widows’ Fund to make provision for their dependants. Scotland has played a disproportionately large role in the history of financial innovation for a small country on Europe’s periphery. The Bank and the Royal Bank of Scotland are among the oldest surviving institutions in the deposit channel (even if their survival was a close call). The Bank of England, which saved them, was also founded by a Scot. My parents and teachers, believing my destiny was to be an actuary, sent me to work at Scottish Widows in the school holidays.

Finance and the Good Society
by Robert J. Shiller
Published 1 Jan 2012

Yet relatively few of us seem bothered by this statistic. Financial Capitalism and the Challenge of Financial Innovation While nancial capitalism inevitably must be made to serve the good society, it cannot be summarized in simple terms. This is so because it represents a bewilderingly broad and cross-cutting array of institutions, instruments, and markets, each element of which evolved through a process of invention not unlike the processes that produced our automobiles and airplanes, and through which they continue to evolve. Financial innovation is an underappreciated phenomenon. According to Google Ngrams, the term nancial innovation was hardly ever used until the late 1970s and 1980s.

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By 2007 this decline had brought prices of home mortgage securities down far enough to create a crisis for investors in these securities. It was called the subprime crisis because the price falls were especially striking among mortgages issued to subprime borrowers, that is, home buyers who are judged more likely to default because of factors including their past payment and employment histories. Financial innovations related to these subprime loans were blamed for the crisis. But the crisis did not remain con ned to subprime mortgages; that was only the initial shock in a vast catastrophe. The consequence was a drop in real estate prices and the collapse of nancial institutions, not only in the United States but also in Europe and elsewhere.

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As such we tend to associate nance with recent problems, such as the mortgage and debt hangovers in the United States and Europe, and with the legal and regulatory errors that preceded these events. But we should not lose sight of the bigger picture. The more important story is the proliferation and transformation of successful nancial ideas. Financial innovations emanating from Amsterdam, London, and New York are developing further in Buenos Aires, Dubai, and Tokyo. The socialist market economy, with its increasingly advanced nancial structures, was introduced to China by Deng Xiaoping starting in 1978, adapting to the Chinese environment the examples of other highly successful Chinese-speaking cities: Hong Kong, Singapore, and Taipei.

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

In 2009 Paul Volcker, a former chairman of the Federal Reserve, questioned the role of finance: “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth—one shred of evidence.... [U.S. financial services increased its share of value-added from 2 percent to 6.5 percent] Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”2 The only financial innovation over the past 20 years that impressed Volcker was the automated teller machine. In the financial centers, high rewards enjoyed by people associated with finance trickled down.

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Writer Robert Frank observed that the wealthy inhabited a different country—Richistan.3 Gains from recent economic growth flowed disproportionately to the wealthy, who benefited from market-friendly governments, favorable tax regimes, protection of property rights, globalization, and technological change, and financial innovation and deregulation. The top 10 percent of earners received the majority of the benefits of the productivity miracle of 1996–2005.4 Wealthy plutocrats both powered and benefited from economic growth. The Forbes 400 richest people in 2006 controlled $1,250 billion, up $92 billion from 1982. To make it on to the list in 2006 you had to have a billion, compared to $75 million in 1982.

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Stern Stewart published an annual Billboard Top 100 Chart that analyzed corporations’ EVA™—economic value added or estimate of economic profit. The idea gained traction when executive remuneration was linked to EVA and companies awarded stock or stock options to executives to align the interests of shareholders and management. Shareholder value fueled financial innovation, new debt and equity securities, allowing companies to raise cheap equity or increase borrowing. Companies repurchased the firm’s shares to boost share prices. Traditionally, companies favored modest borrowing and high credit ratings. Now, they increased debt to reduce their cost of capital.

The Enigma of Capital: And the Crises of Capitalism
by David Harvey
Published 1 Jan 2010

The financial institutions collectively controlled both the supply of, and demand for, housing! The same story occurred with all forms of consumer credit on everything from automobiles and lawnmowers to loading down with Christmas gifts at Toys ‘R’ Us and Wal-Mart. All this indebtedness was obviously risky, but that could be taken care of by the wondrous financial innovations of securitisation that supposedly spread the risk around and even created the illusion that risk had disappeared. Fictitious financial capital took control and nobody wanted to stop it because everyone who mattered seemed to be making lots of money. In the US, political contributions from Wall Street soared.

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Krieger’s figures turned out to be faulty by $80 million but, rather than admit its profitability had disappeared, the bank tried all manner of ‘creative’ accounting practices to cover over the discrepancy before finally having to admit that it had been wrong. Notice the elements in this tale. First, unregulated over-the-counter trading permits all sorts of financial innovation and shady practices which nevertheless make a lot of money. Secondly, the bank supports such practices, even though they don’t understand them (the mathematics in particular), because they are often so profitable relative to their core business and hence improve share value. Third, creative accounting enters the picture, and fourth, the valuation of assets for accounting practices is extremely uncertain in volatile markets.

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Global shifts in production capacity accompanied by highly competitive technological innovations, many of which were labour-saving, contributed further to the disciplining of global labour. The United States still retained immense financial power, even as it lost its earlier dominance (though not significance) in the realm of production. Increasingly, the US relied upon the extraction of rents, either on the basis of its advantages in technological and financial innovation or from intellectual property rights. But this meant that finance should not be burdened by excessive regulation. The crash of the US financial sector in 2008–9 has jeopardised US hegemony. The ability of the US to launch a go-it-alone debt-financed recovery plan is limited politically by staunch conservative opposition at home as well as by the huge debt-overhang accumulated from the 1990s on.

The Great Stagnation
by Tyler Cowen
Published 24 Jan 2011

Contemporary innovation often takes the form of expanding positions of economic and political privilege, extracting resources from the government by lobbying, seeking the sometimes extreme protections of intellectual property laws, and producing goods that are exclusive or status related rather than universal, private rather than public; think twenty-five seasons of new, fall season Gucci handbags. The dubious financial innovations connected to our recent financial crisis are another (perhaps less obvious) example of discoveries that benefit some individuals but are not public goods more generally. A lot of the gains from recent financial innovations are captured by a relatively small number of individuals. Top American earners are increasingly concentrated in the financial sector of the economy. For 2004, nonfinancial executives of publicly traded companies comprised less than 6 percent of the top 0.01 percent income bracket.

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In that same year, the top twenty-five hedge fund managers combined earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning over $100 million a year was nine times higher than the public-company executives earning that amount. When I look back at the last decade, I think the following: There are some very wealthy people, but a lot of their incomes are from financial innovations that do not translate to gains for the average American citizen. The slowdown in ideas production mirrors the well-known rise in income inequality. Labor and capital are fairly plentiful in today’s global economy, and so their returns have been somewhat stagnant. Valuable new ideas have become quite scarce, and so the small number of people who hold the rights to new ideas—whether it be the useful Facebook or the more dubious forms of mortgage-backed securities—earned higher relative returns than in earlier periods.

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I know what the numbers say, but what was the financial sector really producing during those years? The published figures do not pick up the problematic nature of financial sector growth, which of course culminated in a major crash. What we measured as value creation actually may have been value destruction, namely too many homes and too much financial innovation of the wrong kind. Keep in mind that median income growth has been slow, and stock prices—the valuation of capital—haven’t made lasting progress in a long time. As of the fall of 2010, the S&P 500 is more or less back where it had been in the mid-1990s. As economist Michael Mandel puts it, if neither labor nor capital is reaping much gain, can we really trust the productivity numbers?

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
by Diana B. Henriques
Published 18 Sep 2017

Those who subscribed to the efficient market hypothesis believed that markets should be left alone to practice their beehive brilliance without government interference. After all, if everyone was smarter than anyone, everyone was certainly smarter than Uncle Sam. That notion, too, would shape the financial landscape far into the future. In the San Francisco Bay area of the early 1970s, lightbulbs of financial innovation were burning bright everywhere, not just at Berkeley. A remarkable team of computer geeks and misfit bankers, working in a small unit at Wells Fargo Bank in San Francisco, had seized on the “random walk” concept and were trying to build portfolios for their pension fund clients that would behave as much as possible like the overall market.

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The simple question “Who regulates options?” could only be answered, “It depends.” However, the answer to the question “Who regulates stock index futures contracts?” was finally clear, and it was the CFTC. Shad and Johnson had made their deal and had gotten government out of the way of the financial innovation sweeping the marketplace—innovation that would tie the futures market and the stock market together tighter than either man could have imagined. Unfortunately, Shad and Johnson were not traders, and their accord ignored the facts of daily life that traders confronted in the stock market: Stocks didn’t trade constantly throughout the day, without interruption or limitation.

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That may have been how most of Chicago’s financial community thought of the new Chicago Mercantile Exchange Center, which opened for business on the Monday after Thanksgiving 1983. The Merc’s tireless and creative leader, Leo Melamed, had played a pivotal role in turning a struggling market for pork bellies into the roaring hive of prosperous financial innovation that underwrote the new structure. The $57 million building had a million square feet of office space and a forty-thousand-square-foot trading floor, the largest column-free trading floor in the world, hardwired with about fourteen thousand miles of telephone cable. A soaring forty-story office tower rose on the south side of the gigantic rectangle of the trading complex; a twin would eventually stand on the north side.

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

Finnerty, who compiled the Whitmanic catalogue of financial innovations since the 1960s reproduced on page 51, listed 10 stimuli to such creative enterprise. They include risk reduction or the shifting of risk towards one party or the other, reduction of agency costs (lender supervision of management) and issuance costs, tax angles, compliance with or evasion of regulation, changes in the level and volatility of interest and exchange rates, "academic and other research that result in advances in financial theories," accounting gimmickry, and technological advances. This little survey of financial innovation would be incomplete without notice paid to the ease with which nearly anything can be absorbed into the circuit of money.

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From these elements, however, infinitely strange creatures can be made. Or, "Rather than developing new generic instruments," "financial innovation since the mid-1980s has tended to take the form of novel combinations of existing products to support complex and highly sophisticated investment strategies.... At the same time, a growing range of 'custom-tailored' investment products has been developed to maximise possibilities for matching actual portfolio structures to theoretically-based invesment models" (Bank for International Settlements 1993, P- 86). The more reality INSTRUMENTS financial innovations adjustable rate convertible notes • adjustable rate preferred stock • adjustable/variable rate mortgages • All-Saver certificates • Annericus trust • annuity notes • auction rate capital notes • auction rate notes/debentures • auction rate preferred stock • bull and bear CDs • capped floating rate notes • collateralized connmercial paper • collateralized nnortgage obligations/real estate mortgage investment conduits • collateralized preferred stock • commercial real estate-backed bonds • commodity-linked bonds • convertible adjustable preferred stock • convertible exchangeable preferred stock • convertible mortgages/reduction option loans • convertible reset debentures • currency swaps • deep discount/zero coupon bonds • deferred interest debentures • direct public sale of securities • dividend reinvestment plan • dollar BILS • dual currency bonds • employee stock ownership plan (ESOP) • Eurocurrency bonds • Euronotes/Euro-commercial paper • exchangeable auction rate preferred stock • exchangeable remarketed preferred stock • exchangeable variable rate notes • exchange-traded options • extendible notes • financial futures • floating rate/adjustable rate notes • floating rate extendible notes • floating rate, rating sensitive notes • floating rate tax-exempt notes • foreign-currency-denominated bonds • foreign currency futures and options • forward rate agreements • gold loans • high-yield (junk) bonds • increasing rate notes • indexed currency option notes/ principal exchange linked securities • indexed floating rate preferred stock • indexed sinking fund debentures • interest rate caps/collars/floors • interest rate futures • interest rate reset notes • interest rate swaps • letter of credit/surety bond support • mandatory convertible/equity contract notes • master limited partnership • medium-term notes • money market notes • mortgage-backed bonds • mortgage pass-through securities • negotiable CDs • noncallable long-term bonds • options on futures contracts • paired common stock • participating bonds • pay-in-kind debentures • perpetual bonds • poison put bonds • puttable/adjustable tender bonds • puttable common stock • puttable convertible bonds • puttable-extendible notes • real estate-backed bonds • real yield securities • receivable-backed securities • remarketed preferred stock • remarketed reset notes • serial zero-coupon bonds • shelf registration process • single-point adjustable rate stock • Standard & Poor's indexed notes • state rate auction preferred stock • step-up put bonds • stock index futures and options • stripped mortgage-backed securities • stripped municipal securities • stripped U.S.

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If interest could be forced to zero, then accumulation would accelerate and universal prosperity would be our reward. But of course interest rates can't be forced to zero, nor can the rentier be euthanized, nor can financial innovation be snuffed, without transforming capitalism in ways far more radical than Keynes envisioned. Recall Schumpeter's (1939, vol. 2, p. 6l3) observation that financial innovation "is one of the most characteristic features of the financial side of capitalist evolution.... This is not mere technique. This is part of the core of the capitalist process." An attack on liquidity and innovation is an attack on the core of the capitalist process, which is why Keynes's suggestions have been so thoroughly repressed by mainstream economics— rarely even argued with, but simply ignored.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

To understand what those conditions are, we look to the one corner of the economy where competition is “red in tooth and claw”: the hedge fund industry. CHAPTER 7 The Galapagos Islands of Finance QUANTUM MECHANICS For three hundred years, London has been one of the world’s great financial centers, a paragon of financial innovation and stability. Nevertheless, in 1992, the forces of evolutionary change were hard at work in that historic city. The fall of Communism in Eastern Europe had shocked the international financial environment. This geopolitical surprise appeared to open up a new path for the greater economic integration of the nations of Europe—including the United Kingdom.

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THE DEMOCRATIZATION OF INVESTING Passive investing—the idea that you can’t beat the market and should invest in index funds—is now such an important part of the traditional investment paradigm, it’s hard to appreciate just how revolutionary the idea of an index fund once was. These days, however, there seem to be nearly as many indexes as there are stocks. Where did the idea of the index come from, and where is it going? The Adaptive Markets Hypothesis can also explain the evolving nature of passive investing and indexation. As with many financial innovations, the genealogy of passive investing can be traced to academic research, in this case two different programs. We already described one of them: the CAPM, developed by Bill Sharpe (and simultaneously by John Lintner, Jan Mossin, and Jack Treynor). The other is, of course, the Efficient Markets Hypothesis.

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The emergence of the multi-trillion-dollar index fund industry was an evolutionary process driven by competition, innovation, and natural selection. This is the Adaptive Markets Hypothesis at work. NEW SPECIES OF INDEX FUNDS The success of the index mutual fund, beginning with the Vanguard Index Trust, led to an evolutionary explosion of financial innovation. Three different stock market index futures debuted in 1982, based on the New York Stock Exchange (NYSE) Composite, the S&P 500, and the Value Line index, respectively. Indexes for each asset class emerged, and additional index funds to track them: the first bond index fund for retail investors in 1986, the first international share index funds in 1990, and the first exchange-traded fund in 1993.

The Long Good Buy: Analysing Cycles in Markets
by Peter Oppenheimer
Published 3 May 2020

Table of Contents Cover Acknowledgements Note About the Author Preface Introduction Notes Part I: Lessons from the Past: What Cycles Look Like and What Drives Them Chapter 1: Riding the Cycle under Very Different Conditions Notes Chapter 2: Returns over the Long Run Returns over Different Holding Periods The Reward for Risk and the Equity Risk Premium The Power of Dividends Factors That Affect Returns for Investors The Impact of Diversification on the Cycle Notes Chapter 3: The Equities Cycle: Identifying the Phases The Four Phases of the Equity Cycle Mini/High-Frequency Cycles within the Investment Cycle The Interplay between the Cycle and Bond Yields Note Chapter 4: Asset Returns through the Cycle Assets across the Economic Cycle Assets across the Investment Cycle The Impact of Changes in Bond Yields on Equities Structural Shifts in the Value of Equities and Bonds Notes Chapter 5: Investment Styles over the Cycle Sectors and the Cycle Cyclical versus Defensive Companies Value versus Growth Companies Value, Growth and Duration Notes Part II: The Nature and Causes of Bull and Bear Markets: What Triggers Them and What to Look out For Chapter 6: Bear Necessities: The Nature and Shape of Bear Markets Bear Markets Are Not All the Same Cyclical Bear Markets Event-Driven Bear Markets Structural Bear Markets The Relationship between Bear Markets and Corporate Profits A Summary of Bear Market Characteristics Defining the Financial Crisis: A Structural Bear Market with a Difference Finding an Indicator to Flag Bear Market Risk Notes Chapter 7: Bull's Eye: The Nature and Shape of Bull Markets The ‘Super Cycle’ Secular Bull Market Cyclical Bull Markets Variations in the Length of Bull Markets Non-trending Bull Markets Notes Chapter 8: Blowing Bubbles: Signs of Excess Spectacular Price Appreciation … and Collapse Belief in a ‘New Era’ … This Time Is Different Deregulation and Financial Innovation Easy Credit New Valuation Approaches Accounting Problems and Scandals Notes Part III: Lessons for the Future: A Focus on the Post-Financial Crisis Era; What Has Changed and What It Means for Investors Chapter 9: How the Cycle Has Changed Post the Financial Crisis Three Waves of the Financial Crisis The Unusual Gap between Financial Markets and Economies All Boats Were Lifted by the Liquidity Wave The Unusual Drivers of the Return Lower Inflation and Interest Rates A Downtrend in Global Growth Expectations The Fall in Unemployment and Rise in Employment The Rise in Profit Margins Falling Volatility of Macro Variables The Rising Influence of Technology The Extraordinary Gap between Growth and Value Lessons from Japan Notes Chapter 10: Below Zero: The Impact of Ultra-Low Bond Yields Zero Rates and Equity Valuations Zero Rates and Growth Expectations Zero Rates: Backing Out Future Growth Zero Rates and Demographics Zero Rates and the Demand for Risk Assets Notes Chapter 11: The Impact of Technology on the Cycle The Ascent of Technology and Historical Parallels Technology and Growth in the Cycle How Long Can Stocks and Sectors Dominate?

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Also in common with many subsequent bubbles, it is not entirely clear what triggered its ultimate collapse. In this case, there were probably many contributory factors. At the height of the boom in 1636 and early 1637, when demand was at its highest, the bulbs themselves were still in the ground and could not be physically delivered until the following spring. Financial innovation played a part in driving prices ever higher. A futures market in bulbs developed that enabled sellers to sell forward tulips at a given price for a particular quality and weight. The risks compounded when most of these contracts were paid for by credit notes, making the system vulnerable to collapse and, eventually, contagion.

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As with the excitement about the possibilities of faster communications following the first transcontinental calls in 1915, expectations were boosted by dramatic falls in the cost of communication in the 1990s, when the speed of communication accelerated at an even faster rate than before, and with similar consequences. The cost of a three-minute telephone call from New York to London fell from $4.37 in 1990 (in 2000 dollars) to $0.40 in 2000.19 Deregulation and Financial Innovation Light touch regulation, or deregulation, is often an ingredient in the buildup of financial bubbles. In the railway boom of the early 19th century in Great Britain, for example, the repeal of the Bubble Act in 1825, introduced after the collapse of the South Sea bubble in 1720, was an important development.

Where Does Money Come From?: A Guide to the UK Monetary & Banking System
by Josh Ryan-Collins , Tony Greenham , Richard Werner and Andrew Jackson
Published 14 Apr 2012

If you are keen to understand in more depth exactly how money is created by the banking system today, then you may wish to skip ahead to Chapter 4. However, it is important to see how money and banking have developed over time to give us the current system. In the next chapter we shall see that political and economic developments, coupled with financial innovations, led to a situation where bank-created credit-money (henceforth ‘commercial bank money’) came to be accepted by the state and eventually came to dominate the monetary system. References 1 Defoe, D. (1690). Essay on Projects (London), quoted in Davies, G. (2002). A History of Money.

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Key historical developments: promissory notes, fractional reserves and bonds The origins of modern banking in Europe and the UK are a complex mixture of constitutional, fiscal, and monetary developments and there is not room for an in-depth historical account in this book.58 Instead, we will review briefly three key financial innovations that have given rise to the modern monetary system: The emergence of private media of exchange (Bills of Exchange) in the form of promissory notes that circulated independently of state money, which at the time was mainly gold and silver coinage. The practice, by the custodians and exchangers of precious metals and coinage, of issuing deposit receipts to a value greater than the value of deposits the custodians actually possessed – a practice that would later be described as fractional reserve banking.

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These countries were engaged in wars at the time and were short of money. As a result, they took to issuing bonds (Box 3) to the rich merchants and goldsmiths of their respective countries. The practice of bond issuance had begun much earlier in the city states of northern Italy and was another transformative financial innovation – a way for the state and later companies to fund expansionary trade through long-term borrowing without the need for additional metal coinage.75 Box 3: Bonds, securities and gilts A bond is a debt instrument which enables companies or states to access cash through issuing an IOU to an investor.

Capitalism: Money, Morals and Markets
by John Plender
Published 27 Jul 2015

What I can do is acknowledge the long-standing support and stimulus from my colleagues at the Financial Times, the enthusiastic encouragement of David Marsh, managing director of the Official Monetary and Financial Institutions Forum, and of Andrew Hilton, director of the Centre for the Study of Financial Innovation. Anyone who writes about capitalism from a historical and cultural perspective also has to acknowledge a debt to Jerry Z. Muller, whose book The Mind and the Market: Capitalism in Western Thought has been an inspiration and a delight. I offer heartfelt gratitude to my old friend Brian Reading of Lombard Street Research, who read the manuscript.

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They were the folk who believed that trade was a zero-sum game and that the way to enhance the prosperity and strength of a country was to boost exports and restrain imports in order to accumulate reserves of gold. His economic writings, of which A Discourse of Trade was the most important, were admired by Keynes, Schumpeter and Marx. He was also a pioneer of fire insurance after the Great Fire of London in 1666 and helped found England’s first mortgage bank. Barbon combined these remarkable financial innovations with a role as the biggest speculative builder in London, creating the districts around what is now the Strand, and rebuilding the Temple after a fire in 1678. He also developed much of London’s Bloomsbury. His building activities relied heavily on credit, yet he was notoriously reluctant to pay his creditors, even stipulating in his will that his debts should not be met.

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The policy of vastly increasing executive compensation was also, at least with the brilliant vision of hindsight, terribly bad social policy and perhaps even bad morals.42 A similar if less spectacular progression was under way in Europe. The escalation coincided with a power shift within banking whereby traders replaced conventional bankers at the top. They genuinely believed that financial innovations that involved packaging products such as subprime mortgages into bundles of securities that could be sold to investors were both useful and lucrative, as did the credit rating agencies that awarded triple-A status to these securitised products. So, too, did a growing band of mathematicians and scientists who left other research-intensive industries to share in the banking bonanza.

Capital Ideas Evolving
by Peter L. Bernstein
Published 3 May 2007

Why does the private sector lag in innovation in risk management? “The problem is not so much with the managers of private sector enterprises,” he observes, “as with the public nature of financial innovations. As financial innovations are not generally * The New Financial Order won the f irst Paul A. Samuelson Award from TIAA-CREF in 1996. bern_c06.qxd 82 3/23/07 9:03 AM Page 82 THE THEORETICIANS patentable, financial innovators are reluctant to spend large sums developing new products that others can use. Hence, it is difficult for private sector companies to get important new things started along the lines we suggested in Macro Markets and New Financial Order.”

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As Merton sees it, “You can bern_c04.qxd 52 3/23/07 9:02 AM Page 52 THE THEORETICIANS move from the unrealistic world of theory in which everybody agrees about asset prices and risks to the real world in which everybody agrees to use institutions.” The power of innovative institutions to change markets is clear from just a few examples, which Merton and Bodie place under the heading of “the financial innovation spiral.” Money market funds now compete with banks and thrifts for household savings. Securitization of auto loans and credit card receivables has intensified competition among financial institutions as sources for these purposes. High-yield bonds have liberated many companies from the icy grip of their commercial bankers.

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In national mortgage markets, many institutions have developed into major alternatives to thrifts as a source for residential mortgages. These institutional innovations have improved the lot of consumers and business firms by reducing the costs of the services they require.  Merton is convinced that the most fruitful source for continuing the spiral of financial innovation will develop primarily from the valuation of options, or, more precisely, of contingent claims—the contribution to the theory of finance for which he earned the Nobel Prize. Merton had joined up with Fischer Black and Myron Scholes in their search for the valuation of options in the spring of 1970, because he doubted they were on the right track in their conviction that the Capital Asset Pricing Model would produce the right answer (see Capital Ideas, pp. 216–219).

Money and Government: The Past and Future of Economics
by Robert Skidelsky
Published 13 Nov 2018

Distribution and the Macroeconomy 293 iv. The Modern Under-consumptionist Story 298 v. Conclusion 305 11. What Was Wrong with the Banks? 307 i. Pre-crash Orthodoxy 308 ii. Theory 310 iii. Understanding Banking: Some Essential Terms 316 iv. Loosening the Regulatory Noose 318 v. Financial Innovation 322 vi. Conclusion 327 Appendix 11.1: Why Didn’t the Credit Ratings Agencies Do Their Job? 12. Global Imbalances 329 331 i. Introduction 331 ii. A Pre-crash Bird’s-eye View 334 x C on t e n t s iii. Some Basic Theory 335 iv. Current Account Imbalances as a Cause of Meltdown?

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Finance was viewed essentially as an intermediatory, bringing together willing buyers and sellers of goods and services. In the language of the day, the financial market was an ‘efficient’ market, which needed no more regulation than any other market. The peculiar property of finance as a vent for speculation and fraud was ignored. This benign view of finance extended to the financial innovations of the 1990s. Securitization – the process of transforming non-marketable assets into marketable ones – led to a continuous lengthening of the chain of indebtedness. This ‘financialization’ of the economy – the growing share of money being made from purely financial operations – was praised (or at least justified) as ‘making capital allocation more efficient’ and therefore maximizing growth.

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Our economies are still on life-support systems, and the withdrawal of these will be exceptionally challenging. Chapters 10, 11 and 12 look at the structural causes of financial instability. Chapter 10 analyses the macroeconomic impact of the growth of inequality of income and wealth. The focus of Chapter 11 is on financial innovation, partly in response to the explosive increase in the demand for credit. Chapter 12 examines the contribution of current account imbalances to the instability of the pre-crash economic system. And so to the topic of the final part: what is to be done? The central question of political economy today is as it has always been: what does a government need to do to secure the relatively smooth – and socially and morally tolerable – functioning of a decentralized, money-using, largely privately owned economy?

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino
by Jim McTague
Published 1 Mar 2011

In the midst of the journalistic feeding frenzy, it wasn’t long before reporters discovered Arnuk and Saluzzi’s white paper and launched the pair into the limelight. Saluzzi was invited to discuss his findings on Bloomberg television, a cable business channel. The interview was apparently seen by somebody at the SEC, because shortly after the broadcast, Arnuk received an invitation from Henry Hu, chief of the SEC’s Division of Risk, Strategy, and Financial Innovation, to visit Washington, DC with Saluzzi and address the SEC staff. This was exactly the audience that the two traders wanted to reach. Saluzzi and Arnuk brought along a PowerPoint presentation and assumed that they would be addressing a small group of people. Much to their surprise, they were ushered into a heavily populated conference room.

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When the SEC published its concept release in January 2010, it specifically raised Kaufman’s questions. The concept release also reflected agency concern about the allegations that Arnuk and Saluzzi made. This relatively quick response was unusual for the SEC and tribute to Schapiro’s decision some months earlier to create a new Division of Risk, Strategy, and Financial Innovation. She had populated it with economists and MBAs with real Wall Street experience and academics like Henry Hu of the University of Texas whose studies had focused on market risk. This was the first new division within the SEC since the Great Depression, and it was meant to inject the agency with some vigor.

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Adeptly dealing with the Flash Crash was an opportunity for her to make up for past sins, both real and perceived. In fact, she had taken one exceptionally imaginative step upon arriving at the SEC to make sure a Madoff-style scandal never again blindsided her: She had created a new division, the first since the agency’s founding in 1934. The Division of Risk, Strategy and Financial Innovation was staffed with risk specialists, economists, and even some physicists to anticipate threats to the markets posed by new and existing investment activities and products. Schapiro recruited University of Texas professor Henry Hu to head the division. A renaissance man with degrees in science and law, Hu in 1993 had written a forward-looking piece for the Yale Law Review predicting that big financial institutions would make significant mistakes employing relatively new products called derivatives.

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

Years passed, and the fascination of watching the dollar and the price of oil fall began to fade. I switched to a different department at the New York Fed, this one tasked with studying financial innovation. It had its origin in a Bank for International Settlements group that also had a quaint name, the Eurodollar Standing Committee. The Committee dated back to concerns about one of the first great financial innovations of the postwar financial system, the Eurodollar market. Today the Eurodollar market would hardly evoke a yawn from most observers, but at the time the central bankers meeting in Basel took an interest, it was considered a great mystery and even a threat.

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Like Fermat, what Fischer Black and Myron Scholes (and Robert Merton) added, was a way to determine the “fair” value of an option (subject to various caveats related to the reasonableness of the model’s assumptions). Once adopted, their solution replaced the prior ad hoc pricing approach. Fermat is not the only historical example of a scientist devising a financial innovation that today would label him as a quant. A particularly striking example is the role quants played in improving government finance practices as far back as the sixteenth century. A common means of financing municipal and state debt in the Renaissance was the issuance of life annuities. In return for providing a sum to the government, the provider could designate that a regular annual payment go to a designee for life.

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The Eurodollar market had arisen as a side effect of the U.S. current account deficits that had brought down the original Bretton Woods system, it JWPR007-Lindsey 298 May 7, 2007 17:27 h ow i b e cam e a quant appeared to threaten a loss of the Federal Reserve’s ability to limit the U.S. money supply, and to top things off, the Soviet Union and later the oil exporters were among the largest depositors. In my new role, I searched for reasons to worry about financial innovations that, like the Eurodollar market in its time, were poorly understood, and that with some imagination could be seen as potentially harmful. In particular, I studied newfangled currency options such as average-rate, basket and barrier options. And, like the Eurodollar market, these now seem about as threatening to financial stability as a plate of pasta.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

The second part of this book delves into the blockchain from the perspective of its transitionary role in finance. Following the financial crisis of 2008, the financial sector has been in a state of flux. On one side, governments and regulators now demand a greater level of transparency with respect to financial innovation, taxation, and cross-border transactions. On the other hand, technological progress is defragmenting the financial sector, causing incumbents to be challenged by tech firms. While the current dialogue looks at the blockchain as an independent technology, this section of the book attempts to clarify its amalgamator function when juxtaposed with other technologies that are currently fragmenting the sector of finance.

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About the Technical Reviewer Garrick Hileman is a senior research associate at the Cambridge Center for Alternative Finance and a researcher at the Center for Macroeconomics. He was recently ranked as one of the 100 most influential economists in the UK and Ireland and he is regularly asked to share his research and perspective with the FT , BBC, CNBC, WSJ , Sky News , and other media. Garrick has been invited to present his research on monetary and financial innovation to government organizations, including central banks and war colleges, as well as private firms such as Visa, Black Rock, and UBS. Garrick has 20 years’ private sector experience with both startups and established companies such as Visa, Lloyd’s of London, Bank of America, The Home Depot, and Allianz.

…

As an increasing number of consumers took on debt to purchase products, it meant that the growth of the non-financial institutions had to be leveraged by taking on more debt. As the spiral of debt continued, the risk attached to loans grew in volume, to the point that it was now necessary to address the situation. It is here that financial innovation came to the rescue. As the power of banks decreased due to the issuance of debt by non-financial institutions, the banks installed a new risk management practise via their activities in exchanging securities and specifically through CDOs (Collateralised Debt Obligations ), Collateralized Loan Obligations (CLOs) and CDSs (Credit Default Swaps ).

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

“I tried to push back against complacency,” Geithner wrote, “telling a room full of bankers that the wonders of the new financial world would not necessarily prevent catastrophic failures of major institutions, and should not inspire delusions of safety on Wall Street. . . . I suggested that financial innovation was driving risk and leverage into corners of the financial system with weaker supervision, and that our tools for monitoring systemic risk weren’t keeping up.” Hmmm. Geithner’s memory doesn’t match the actual text of his speech, which painted a picture of the system’s financial stability and, yep, complacency. Though Geithner mentioned that financial innovation presented “significant challenges,” he expressed no warnings, sounded no alarms. Bankers had heard this speech a hundred times over rubber chicken.

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(At a conference, I chuckled when an economist stood at a podium deriding the rigidities of the “dismal science.” Somewhat vertically challenged with a bald head, Wells Fargo’s Mark Vitner remarked, “If you seasonally adjust me, I’m George Clooney.”) This created a weird disconnect every time I went to work. Inside the Dallas Fed, there was no housing bubble. ARMs were the greatest financial innovation to ever bless the middle class. Mortgage equity withdrawal was fueling a fantastic wealth effect. Derivatives were sophisticated financial instruments that diffused risk. All of the Fed’s eccentric econometric models showed the future was rosy, that baby boomers would retire with record levels of prosperity.

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Eccles Federal Reserve Board Building on Constitution Avenue in Washington is the Fed’s brain, the imposing stone behemoth on Liberty Street is the Fed’s beating heart. When Geithner set foot in the door, neither the brain nor the heart of the Fed sensed any danger. Fed economists had “growing confidence that derivatives and other financial innovations designed to hedge and distribute risk—along with better monetary policy to respond to downturns and better technology to smooth out inventory cycles—had made devastating crises a thing of the past,” Geithner said in his memoir, Stress Test. A protégé of Rubin and Summers, Geithner had no experience on Wall Street or in banking.

The New Geography of Jobs
by Enrico Moretti
Published 21 May 2012

In 2010, 3,649 patents were granted in the United States for financial or business practice innovations, one of the most important categories. Currently the American public holds a rather negative view of the social value of financial “innovation,” given the role of derivatives in triggering the Great Recession of 2008–2010. But this is probably an overreaction. While there are important exceptions, by and large financial innovation has contributed to supporting America’s economic growth. After all, the fact that planes are flying people from one corner of the country to another at affordable prices has as much to do with innovative hedges against high fuel costs as with advances in aviation technology.

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The innovation sector includes advanced manufacturing (such as designing iPhones or iPads), information technology, life sciences, medical devices, robotics, new materials, and nanotechnology. But innovation is not limited to high technology. Any job that generates new ideas and new products qualifies. There are entertainment innovators, environmental innovators, even financial innovators. What they all have in common is that they create things the world has never seen before. We tend to think of innovations as physical goods, but they can also be services—for example, new ways of reaching consumers or new ways of spending our free time. Today this is where the real money is.

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It is now a premier location for Internet portals and information services, and along with Los Angeles it accounts for a large number of digital entertainment jobs. In 2011, Google undertook a major expansion of its New York office, paying $2 billion to buy a large building near the meatpacking district. The New York region also remains the undisputed world leader in financial innovation. Historically, the Washington, D.C., area never had many high-tech jobs apart from a sizable cluster of defense contractors. But in the past twenty years the region has been remarkably successful at attracting a wide array of innovative companies to the high-tech Dulles corridor and to the downtown area.

The Global Minotaur
by Yanis Varoufakis and Paul Mason
Published 4 Jul 2015

Volcker lost no time in lashing out with the words: ‘I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth; one shred of evidence.’ One hapless banker retorted that the financial sector in the United States had increased its share of value-added from 2 per cent to 6.5 per cent. Volcker responded with a killer question: ‘Is that a reflection of your financial innovation, or just a reflection of what you’re paid?’ To finish off the banker, he added: ‘The only financial innovation I recall in my long career was the invention of the ATM.’ The combination of options to buy, hedging and leveraging is such risky business that, had it been a pharmaceutical, never in a million years would it have secured approval from the US Food and Drug Administration.

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Together, these sins fed into the self-congratulatory conviction that a paradigm shift had occurred, enabling the world of finance to create unlimited, benign, riskless debt. The first sin, which took the form of a mathematized rhetoric, lulled authorities and academics into a false belief that financial innovation had engineered risk out of the system; that the new instruments allowed a new form of debt with the properties of quicksilver. Once loans were originated, they were then sliced up into tiny pieces, blended together in packages that contained different degrees of risk,3 and sold all over the globe.

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Any fair-minded investigator of these episodes must, many believe, conclude that the economic theories that dominated the thinking of influential people (in the banking sector, the hedge funds, the Fed, the European Central Bank (ECB) – everywhere) were no more than thinly veiled forms of intellectual fraud, which provided the ‘scientific’ fig leaves behind which Wall Street tried to conceal the truth about its ‘financial innovations’. They came with impressive names, like the Efficient Market Hypothesis (EMH), the Rational Expectations Hypothesis (REH) and Real Business Cycle Theory (RBCT). In truth, these were no more than impressively marketed theories whose mathematical complexity succeeded for too long in hiding their feebleness.

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society
by Will Hutton
Published 30 Sep 2010

But the main gains from trading come from the transfer of wealth to the smart traders from the less astute who trade with them out of institutional needs or outright stupidity.’ Finance – along with the law and piracy – has always been a route to great wealth, a classic rent-seeking occupation. Today, it is even more so. In their defence, bankers and financiers usually point to ‘financial innovation’ as an attribute that society should desire and value, but their arguments are hamstrung by their own astonishing inability to distinguish between innovation that is economically and socially useful and that which is not. For example, James Kwak argues it was this blindness that lay behind the crisis in so-called ‘sub-prime’ mortgages – financing offered to ‘sub-prime’ borrowers.

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For example, James Kwak argues it was this blindness that lay behind the crisis in so-called ‘sub-prime’ mortgages – financing offered to ‘sub-prime’ borrowers. The bankers boasted that they were promoting home-ownership, but they were not. They were actually promoting home-buyership, which the buyers, with low or sometimes zero incomes, could not sustain – a socially toxic financial innovation. Other innovations that allegedly better managed risk or liquidity turned out to be illusory, as I discuss in Chapters 6 and 7. Meanwhile, other, more mundane innovations – like cashpoint machines and credit cards – have proved a great deal more useful, but banks have muddied their benefits by charging excessively for them.

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Then there is the three-masted sailing ship, which allowed large vessels to sail close to the wind, permitted the Portuguese and then their European imitators to sail around the world. Without this GPT, there would have been no circumnavigation of the globe; no discovery of the Americas, leading to new centres of power and productive capacity; no European colonisation; no long-distance sea trade; no rich European merchant class; no consequent financial innovations, such as joint stock companies and marine insurance, to deal with the risk and uncertainty of long voyages; and less possibility of the principles of magnetism being understood. Similarly, in the nineteenth century, the railway was much more than just a transport technology. It transformed companies, creating both mass consumption and mass production.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey
Published 12 Oct 2017

We will not concern ourselves here with this part of the story, except for acknowledging that it is a big part of the story and that it is partly traceable to state action. The other big component of financialization has been an explosion in household credit, an explosion made possible by the financial innovation known as securitization. Between 1980 and 2007, total household credit soared from 48 percent of GDP to 99 percent, with the sharpest increases occurring during the housing bubble. Residential mortgages dominate household credit, which also includes credit cards, student loans, and other consumer borrowing.

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As of 2001, private label issuers still held only about 10 percent of the market; by 2006, their market share had jumped to almost 40 percent.10 The place where the competitive field was most open was at the bottom of the market—namely, low-quality or “subprime” mortgages with high loan-to-value ratios (i.e., low down payments) and low or no documentation of borrower income. The development of new financial products, a process once proudly called “financial innovation,” further expanded the market for mortgage-backed securities and the demand for more underlying mortgages to be issued. In a beguiling bit of alchemy, low-quality mortgages could be transformed into AAA securities by slicing pools of mortgages into “tranches” so that the senior-most slices are the last to absorb any default losses.

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In a beguiling bit of alchemy, low-quality mortgages could be transformed into AAA securities by slicing pools of mortgages into “tranches” so that the senior-most slices are the last to absorb any default losses. This alchemy could then be embellished with “synthetic” securities comprising tranches of tranches. Other derivatives, like credit default swaps, appeared to spread risk even more widely, fueling demand for even more expansion of mortgage credit. Egged on by the combination of financial innovation and expectations of ever-rising home prices, mortgage lending exploded and underwriting standards collapsed. Charles Calomiris and Stephen Haber offer a good summary of that collapse: “In 1990 a mortgage applicant needed a 20 percent down payment, a good credit rating, and a stable, verifiable employment and income history in order to obtain a low-risk, 30-year fixed-rate mortgage, but by 2003 she could obtain a high-risk, negatively amortizing adjustable-rate mortgage by offering only a 3 percent down payment and simply stating her income and employment history, with no independent verification.”11 Rarities before the late 1990s, high-risk subprime and Alt-A mortgages went from 8 percent of new mortgage lending in 2001 to 36 percent in 2006.12 For a while, the deterioration in credit standards kept the home price boom going, but eventually the bubble burst, nearly taking the global economy with it.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

To employ all the money they had borrowed, banks had to search out marginal customers and extend themselves into new, riskier areas. As Minsky put it, “[T]he leverage ratio of banks and the import of speculative and Ponzi financing in the economy are two sides of a coin.” Another shortcoming in the traditional view of banking that Minsky highlighted was its failure to take adequate account of financial innovation. “Like all entrepreneurs in a capitalist economy, bankers are aware that innovation assures profits,” Minsky wrote. “Thus, bankers, whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market.” One quick way for a bank to expand its revenues is by extending credit to people and firms that previously it would have turned down for loans because of doubts about their ability to repay.

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In the era when banks ordinarily held on to the loans they issued until they matured, pursuing such a risky lending strategy generally didn’t make sense: the extra income from the new loans wasn’t enough to cover the increased probability of defaults. But, beginning in the 1970s, a series of financial innovations transformed the incentive structure that banks faced. The key development was the rise of “securitization.” In 1970, the Government National Mortgage Association (Ginnie Mae), one of three government-sponsored agencies that guarantee certain types of home loans—the other two are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac)—issued a new type of bond known as a residential mortgage-backed security (RMBS).

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Thus conceived, the so-called shadow banking system would grow to elephantine proportions while remaining largely beyond the purview of regulators, bank stockholders, and journalists. Minsky didn’t realize the full implications of securitization—nobody did—but he was one of the few economists to draw attention to it. After his death in 1996, some of his colleagues in the small but dedicated post-Keynesian school pursued his interest in financial innovation. In his 2002 book, Financial Markets, Money and the Real World, Paul Davidson, of the University of Tennessee, pointed out that almost half the loans that U.S. banks initiated in 2001 had subsequently been transferred to nonbank entities, mostly through securitization. “The downside aspect of this shift in the source of bank profits from interest earnings to originating and servicing fees is that bank loan officers do not worry as much about the creditworthiness of borrowers as long as there is a strong market for these loans,” Davidson wrote.

When the Money Runs Out: The End of Western Affluence
by Stephen D. King
Published 17 Jun 2013

With world trade and international financial relationships nurtured by newly created international institutions, the protectionism and isolationism of the interwar years became but a distant memory: economic activity in the industrialized world thus began to flourish thanks to the unleashing of huge trade multipliers, with exports from Japan to the US, for example, rising at an annual rate of approaching 20 per cent throughout the 1950s and 1960s. Financial innovations that had first appeared in the 1920s – most obviously, the arrival of consumer credit – began to spread far and wide, allowing consumers to spend today and pay tomorrow. US household debt rose from less than 40 per cent of household income at the beginning of the 1950s to almost 140 per cent of household income before the onset of the financial crisis.

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This difficulty must fall somewhere and must necessarily be severely felt by a large portion of mankind.2 As it turned out, Malthus wrote his Essay at just the wrong time. The nineteenth century witnessed the arrival of the Industrial Revolution, an extraordinary leap forward in economic and financial affairs. New steam-related technologies emerged to deliver enormous productivity gains. Financial innovations – the growth of the joint-stock company, the development of banks and other financial institutions – allowed savings to be channelled more effectively into the new investment opportunities. Back-breaking work slowly disappeared, the children of labourers – on the land and in the factories – became the aspirational middle classes and per capita incomes went through the roof: between 1820 and 1900, the incomes of British citizens rose 167 per cent.

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Underneath all this, however, was a key assumption, namely that the ultimate ‘real’ assets underpinning all of this paper wealth – in the main, US housing – were actually worth something. Specifically, the belief was that US housing would never fall in value: after all, it had never done so since the Second World War, so there was, apparently, little reason to think that a sudden decline was imminent. Yet, as a consequence of financial innovation, combined with political momentum in favour of a wider property-owning democracy, the nature of the US housing market was changing: borrowers were becoming increasingly ‘subprime’ and, thus, were slowly but surely becoming a bigger credit risk. Yet, with the system slicing and dicing credit risk into so many tiny parts, it was difficult for any one observer to spot the risk to the system as a whole.

Rethinking the Economics of Land and Housing
by Josh Ryan-Collins , Toby Lloyd and Laurie Macfarlane
Published 28 Feb 2017

Residential mortgage-backed security (RMBS) – A type of asset-backed security that is secured by a collection of domestic mortgages. Section 106 – A section of the Town and Country Planning Act 1990 which allowed local planning authorities to enter into legally binding agreements with developers, with the latter having to provide certain public benefits as part of the development. Securitisation – A financial innovation undertaken by banks involving the pooling together and repackaging a number of illiquid loans – loans that cannot easily be sold or exchanged for cash – and issuing tradable debt securities against these loans that are sold to investors. These securities are repaid as the underlying loans are repaid.

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(Feldstein, 2008) The lower rate of defaults of securitised products in Europe compared with the US may be a reflection of underlying legal differences in mortgage loans between the two countries, as well as differences in securitisation practice. 5.5 Macroeconomic effects of the liberalisation of mortgage credit The above historical review has shown how, since the 1970s, land has become ‘financialised’, as the deregulation of the financial system and financial innovation allowed for the emergence of repeated property credit booms and busts. In this section we turn to some of the important effects of mortgage credit liberalisation on the wider economy. The liberalisation of mortgage credit has revolutionised the relationship between land values, house prices and the wider economy in the UK.

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Many advanced economies enjoyed an unprecedented period of steady growth coupled with low inflation from the 1990s and up to the crisis – described as the ‘Great Moderation’ – that may have reassured central banks that policy was working (Bezemer and Grydaki, 2014). Mervyn King described the 1990s as the ‘NICE’ decade – a period of ‘non-inflationary, consistent expansion’ (King, 2003, p. 3). In the 2000s, financial innovations, including RMBS, were seen as spreading risk rather than amplifying it. The build-up of mortgage debt smoothed the business cycle but encouraged excessive leverage in both the banking and household sector which eventually resulted in fragilities that led to financial collapse (Barwell and Burrows, 2011).

Stress Test: Reflections on Financial Crises
by Timothy F. Geithner
Published 11 May 2014

In fact, economists were starting to debate whether America’s long stretch of stability constituted a new normal, a Great Moderation, a quasi-permanent era of resilience to shocks. There was growing confidence that derivatives and other financial innovations designed to hedge and distribute risk—along with better monetary policy to respond to downturns and better technology to smooth out inventory cycles—had made devastating crises a thing of the past. I did not share that confidence. I had no particular knowledge or insight into whether the new financial innovations were stabilizing or destabilizing, but I was reflexively skeptical of excess conviction in any form, especially excess optimism. My dominant professional experiences had involved financial failures.

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And working for Secretary Rubin surely affected my view of Wall Street competence, because he was as competent as anyone I knew. I did come of age professionally at a time when financial innovation and the freer flow of capital across borders were widely seen as good things. As a young international negotiator, I pushed for open markets for the U.S. financial industry, even though I sometimes had misgivings that we were pushing too hard. I greatly admired Rubin, Summers, and Greenspan, and I shared their general approval of markets and financial innovation. But the common broad-brush caricature of that trio as unswerving free-market ideologues is unfair. For example, during the Clinton years, they all pushed for stricter regulation of the mortgage giants Fannie Mae and Freddie Mac, the “government-sponsored enterprises” (GSEs) that were exploiting their implicit federal backstop to load up on low-priced leverage.

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I had seen during the emerging-market crises of the previous decade how long periods of stability and growth could breed instability and disaster. Confidence had always been an evanescent thing, and in this new age of mobile capital, trauma in one part of the world or one corner of the financial system could spread quickly. I didn’t see how a few years of calm or some clever financial innovations would cure the basic human tendency toward mania and self-delusion. History suggests that financial crises are usually preceded by proclamations that crises are a thing of the past. In my very first public speech at the New York Fed in March 2004, I tried to push back against complacency, telling a room full of bankers that the wonders of the new financial world would not necessarily prevent catastrophic failures of major institutions, and should not inspire delusions of safety on Wall Street.

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism
by Kevin Phillips
Published 31 Mar 2008

Mohamed El-Erian, president of the Harvard Management Company, observed in 2007 that “Over the past two years, markets have developed powerful liquidity factories . . . as more investors have embraced debt in an attempt to increase the impact of their investments.” He cited hedge funds and private equity firms. Bond manager Bill Gross reminded clients that much as circa 1950 economics texts had described how money deposited at a local bank could be multiplied five- or sixfold by the operations of the banking system, latter-day financial innovators had done an “end run” around the banks: “Derivatives and structures with three- and four-letter abbreviations—CDOs, CLOs, ABCP, CPDOs, SIVs (the world awaits investment banking’s next creation: IOU?)—can now take a ‘depositor’s’ dollar and multiply it ten or twenty times” (see pages 108-111).

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ONE Introduction The Panic of August We are living through the first crisis of our brave new world of securitised financial markets. It is too early to tell how economically important this upheaval will prove. But nobody can doubt its significance for the financial system. Its origins lie with credit expansion and financial innovation in the U.S. itself. It cannot be blamed on “crony capitalism” in peripheral economies, but rather on irresponsibility in the core of the world economy. —Martin Wolf, Financial Times, September 2007 The “crack cocaine” of our generation appears to be debt. We just can’t seem to get enough of it.

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It is the thesis of this book that far-reaching economic and political events and consequences began to unfold in midsummer’s melee—developments that at least in part followed the direction that many specialists had foreseen—regarding U.S. housing prices, credit-bubble risk, the instability of so many financial innovations never crisis-tested, the ever-more-apparent inadequacy of global oil production, the related vulnerability of the dollar, and, behind it all, the false assurance of American “imperial” hubris. The administration of George W. Bush, rarely known for strategic grasp, miscued again in the early days of the crisis.

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy
by Iain Martin
Published 11 Sep 2013

But while there are certainly people in this story and in the wider world of banking for whom avarice seems to have been the main motivation, greed on its own is an insufficient explanation for why the blow-up of the Royal Bank of Scotland was quite so spectacular. Says a senior figure in the City who came to know Goodwin: ‘Fred was building a monument and he was bloody proud of it.’ In making his monument he was building on foundations laid hundreds of years before by men who were financial innovators and patriots. Those who cared about the Royal Bank could point to an exceptional heritage and claim plausibly that it was no ordinary company, not some here today gone tomorrow firm willing to be treated as a chattel by asset-stripping foreigners. Its very history seemed to endow it with a special status.

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His purchase, on behalf of the French government, of the Mississippi Company in Louisiana was designed to boost trade. It was inspired in part by the Company of Scotland and the mania for joint stock companies and trading in shares. Law fled France once his bubble burst. In Scotland too, periodically, restraint would also vanish in a miasma of financial innovation and greed. The Ayr Bank had liabilities of more than £1m and crashed spectacularly in 1772, stalling the Scottish economy for a while and ruining many farmers and merchants. Established just three years previously, with the aristocracy of Ayrshire and surrounding counties heavily invested, the Ayr Bank had expanded too fast, made too many loans and became overextended.

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He received an honorary knighthood from the Queen for his ‘outstanding contribution to global economic stability’. ‘If risk is properly dispersed, shocks to the overall economic system will be better absorbed and less likely to create cascading failures that could threaten financial stability,’ he said in 2002.15 The financial innovation of recent years was, he declared, on the whole an immensely positive development because it diluted risks so that they were much more widely dispersed. This was exactly what some banks, growing in size, wanted to hear. Goodness, the complex new products they were experimenting with to expand their activities might actually make the world a safer place.

Borrow: The American Way of Debt
by Louis Hyman
Published 24 Jan 2012

Bank of America, in particular, had a long history of consumer finance across California and easily transitioned into this new form of lending. In September 1967, for instance, 58 percent of all credit card debt was in the California Federal Reserve district. New York, that long-standing bastion of financial innovation, had only 13 percent of the balances.10 Bank of America (BofA) launched BankAmericard in 1959. It was a disaster. It grew too quickly, and its explosion meant that good as well as bad credit risks received cards. There was widespread fraud. Bank of America, confident in the program’s promise, kept up despite losses and by 1961 was able to run it profitably, proving the viability of bank credit cards.11 Regional banks looked to the BofA as a model for their programs.

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The percentage of households with credit cards rose from 35 percent in 1980 to 65 percent in 1991.9 These new borrowers were poorer and riskier than any before, but credit card companies had, so they believed, figured out a way to handle all the risk. They also believed they had found a nearly endless source of capital. Though the credit departments of department stores of the 1950s and ’60s had collapsed under their scarcity of capital, credit card and mortgage companies of the 1970s and ’80s faced no such obstacle because of a financial innovation that underpinned this debt expansion. Securitization had come to the credit card and, through its ability to repackage risk, facilitated this new group of high-risk borrowers. After John and Priscilla Myers moved into their split-level in 1984, they might have watched a shopping channel on their newly installed cable television.

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Over the 1960s and ’70s, City National became one of the leading credit card processors, offering its services to other banks, credit unions, and even finance companies. By 1977, it handled 33 million transactions annually—90 percent of which were on behalf of other banks.10 Its actual banking assets remained small, but it became a hotbed of financial innovation, always at the edge of new technologies such as point-of-sale machines, ATMS, and electronic banking. For years Banc One had offered credit cards to traditional upper-middle-class borrowers. The profits of their credit cards in the early 1980s emboldened lenders like Banc One to push into new markets such as television shopping.

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It
by Ian Goldin and Mike Mariathasan
Published 15 Mar 2014

First, the global financial crisis that followed the failure of Lehman Brothers in 2008 constitutes the first truly global manifestation of systemic risk that we see as characterizing the twenty-first century. Although many blame the bursting of the real estate bubble for starting the crisis, few have examined how economic integration and financial innovation in a deregulated environment created a financial network that was inherently vulnerable to systemic risk. Our second reason for choosing the financial sphere for our first analytical chapter is the stunning pace of innovation and technological advancement in this sector, which makes the financial system an incubator of globalization.

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For example, it has been argued that markets for securities might become fragile if investors were to demand safe assets but neglect certain tail risks.26 Such a situation closely resembles that in the period between 2003 and 2007, when large numbers of new mortgage-backed securities were issued that investors perceived as safe. It has also been shown that heterogeneous expectations and adaptive behavior can lead to a situation in which more hedging instruments can destabilize markets.27 A similar motive emerges with respect to financial innovation, which typically increases the part of portfolio variance that is due to speculation when traders do not share the same assumptions about the evolution of markets.28 All of these findings rely on models that deviate from the traditional mantra of maintaining full rationality where all agents have perfect knowledge about the economy and each other.

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Matthew Jarzemsky, 2012, “‘Fat-Finger’ Error Caused Oil-Stock Price Swings,” Wall Street Journal, 19 September, accessed 21 January 2013, http://blogs.wsj.com/marketbeat/2012/09/19/fat-finger-error-caused-oil-stock-price-swings/?KEYWORDS=Oilwell+Varco. 16. Lawrence J. White, 1997, “Technological Change, Financial Innovation, and Financial Regulation in the U.S.: The Challenges for Public Policy,” presentation at the Conference on Performance of Financial Institutions, Wharton Financial Institutions Center, University of Pennsylvania, Philadelphia, May 8–10, 24. 17. Ibid. 18. Charles Roxburgh, Susan Lund, and John Piotrowski, 2011, Updated Research: Mapping Global Capital Markets (New York: McKinsey), August, 2, accessed 21 January 2013, http://www.mckinsey.com/insights/mgi/research/financial_markets/mapping_global_capital_markets_2011. 19.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them
by Nouriel Roubini
Published 17 Oct 2022

Taking note, every major central bank has begun to explore the potential for central bank digital currencies (CBDC), a course with significant opportunities and some pitfalls. All these financial innovations and other changes in financial markets lead to serious questions about the stability of the system in the face of megathreats. How much more unconventional will monetary policies become? What are the potential dire consequences of these experiments? Will fiat currencies survive as resilient stores of value, units of account, and mediums of exchange, or will policy actions debase them and financial innovation displace them? Will financial crises become more frequent and virulent? Will monetary unions such as the eurozone foster prosperity or eventual collapse?

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Chapter 5 The Coming Great Stagflation Fears of economic misery conjure the Great Depression for most people. We teeter now on a different precipice: not depression, but stagflation. Recall the 1970s, a decade that featured bubbles, busts, an end to the global gold exchange standard, devaluation of the dollar, mounting debt, risky financial innovation, monetary and fiscal experimentation, and oil supply shocks driven by geopolitical shocks. It all culminated in double-digit inflation, stubborn unemployment, and persistent recession. That is the corrosive condition known as stagflation, or stagnation with inflation. As economic headaches go, the seventies checked nearly every box.

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Data are still coming in. We can point now to tentative conclusions, but we absolutely must figure out the future of money, finance, and reserve currencies, stable or unstable as they may be. Two or three stumbles could trigger economic shocks that would quickly spiral out of control. If monetary and financial innovation leads to chaos and instability rather than a more stable monetary and financial system, we will indeed enter megathreat territory. The ice has never looked thinner to seasoned observers like Peter R. Fisher, a former senior official in the US Treasury and the New York Federal Reserve. “I feel as anxious today as I’ve ever felt about the financial world,” Fisher told the Frontline podcast in November 2021.4 “The Fed has been pumping up asset prices in a way that is creating a bit of an illusion.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

Today, however, the situation is rather different. Virtually all parts of the real economy are dependent to some degree upon the financial markets, and most important, the conditions of creditworthiness. Progress in Managing Cyclical Crises 223 There is a little irony to the effects of financial innovation. Financial innovation, of which securitization is a part, serves to socialize risk. It spreads risk from the balance sheets of a few to the balance sheets of many. In this regard, financial innovation on the whole has been a positive force; it has been the force behind vigorous insurance markets and higher loan volumes.

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Of course, because of financial innovation, the answer was that many more people had exposure to the risk who were otherwise far removed from the original lending apparatus: banks, foreign governments, municipalities, pensions, individuals, and other institutions. They all had to endure the financial shock at once because of this common source of risk. Financial innovation, for all the good it normally does, had now created a situation not unlike the outbreak of a deadly virus: at first, nobody was quite sure who may have contracted the virus, so agents tried to avoid contact with one another by ceasing to further interlink their balance sheets through the credit market.

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Quigen Liu, “䆎Ё೑সҷଚϮǃ催߽䌋䌘ᴀ㒘㒛Ёⱘÿড়䌘ÿϢÿড়ӭ’” [Joint-stock partnerships in business and usury capital organization in ancient China], Hebei Academic Journal (Hebei University), no. 5 (1994): 86–91. Valerie Hansen and Ana Mata-Fink, “Records from a Seventh-Century Pawnshop in China,” in The Origins of Value: The Financial Innovations That Created Modern Capital Markets, eds. William N. Goetzmann and K. Geert Rouwenhorst (Oxford: Oxford University Press, 2005), 54–58; Homer and Sylla, History of Interest Rates, 614. Hansen and Mata-Fink, “Records from a Pawnshop,” 58–59. Michael T. Skully, “The Development of the Pawnshop Industry in East Asia,” in Financial Landscapes Reconstructed: The Fine Art of Mapping Development, eds.

Economics Rules: The Rights and Wrongs of the Dismal Science
by Dani Rodrik
Published 12 Oct 2015

With a few, but notable, exceptions, such as the future Nobel Prize winner Robert Shiller and the future governor of India’s Central Bank and Chicago economist Raghu Rajan, economists overlooked the extent of problems in housing and finance. Shiller had long argued that asset prices were excessively volatile and had focused on a bubble in housing prices.5 Rajan had fretted about the downside of what was then praised as “financial innovation” and warned as early as 2005 that bankers were taking excessive risks, earning a rebuke from Larry Summers, then president of Harvard, as a “Luddite.”6 That economists were mostly blind-sided by the crisis is undeniable. Many interpreted this as evidence of a fundamental breakdown in economics.

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Markets became, in effect, the engine of social progress. They would not only mediate efficiently between savers and investors; they would also distribute risk to those most able to bear it and provide access to credit for previously excluded households, such as those with limited means or no credit history. Through financial innovation, portfolio holders could eke out the maximum return while taking on the least amount of risk. Moreover, markets came to be viewed not only as inherently efficient and stable, but also as self-disciplining. If big banks and speculators engaged in shenanigans, markets would discover and punish them.

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Such thinking by economists had legitimized and enabled a great wave of financial deregulation that set the stage for the crisis. And it didn’t hurt that these views were shared by some of the top economists in government, such as Larry Summers and Alan Greenspan. In sum, economists (and those who listened to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation improves the risk-return trade-off, self-regulation works best, and government intervention is ineffective and harmful. They forgot about the other models. There was too much Fama, too little Shiller. The economics of the profession may have been fine, but evidently there was trouble with its psychology and sociology.

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A)
by Scott McCleskey
Published 10 Mar 2011

See Office of Information and Regulatory Affairs (OIRA) over-the-counter market, 39, 71, 168 P Parmalat, 84 Petrou, Karen, 43 Plan B, 10, 20, 22, 30, 81, 144 point-in-time ratings, 96 political capture, 104 privacy laws, 134–35, 137, 141 private equity funds, 105, 180 E1BINDEX 06/16/2010 194 11:28:9 n Page 194 Index R Regan administration, xv regulation and innovation about, 41–44 conclusions, 45 credit default swaps (CDSs), 42–44 financial innovation and risk management, 42 financial innovation pushes boundary of complexity further, 43 financial regulators and regulatory lag on innovations, 43 internal risk controls, 44 legislation to reform markets after near-collapse of financial system, 41 market complexity, 44 mortgage-backed securities, 42 policy implications, 44 regulation could stifle all innovation, 42 residential mortgage-backed securities, 44 transparency as regulatory tool, 44 regulation of free markets about, xv–xvi Bernie Madoff scandal, xxi Commodities Future Trading Commission and transparency to credit derivatives market, xvi conclusion, xx–xxi credit rating agencies and subprime-loan pools, xvii–xix, 88, 93 credit rating agencies diluted meaning of AAA, xxi Efficient Market Theory, xix market collapse is 2008, xx markets, inefficiencies and imbalances of distorted, xvii market self-regulation, xix–xx perfect markets regulate themselves, xx philosophy to math, the shift from, xvii–xix regulation, ideological legitimacy of, xv regulation is not separate from market, xv regulation vs. justice, xx regulation vs. retribution, xx self interest and free trade, xvii selfish interest drives irresponsible, inordinate risk-taking and fraud, xxi Smith, Adam, xvi–xvii subprime mortgages, xxi transparency and market self-regulation, xix regulations are there other ways to achieve the same aim?

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Rather than diluting risk, securitization concentrated the risk into mortgage backed securities that then infected the entire financial system as they were sold to financial institutions and investors everywhere. Some have argued that securitization is a product we would have been better off without. This brings us in the next chapter to the question of whether regulation should act as the gatekeeper to financial innovation. C05 06/16/2010 11:17:40 Page 41 5 CHAPTER FIVE Should Regulation Stifle Innovation? A C O M M O N C O M PL A IN T A B O U T proposed regulations is that they would have the consequence, unintended or otherwise, of ‘‘stifling’’ innovation in the financial services industry—the creation and growth of new financial products.

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It was no surprise, then, that the charge would arise with respect to major pieces of legislation aimed at reforming the markets in the wake of the near-collapse of the financial system. In the U.S. market, the idea of stifling innovation is akin to censorship in the arts—by limiting creativity you limit genius and progress. The notion that financial innovation is at the heart of economic growth is so deep-seated among free marketers that it has become nearly unchallengeable. And it is true, up to a point. But while the logic of expanding the frontier of financial engineering is compelling on the surface, the financial crisis has challenged the underlying assumption that all innovation is good.

The Cost of Inequality: Why Economic Equality Is Essential for Recovery
by Stewart Lansley
Published 19 Jan 2012

Across the globe, regulators, politicians and financiers had come round to the view that, after a shaky decade and a half, the market model had finally triumphed. According to Kenneth Rogoff, chief economist at the IMF from 2001 to 2003, ‘the policy community has developed a smug belief that enhanced macroeconomic stability at the national level combined with continuing financial innovation at the international level have obviated any need to tinker with the (international financial) system’.206 The prophets of market ideology made grand claims for their beliefs. The medicine of the markets had at last overturned the failings of post-war welfare capitalism. The rise of finance to a more central place in the economy had lowered financial risk.

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As David Moss described it, ‘The rise of these massive [American banking] institutions represented a profound change in our financial system and a powerful new source of systemic risk.’251 Far from improving the efficiency with which resources were allocated, as banking executives liked to claim, ballooning levels of liquidity, fed by more and more complex forms of financial innovation, merely fuelled a series of unsustainable financial and asset bubbles. While it was the role of government to put a cap on risk, a fourth mechanism then came into play. In more equal societies, the financial sector is more circumscribed and much less able to capture regulators and politicians.

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But gradually other interest groups with legitimate claims for a share of the influence, from trades unions and town halls to manufacturers and small businesses, became at best marginalised, at worst, ignored. The only voices that came to count, it seemed, were those coming from corporate boardrooms and City offices. The Treasury itself became little more than an outpost of the City. A torrent of City lobbying secured Treasury support for the idea that financial innovation was good for the economy, that the City was a key generator of social value and should be the central engine of economic growth. As Manchester University academics have described it, ‘The new Treasury doctrine is the impossibility of upsetting the City.’260 The forces that drove economic instability were not external shocks that could not have been foreseen, but ones implicit to the great shifts in policy direction instituted from the late 1970s.

23 Things They Don't Tell You About Capitalism
by Ha-Joon Chang
Published 1 Jan 2010

There are some service activities, such as banking, which have greater scope for productivity increase than other services. However, as revealed by the 2008 financial crisis, much of the productivity growth in those activities was due not to a real rise in their productivity (e.g., reduction in trading costs due to better computers) but to financial innovations that obscured (rather than genuinely reduced) the riskiness of financial assets, thereby allowing the financial sector to grow at an unsustainably rapid rate (see Thing 22). To sum up, the fall in the share of manufacturing in total output in the rich countries is not largely due to the fall in (relative) demand for manufactured goods, as many people think.

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However, Simon’s theory shows that many regulations work not because the government necessarily knows better than the regulated (although it may sometimes do – see Thing 12) but because they limit the complexity of the activities, which enables the regulated to make better decisions. The 2008 world financial crisis illustrates this point very nicely. In the run-up to the crisis, our ability to make good decisions was simply overwhelmed because things were allowed to evolve in too complex a manner through financial innovation. So many complex financial instruments were created that even financial experts themselves did not fully understand them, unless they specialized in them – and sometimes not even then (see Thing 22). The top decision-makers of the financial firms certainly did not grasp much of what their businesses were doing.

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However, we should not rush into restraining financial markets simply because of this once-in-a-century financial crisis that no one could have predicted, however big it may be, as the efficiency of its financial market is the key to a nation’s prosperity. What they don’t tell you The problem with financial markets today is that they are too efficient. With recent financial ‘innovations’ that have produced so many new financial instruments, the financial sector has become more efficient in generating profits for itself in the short run. However, as seen in the 2008 global crisis, these new financial assets have made the overall economy, as well as the financial system itself, much more unstable.

Restarting the Future: How to Fix the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 4 Apr 2022

They seem to be responsible for a slowdown in business investment as a first-order effect. The second-order implications are, we believe, even more troubling. The difficulty of financing modern business investment appears to be limiting equality of opportunity, reducing innovation, encouraging potentially unsound forms of financial innovation, and increasing risk in the banking system. The net result is a lower-growth economy that is more prone to financial crises. We think of advanced economies as sophisticated and clever places, but at an individual level the opposite is often true. A hunter-gatherer in the State of Nature needs to be smart, savvy, and constantly alert, but modern life is full of rules and systems that allow people to carry out important tasks thoughtlessly, carelessly, and even stupidly—and everything will still work.

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The Friedman Doctrine, named after a 1970 essay by Milton Friedman that argues “the business of business is business” rather than serving the needs of stakeholders, began growing in popularity in the 1980s and now represents the mainstream position on corporate governance, especially in the United States and Britain. The epitome of value-based management is activist hedge funds, which buy into the stocks of companies with unimpressive share price performance and try to force management to improve it. Value-based management is another example of a financial innovation that cuts down on cognitive load. It replaces a messy, embedded, judgment-based system with a simpler set of rules and a more clearly divided set of responsibilities. It is an innovation that harnesses a powerful force: if managers own stock or options, then shareholders can rely on the managers’ self-interest to motivate them to improve company performance: the interests of the principal and agent are better aligned.

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Others involve lightly regulated equity (such as equity crowdfunding) or unsecured bonds (such as minibonds). And still others involve using cryptocurrencies to finance new businesses or new organisational structures like special purpose acquisition companies. Some of these products look like unimpeachably valuable financial innovations, connecting willing providers of capital to willing firms. Others look more questionable. Some critics have claimed that some consumer bonds and crowdfunding issues offer bad risk–return trade-offs to investors too naive to know better. In addition, some crowdfunding leverages investors’ goodwill towards a particular type of business to provide capital at a submarket rate.

Butler to the World: How Britain Became the Servant of Tycoons, Tax Dodgers, Kleptocrats and Criminals
by Oliver Bullough
Published 10 Mar 2022

If a London bank would pay more than the US government permitted, bring it on; if not, buyer beware. This was an early example of what has come to be called ‘financial innovation’, a term for the bewildering techniques developed in the City and on Wall Street to move money in more profitable ways. We tend to reflexively approve of innovation, since it brings us new medicines, machines and ideas. It is worth pausing, however, to ask what exactly financial innovation actually is. Unlike the kinds of innovation that have brought us the iPhone or antibiotics, a new financial technique doesn’t carve a new niche out of the natural world or find a cleverer way to exploit existing materials.

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Boiled down to its essentials, finance always does the same thing: it takes money from people who have it but don’t need it, and gives it to people who need it and don’t have it, and earns a fee for its trouble. Governments try to regulate this process, to direct the funding towards the causes they care about, and financial institutions try to avoid those rules so they can direct the funding towards the causes that will pay the largest fees. That is financial innovation, which is simply an artificial way of exploiting artificial rules governing the artificial thing we call money, and normally involves finding mismatches between regulations in different countries. It’s clever, but it adds nothing to the sum of human achievement. And that’s how it worked with Eurodollars.

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INDEX A accountants regulators 185, 186 Suspicious Activity Reports 189 Acheson, Dean 58 Action Fraud 214, 218 Aliyev family 191–3 Aliyev, Nurali 199, 200, 202 Aliyev, Rakhat 198, 199, 200 Allard Prize 145 Aloi, Tony 229–30, 231 Altman, Oscar 52 Angola 155 Anguilla 198, 235, 243 Apple 223 Archbishop of Canterbury’s Faculty Office 186–8 Asquith, Lord Julian 234 Asquith, Raymond 159, 169, 173 Assad, Hafez al- 159 Assange, Julian 171 Assets Recovery Agency 204 Association of Accounting Technicians 135 Australia 19 visas 244 Austria 166, 170, 171 autonomy 31, 38, 57 Azerbaijan 191–3, 197 B BAE Systems 85–9 Ballester, Freddie 98–100, 104, 105, 114, 121 Bank of England 36–40 cultural uniformity 45–6 Eurodollars 45–7, 49, 50–1, 54–5, 58–9, 232 governors 32, 33, 36 and Midland Bank 42 Suez Crisis 44 banknotes 8 banks and money laundering 194 Suspicious Activity Reports 189–90 Baring, Evelyn, first Earl of Cromer 16, 32 Baring, George Rowland Stanley, third Earl of Cromer 32–3, 36, 39, 55, 232 Baring, Rowland, second Earl of Cromer 32 Barings Bank 57 Barker, Alison 183 Barkshire, John 34, 40, 229–31 BBC, Orwell statue 8 Bean, David 88 Bell, Geoffrey 45–6, 51 Bell, Lord 171 Bercow, John 163 Berry, Elspeth 138, 146–7 Betfair 115 Better Regulation Task Force 111 betting see gambling Betting and Gambling Council 119 Billion Bright Trading Limited 213 billionaires, and COVID-19 pandemic 58 Birnbaum, Eugene 54 Blair, Tony 109 blockchain 242, 243 Boeing 170 BOLSA (Bank of London and South America) 50, 57 Bolton, George 43, 50 Bossano, Joe 95, 96–7, 123, 124 Bretton Woods 30, 31 Brexit 12–13, 140, 142, 144, 248, 249 Bridgen, Andrew 140–1 British empire 18–20, 58 and City of London 30 British Private Equity and Venture Capital Association 142 British Syrian Society 159–60 British Ukrainian Society (BUS) 159–60, 172–3, 174 British Virgin Islands (BVI) 68–71, 74, 79–81, 91, 227 Firtash 161 Khassenov 209 shell companies 72–9, 81–5, 86–9, 90, 123, 124, 235, 238, 239, 240 Brompton Road Tube station 151–3, 164–5, 170, 172, 174, 176–7 Brown, Gordon 132 Brown, John 108, 109–10 Budapest Project 167–8, 169 Burma 20 Butler, Paul 71, 72–3, 75–6 butlers 4–6 Jeeves 6–7, 10–11 C Callaghan, James 36 Cambridge University 160–1, 162, 163, 169, 171–2, 237 Canada 19 visas 244 capital flows 31–2, 50, 51, 55, 59 Eurodollars 40–2, 44–57, 58–9, 232, 238 funk money 64–6, 78–9, 82, 208 capitalism 35 Cassidy, Rebecca 111–12, 113, 116–17, 119 Cayman Islands 233–5, 241, 243, 247 Ceylon 20 Chambers, Ajit 149–50, 151, 152, 153, 165, 176–7 Chandler, Victor 104–7, 108 Child & Child 192–3 China British investment in 19 cultural revolution 66 and Hong Kong 78, 82 money laundering 1–4 socialism 123 and Tanganyika 63 Church of England 186–8 Churchill, Winston 7, 21 City of London 29–30, 32, 57–8 Big Bang 56 cultural uniformity 32–4, 35–6 deregulation 56–7 Eurodollars 44–57, 58–9 financial innovation 48 and funk money 64, 65 Midland Bank 40–2 money laundering 182, 184 offshore finance 249 regulation 39–40 Scottish limited partnerships 137–9, 141, 142–3 and Suez Crisis 42–4 Clarke, Kenneth 240 Clinton, Bill 109, 121, 236 Cobbold, Cameron 33 Colston, Edward 7 Columbus, Christopher 69 communism 35 Tanganyika 62, 63 Coomes, Mr and Mrs 101 Coral 103, 107 Countrywide 193 COVID-19 pandemic 13, 15 and billionaires 58 Crimea 164 Cromer, Evelyn Baring, first Earl of 16, 32 Cromer, George Rowland Stanley Baring, third Earl of 32–3, 36, 39, 55, 232 Cromer, Rowland Baring, second Earl of 32 Crown Prosecution Service 204, 218 Cuban Missile Crisis 52 Curaçao 71–2, 198 Cyprus 19 Firtash 166 D Daily Telegraph 108 Danske Bank 144–5 Davies, Philip 115 defence against money laundering (DAML) SARs 195 Department for Culture, Media and Sport 110 Deripaska, Oleg 226 DF Foundation 161 dirty money see money laundering dollars 41–2, 44, 48 see also Eurodollars double taxation treaties 72, 75 E The Economist 151–2 Eden, Anthony 23, 24, 26 Edmonds, Tamlyn 219–20, 221, 222 Edmonds Marshall McMahon (EMM) 219–20, 225 Egypt, Suez Crisis 15–19, 20–7 Eisenhower, President 24 ELMER 195, 205 Envers 87, 88 estate agents 193 Suspicious Activity Reports 189 Eurobonds 45 Eurodollars 40–2, 44–57, 58–9, 232, 238 exchange rates 31–2, 38 F Fawcett, Millicent 8 FBI Budapest Project 168 Firtash 168–71, 200, 202 Federal Reserve 46, 48 Eurodollars 51, 53–4 Financial Action Task Force (FATF) 182–4 Financial Conduct Authority (FCA) 183, 185, 186 financial innovation 48 see also Eurodollars Financial Intelligence Unit (FIU) 190, 195 Financial Security Index (Tax Justice Network) 235 Financial Times 38 Firtash, Dmitry 157–66, 171–6, 177, 181, 219, 227 Brompton Road Tube station 164–5, 170, 172, 174, 177 Cambridge University 160–1, 162, 163, 169, 171–2, 237 FBI case 168–71, 200, 202 Firtash, Lada 163, 172 fixed-odds betting terminals (FOBTs) 112 Fonseca, Ramon 78 Foreign Affairs Committee 166, 179–81, 248 Fortuna United LP 128–30 France Eurodollars 49 overseas territories 243 prosecutions 216 Suez Crisis 23–4 Franco, Francisco 93, 95 Franklin, Professor Simon 161 Fraser, Ian 128–9 Freud, Jane McAdam 165 Fry, Richard 29–30, 57 funk money 64–6 Hong Kong 78–9, 82 Kazakhstan 208 G gambling 10, 102–5 deregulation 107–14, 236–7 gambling addiction 111, 116– 20, 121, 124 Gibraltar 98–102, 104, 105–7, 113, 114–17, 122–4, 242–3 Gambling Commission 118, 119, 185 Gambling with Lives 118 Gamesys 120 Garcia, Joe 122–3 Gartcosh 125–6 gas 153–5, 168 Gazprom 153, 155, 156, 157, 158, 161 Gazprombank 161 Germany, Eurodollars 49 ghost stations 149–53, 164–5 Gibraltar 91–8, 114–15, 122, 227, 235, 238, 241–3, 245 blockchain 242, 243 gambling 10, 98–102, 104, 105–7, 109, 110, 113, 114– 17, 119–20, 121–4, 242–3, 245 smuggling 92, 97 Global Witness 157–8, 169, 196, 198, 200, 205 golden visas 244–5 Goodman, Helen 172–3 Granovski, Vladimir 159 Greece financial crisis 31 visas 244 Green, Jeremy 57 Greenspan, Alan 46 Grogan, John 159, 160 Group DF 161 Grundy, Milton 233–4, 235–6 Guernsey 235 Guyana 19 H Hambro, Charles 49 Hambros Bank 57, 65 Hayek, Friedrich 35 Hayward, Mark 188 hedge funds Cayman Islands 234 and limited partnerships 138 Her Majesty’s Revenue and Customs 185 Herald 125, 147 Hitler, Adolf 21 Hodge, Margaret 239–40, 241, 247–8 Hodivala, Jama 223 Home Office, UWOs 197 Hong Kong and British Virgin Islands 78–9, 82 Khassenov 208–9, 211–12, 213, 220 Horrocks, Ian 210, 214–15, 218, 219, 220, 221 HSBC 189, 193 Hungary 166, 167–8, 169 Hunte, Lewis 76, 77 Huntington, Earl of 107 I India 19, 20 Institute of Chartered Accountants 194–5 Intelligence and Security Committee 175–6, 201 international business companies (IBCs) 77–8, 83–4 International Centres Forum 90 Ireland betting duty 106 petrol taxes 47, 54, 56, 236 Isle of Man 235, 243 Isola, Albert 241–2 Israel, Suez Crisis 23–4 Italy, visas 244 J Jaspert, Augustus James Ulysses 80–1 Jeeves, Reginald 6–7, 9, 11, 59, 101, 110–11, 232, 246 Jersey 235 Johnson, Boris Brexit campaign 225 London Underground 149–50, 151 and Russian influence in UK 175 Jowell, Tessa 110 Justice Committee 225 K Kazakhstan 198–201, 207, 208 Kennedy, John F. 63 Kenya 19, 61 Keynes, John Maynard 35 Khassenov, Argyn 207–15 private prosecution 215, 219– 23, 226 Kleinwort Benson 64 Kroll 126, 127, 128 Kulich, Aleksandr 209, 213 Kulich, Andrey 208–9, 210, 211, 213–14, 220, 221–3, 226 L Ladbrokes 103, 104, 107, 115 Laird, Judge Francis 220, 221 Lancet 124 Lasser Bros 229 Law Commission 190–1 Law Society of Scotland 136–7 lawyers 11–12 private prosecutions 223–4 regulators 185 Suspicious Activity Reports 188–9 Leask, David 125–6, 128, 131, 134, 135, 136, 144, 147 Lebedev, Yevgeny 248 legislative reform orders (LROs) 139–40 Levin, Carl 247 Li Ka-Shing 78–9 limited partnerships (LPs) 138, 143–4, 146–7 Northern Ireland 146 private fund limited partnerships 142, 145–6 Scottish limited partnerships 128–45, 227, 245, 246 London Kleptocracy Tours 162–3, 196 London Underground 149–51 Brompton Road Tube station 151–3, 164–5, 170, 172, 174, 176–7 M McMafia 179, 196, 214 Macmillan, Harold 20, 23 Malaya 19, 20 Malone, Jeff 17–18, 25–6, 34–5 Malta 242 Marx, Karl 35 May, Theresa 182 Mercantile House 229 merchant banks 36, 44 Metcalf, David 244 Micky Blue Eyes 230–1 Midland Bank 40–2, 44, 45, 51–2, 57 Migration Advisory Committee 244 Mills, Nigel 203 Ministry of Defence Brompton Road Tube station 152, 164–5, 172 Gibraltar 94–5, 114–15 Mishcon de Reya 199, 201 Mitchell, Andrew 239–40, 241, 247–8 Mkapa, Benjamin 89 Mogilevich, Semyon 157, 158, 167–8, 169 Moldova 126–7, 128, 129, 131, 132, 142, 143, 147 money laundering 1–4, 9, 179– 82, 196–8, 203–6, 246 Aliyev family 191–3 Cayman Islands 247 Financial Action Task Force 182–4 limited partnerships 128–45, 146, 245 Mogilevich 167–8 Nazarbayeva case 198–203 Panama Papers 191–2 UK regulation 184–96 Moneyland (Bullough) 30, 45, 130 Montado, Ernest 94, 95 Montegriffo, Peter 114 Moscow Narodny Bank (MNB) 41 Mossack Fonseca 78, 83, 191 Mullin, Roger 132, 134–6, 138– 42, 143–4 Mynors, Humphrey 39 N Nasser, Gamal Abdel 22, 23 National Crime Agency (NCA) 197, 201–4, 241 and Khassenov 214 Nazarbayeva case 199–201, 202, 203 National Lottery 103–4 Nazarbayev family 208 Nazarbayev, Nursultan 198, 201 Nazarbayeva, Dariga 198, 199, 200, 202 Ndibe, Okey 10 Netherlands 190 New Deal 31, 56 New York 229–31 New York Times 53, 89–90 New Zealand 19 Nigeria 155 healthcare 9–10 Nixon, Richard 55 Noriega, Manuel 78 Northern Ireland limited partnerships 146 petrol taxes 47, 54, 56, 236 notaries 187–8 Noyes, James 120 Nurse, Gwyneth 141–2, 143 Nyerere, Julius 62–3, 85, 89–90 O O’Brien, Leslie 54 Ogle, Vanessa 64 online gambling 114–17, 119– 20, 124 Only When I Larf 212 Orange Revolution 155–7, 159 Orban, Victor 169 Ormerod, David 191 Orwell, George 8 overseas territories 235, 239–41, 243, 245 see also British Virgin Islands; Cayman Islands; Gibraltar Owens, Lynne 201 P Panama 78, 82, 240 Panama Papers 83, 191–2 partnerships 132 see also limited partnerships Party Gaming 114, 121–2 Patel, Priti 181 Peel, Robert 7–8 Petfre 120 Philip, Prince 61, 161, 162, 169 police 216–17 and financial crime 218, 219– 20, 246 funding 224 Gartcosh 125–6 Hungary 168 and Khassenov 214, 219–20 and London Kleptocracy Tours 163 and private sector 202 and Scottish limited partnerships 126, 144, 146, 246 Portugal, visas 244 private equity, and limited partnerships 137–9, 142 private fund limited partnerships (PFLPs) 142, 145–6 private prosecutions 215–19, 223–8 Khassenov 215, 219–23, 226 problem gamblers 111, 116–20, 121, 124 Pryor, Henry 195 Public Accounts Committee 248 Purplebricks 193 Putin, Vladimir 155 and Ukraine 156, 164, 166 R Racing Post 106 Rankin, Ian 125, 134 Reagan, Ronald 56 Red Diamond Trading Limited 86, 88 Regulatory Reform Committee 139, 141–2 Rhodes, Cecil 7, 18–19 Riegels, Colin 71 Riegels, Michael in British Virgin Islands 68, 71, 73–4, 75, 76, 77, 78, 82, 83–5 in Tanzania 61–2, 63, 65–7, 85 and Tanzania radar contract 89 Riegels, Norma 67, 68, 73, 75, 84–5 Risby, Lord 159–60, 163–4, 173 Rock Turf Accountants 98, 100–1 RosUkrEnergo (RUE) 155, 156–7, 158, 169 Rothermere, Viscount 32 Royal Navy, Gibraltar 92, 93, 94–5 Russia money in UK 175–6, 179, 182, 222 organised crime 167 and Ukraine 154, 155, 164 S Saudi Arabia, and BAE Systems 87, 90 Scotland, police force 246 Scotsman 125 Scottish limited partnerships (SLPs) 128–45, 227, 245, 246 Scottish National Party 131–2 Scottish private fund limited partnerships 146 Scottish Property Federation 136, 142 Serious Fraud Office (SFO) 206 and BAE Systems 88–9, 90 Seychelles 128–9 Sharif, Khalid Mohammed 192–3 Shaw, David 84 shell companies 72–84, 86–9, 90, 123, 124, 130–1, 196, 237, 239–40 Scottish limited partnerships 128–32 Shetler-Jones, Robert 159, 171, 175 Shonfield, Andrew 37–9, 59 Shor, Ilan 127, 128 Short, Clare 86 Skripal, Sergei 179 Smith, Richard 128–9, 133–4 Solicitors Regulation Authority (SRA) 192–3 Soviet Union 153 see also Kazakhstan; Russia; Ukraine Spain, and Gibraltar 93, 95, 97–8, 124 Spink, Mike 162, 165 sportsbook.com 114 Spring, Richard (Lord Risby) 159–60, 163–4, 173 Standard Chartered 209, 210, 211–12, 220 Stark, Pete 75 sterling 30, 42–3 The Sting 212 Stoutt, Lavity 75, 76 Suez Crisis 15–19, 20–7, 34–5, 42–4, 58, 249 Suez Veterans’ Association (SVA) 15, 16–18, 22, 24, 25–6 suicides, and gambling addiction 118 surveillance capitalism 117 Suspicious Activity Reports (SARs) 2–4, 187–91, 192, 193, 194 ELMER 195, 205 Switzerland Eurodollars 49 Firtash 166 T Tanchel, Vivienne 225–6 Tanganyika 61–3 Tanzania 63, 65–7, 85 corruption 89–90 radar contract 85–9 tax havens 72, 84 see also British Virgin Islands; Cayman Islands; Curaçao Tax Justice Network (TJN) 235 taxation treaties 71–2, 75 Thank You, Jeeves (Wodehouse) 110–11 Thatcher, Margaret 56 Thompson, Mark 181, 206 The Times 131, 140 Tortola 69 Trainspotting 128 Transparency International 185, 194, 196 Transport for London (TfL) 149 Traynor, Brian 99–100 Treasury and Bank of England 37–8 limited partnerships 136, 139, 141–2, 143 Treaty of Utrecht 93 Tube see London Underground Turpin, Neil 187, 188 U UK Finance 190 Ukraine 131, 170, 174–5 British Ukrainian Society 159–60 corruption 155, 164 gas 153–5, 156–7, 158, 168 Orange Revolution 155–7, 159 unexplained wealth orders (UWOs) 196–202, 203–4 United Nations General Assembly, Suez Crisis 43 United States and BAE Systems 87 and British Virgin Islands 78, 82 and Cayman Islands 247 Eurodollars 51, 52, 55 financial deregulation 56–7 and Firtash 166, 168–71, 176, 177 gambling 102, 120–2, 236 and Gibraltar 96 and money laundering 189, 191, 193 New Deal 31, 56 offshore business 71–2, 73, 74–5 and organised crime 166–71 and Panama 78 Regulation Q 41, 56 Suez Crisis 24–5, 43–4 and Tanganyika 63 and Ukraine 164 visas 244 United States Virgin Islands (USVI) 70 V Venezuela 155 Vicious Games (Cassidy) 111– 12, 113, 116–17, 119 Virgin Islands 69, 70 see also British Virgin Islands visas 244–5 Vithlani, Shailesh 85–8 Volcker, Paul 46 W Walker, David 50–1 Wall Street Journal 168–9 Wallace, Ben 194, 196 Washington, George 63 welfare state 31, 56 Westwood, Neville 71, 73 Wheatley, Sowande 240 whistle-blowers 246–7 Whittingdale, John 173–4 Wilkinson, Howard 145 William Hill 103, 107, 108, 115 Without the Option (Wodehouse) 6–7 Wodehouse, P.

The Physics of Wall Street: A Brief History of Predicting the Unpredictable
by James Owen Weatherall
Published 2 Jan 2013

Still, it’s not as though market crashes or speculative bubbles are a new phenomenon — after all, the largest market collapse in modern times occurred in 1929, long before derivatives became important. What’s more, for the past forty years, essentially the period over which financial innovation has been most important, the financial services sector has buoyed Western economies. In the United States, for instance, the financial services industry has grown six times faster than the economy as a whole. This rapid growth has occurred at the same time that other industries, such as manufacturing, have either declined or grown much more slowly. Financial innovation, like other technological innovation, has thus played a major role in buoying the U.S. and other Western economies over the past three decades.

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The final part of the book will show how models have continued to evolve outside of mainstream finance, as physicists have imported newer and more sophisticated ideas to finance and economics, identifying the problems with our current models and figuring out how to improve them. Black was instrumental in producing a new status quo on Wall Street, but his ideas were just the beginning of the era of financial innovation. 6 The Prediction Company WHEN THE SANTA FE TRAIL was first pioneered in 1822, it stretched from the westernmost edge of the United States — Independence, Missouri — through Comanche territory and into the then-Mexican state of Nuevo Mexico. From there it passed over the high plains of what is now eastern Colorado and then took the Glorieta Pass through the Sangre de Cristo Mountains, the southernmost subrange of the Rockies.

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But the process that I have described in this book is the best way we have ever come up with for addressing our biggest challenges. We shouldn’t abandon it here. There’s a third criticism of financial modeling that one sometimes hears. This one is a little deeper. It has been made most influentially by Warren Buffett, who has famously warned of “geeks bearing formulas.” This view has it that financial innovation is a dangerous thing because it makes financial markets inherently riskier. The excesses of the 2000s that led to the recent crash were enabled by physicists and mathematicians who didn’t understand the real-world consequences of what they were doing, and by profit-hungry banks that let these quants run wild.

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony
by David G. W. Birch
Published 14 Apr 2020

Chapter 7 Private digital currency Digital currencies issued by Big Tech firms would undoubtedly have some advantages relative to fiat currencies. — Gita Gopinath, IMF chief economist, Financial Times (7 January 2020) It is now a quarter of a century since a pamphlet I picked up at the Centre for the Study of Financial Innovation (CSFI) changed my view on the provision of currencies. It was provocatively titled ‘The IBM dollar’ and was written by the noted lateral thinker Edward de Bono. His thesis on the future of money, later reprinted in David Boyle’s superb collection The Money Changers (de Bono 2002), was that technological developments in computers, communications and cryptography (my paraphrasing) would reduce the cost of creating money to the point where it would make sense for private organizations to make their own.

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However accurate this scenario may or may not be, the virtual money debate is no longer about e-money versus digital cash, hash tables versus smart chips or proof of work versus proof of stake. It is all about global power. As a historian, it is natural for Ferguson to remind us that the countries which have forged the path in financial innovation have led in every other way, too (Ferguson 2019). He cites Renaissance Italy, the Spanish Empire, the Dutch Republic and the British Empire, all the way through to post-1930s America. He goes on to note that once a country loses that financial leadership, it loses its place as a global hegemon.

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Glossary ACU: alternative currency unit AI: artificial intelligence AML: Anti-Money Laundering AMLDV: Anti-Money Laundering Directive API: application programming interface BIS: Bank for International Settlements BRI: Belt and Road Initiative (China) BSA: Bank Secrecy Act (United States) CBDC: central bank digital currency CDD: customer due diligence CDP: collateralized debt position CFA: Franc of the Financial Community of Africa CFSI: Centre for the Study of Financial Innovation CHIPS: Clearing House Interbank Payment System CPS: Crime Pays System CTF: counter-terrorist financing DCA: digital currency area DCEP: Digital Currency/Electronic Payment DeFi: decentralized finance ECB: European Central Bank ECU: European Currency Unit ELMI: Electronic Money Institution ESL: enterprise shared ledger FinCEN: Financial Crimes Enforcement Network FINMA: Financial Market Supervisory Authority ICO: initial coin offering IMF: International Monetary Fund IMFS: International Monetary and Financial System JPMC: JPMorgan Chase SHC: synthetic hegemonic currency HMRC: Her Majesty’s Revenue and Customs KYC: Know Your Customer KYZ: Known-bY-Zuck NFC: near-field communication NCSC: National Cyber Security Centre NIST: National Institute of Standards and Technology OFAC: Office of Foreign Assets Control PBoC: People’s Bank of China PEPSI: Pan-European Payment System Initiative PIN: personal identification number Pseudonym: a persistent alias to an identity PQC: post-quantum cryptography SDR: special drawing right SEC: Securities and Exchange Commission SGA (Saga): a partially collateralized stablecoin SHC: synthetic hegemonic currency Sibos: The annual SWIFT banking conference SIM: subscriber identification module, the chip inside a digital mobile phone that links the device to a user SMS: short message service (the GSM text message service) SWIFT: Society for Worldwide Interbank Financial Telecommunications USSD: Unstructured Supplementary Service Data Bibliography Adrian, T., and T.

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America)
by Louis Hyman
Published 3 Jan 2011

For Great Society policymakers and promoters, the problems of inequality were framed as a problem of credit access rather than job access. More credit, and not higher wages, would be enough to solve the problems of America’s cities. Toward that end, federal policy fashioned the financial innovation that made possible America’s debt explosion—the asset-backed security—that expanded well beyond its original purpose. Solving the urban crisis would require solving the housing crisis. But to fix the housing crisis, radical financial innovation would have to occur to maintain the capital flows into mortgages. As the urban riots became the urban crisis, however, mortgage markets had a crisis of their own. American mortgage markets had abruptly frozen—the so-called Credit Crunch of 1966—as investors rapidly withdrew their deposits from banks and put their money in the securities markets.

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As automobile production exploded in the 1920s, so too did the need for automobile financing for both consumers and dealers alike.61 The capital requirements of more expensive, mass-produced goods led retailers and entrepreneurs to explore new options in consumer finance and, in the process of meeting their own immediate needs, created a novel financial institution that was neither an informal lender nor a commercial bank—the finance company. Modern, pervasive installment credit found its institutional bedrock in the financial innovation of the early automobile industry. The financial infrastructure of installment credit grew out of the very requirements of heavy capital manufacturing for mass production, but once created, finance companies found other markets outside of the automobile industry. They turned to less capital-intensive retail sectors, which enabled the expansion of installment credit throughout the American economy.

…

Moving beyond the resale networks of the mid-twentieth century, new ways to sell debt anonymously on national and even international capital markets inaugurated a new relationship between consumer credit and investor capital. In an insecure world, unsecured debt came of age. Mortgage-backed Securities and the Great Society The financial innovation that ultimately allowed capital markets to directly fund any form of debt began with the federal government, not business. In the late 1960s, the federal government sought a way to 224 CHAPTER SEVEN channel capital into America’s rioting cities. Capital would make possible the Great Society ambitions of saving America’s cities and the newly rising pension funds needed to invest.

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future
by Paul Krugman
Published 28 Jan 2020

Florida’s Local Government Investment Pool, which acts as a bank for the state’s school districts, was supposed to be risk-free; it wasn’t (and now schools don’t have the money to pay teachers). How did things get so opaque? The answer is “financial innovation”—two words that should, from now on, strike fear into investors’ hearts. O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends. But the innovations of recent years—the alphabet soup of C.D.O.s and S.I.V.s, R.M.B.S., and A.B.C.P.

…

By 2005 or so I and many (but not enough) others had grown concerned about what looked like an immense housing bubble. It seemed obvious that bad things would happen when that bubble burst. As it turned out, it was far worse than almost anyone realized. Years of financial deregulation and financial “innovation” (which often amounted to finding ways to evade regulation) had created a banking system that was, in a modern, high-tech way, just as vulnerable to panics as the banking system on the eve of the Great Depression. And the panic came. The columns in this section describe the growing fear I and others felt that something was going terribly wrong, and the wall of misconception we had to climb when the things we feared might happen, did.

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We know, in particular, that Alan Greenspan brushed aside warnings from Edward Gramlich, who was a member of the Federal Reserve Board, about a potential subprime crisis. And free-market orthodoxy dies hard. Just a few weeks ago Henry Paulson, the Treasury secretary, admitted to Fortune magazine that financial innovation got ahead of regulation—but added, “I don’t think we’d want it the other way around.” Is that your final answer, Mr. Secretary? Now, Mr. Paulson’s new proposal to help borrowers renegotiate their mortgage payments and avoid foreclosure sounds in principle like a good idea (although we have yet to hear any details).

Capitalism Without Capital: The Rise of the Intangible Economy
by Jonathan Haskel and Stian Westlake
Published 7 Nov 2017

This is not inherently impossible, but it is certainly not what most supporters of government lending programs propose, expect, or support. The second way to address the problem is by devising new types of lending. Financial innovation has been something of a dirty word since the financial crisis—former Federal Reserve Chairman Paul Volcker went so far as to say the only beneficial financial innovation of the decades prior to the financial crisis was the automated teller machine—but, in fact, lenders have over the years come up with novel ways to use at least some types of intangible assets as security. One recent working paper (Mann 2014) suggests that 16 percent of patents registered at the US Patent and Trademark Office have been pledged as collateral at some point.

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A couple of studies have looked at the impact of US banking deregulation on investment in innovation: one showed that the deregulation of interstate banking saw an increase in lending to innovating companies (based on the number and quality of their patents), implying that greater competition pushes banks to be more willing to lend to businesses making (at least one type of) intangible investment (Amore, Schneider, and Zaldokas 2012). There are also a growing number of specific financial innovations focused on lending against intangibles. When David Bowie died in 2016, there were plenty of tributes to his musical innovations, but rather fewer to the contribution he made to intangible finance by raising a $55 million bond against his future royalties. The governments of Singapore and Malaysia (working together with UK organizations such as the Intellectual Property Office), for example, have begun programs to subsidize or guarantee bank loans against intellectual property, in the hope that these subsidies will increase the availability of intangible-backed loans.

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We might speculate that the reason VCs can seem like a clique is not because the venture capitalists are unusually bad or cliquish people, but because the underlying model of the VC business thrives on dense social networks, which will always tend to gravitate to cliquishness in the absence of countervailing effort, and perhaps even then. What Venture Capital Can’t Do So there is a strong case for saying that venture capital is well suited to investing in intangible-rich businesses and should be rightly held up as a positive type of financial innovation. But VC is not a panacea for business investment, and on its own VC will struggle to solve the problem of how to finance the capital development of an intangible economy. There are three problems that face VC firms and VC-backed companies, some of which arise from the nature of intangible investments themselves.

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History
by Alexis Stenfors
Published 14 May 2017

In September 2009, Adair Turner, the chairman of the FSA at the time, delivered a speech in London that went on to be cited frequently in the British media.16 He was critical towards the City and the role banks had played in the run-up to the financial crisis. ‘Not all financial innovation is valuable, not all trading plays a useful role, and a bigger financial system is not necessarily a better one,’ he said. ‘There are good reasons for believing that the financial industry, more than any other sector of the economy, has an ability to generate unnecessary demand for its own services – that more trading and more financial innovation can under some circumstances create harmful volatility against which customers have to hedge, creating more demand for trading liquidity and innovative products.’

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From a personal perspective, the global financial crisis also acted as a trigger point in revealing the wider implications of LIBOR. The STIRT desks at the banks had not been particularly glamorous before 2007. We traded a range of instruments that were important, but not interesting and complex enough to represent the forefront of financial innovation. The turnover in OISs, FRAs, IRSs (interest rate swaps), CRSs (cross-currency basis swaps) and FX swaps, among others, was enormous. However, options, long-end interest rate swaps and structured products enjoyed considerably more prestige. The crisis turned everything upside down. Suddenly, the spotlight fell on us.

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Opponents raised concerns surrounding the possible inflationary effects caused by excessive lending by banks, the weakening role of the central bank in controlling the monetary system,9 the difficulties for smaller banks of competing with the new ‘universal’ banks, and the Eurocurrency market’s destabilising impact on exchange rates. Some argued that the market had created a set of semi-independent international interest rates over which no single country or institution had control.10 Questions were also asked about the vulnerability of domestic banks as a result of the opaqueness of the new financial innovations and whether and how they should be regulated. In fact, the arguments used back then were surprisingly similar to some of those used during and after the financial crisis of 2007–08. Banks were seen as having lent recklessly. Banks had created financial instruments that hardly anybody understood.

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again
by Atif Mian and Amir Sufi
Published 11 May 2014

In contrast, if the investors are equity investors, meaning that they share the profits of the business, they will have a strong incentive to detect theft. Debt convinces investors that they don’t have to worry about fraud because their senior claim on the asset protects them. In a world of neglected risks, financial innovation should be viewed with some degree of skepticism. If investors systematically ignore certain outcomes, financial innovation may just be secret code for bankers trying to fool investors into buying securities that look safe but are actually extremely vulnerable. * * * In a cruel twist of irony, Kindleberger passed away in 2003 at the age of ninety-two, just as the mortgage-credit boom was starting.

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In our research, we directly linked these two patterns by showing that the rate of securitization was much stronger in low credit-quality zip codes compared to high credit-quality zip codes. Securitization transformed global capital inflows into a wild expansion of mortgage credit to marginal borrowers. But it was only possible if the lenders were sure their funds were protected. Manufacturing Safe Debt A cynical view of financial innovation sees it merely as bankers fooling investors into buying very risky securities that are passed off as safe. There is substantial research demonstrating that this is exactly what private-label securitization was during the housing boom. Josh Coval, Jakub Jurek, and Erik Stafford show that when investors buying mortgage-backed securities made small mistakes in assessing their vulnerability, securitization enabled banks to amplify the effect of these mistakes.

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This can be confirmed by noting that 100 × $125,000 = $12.5 million. 10. See, for example, Edward Glaeser, Joshua Gottlieb, and Joseph Gyourko, “Can Cheap Credit Explain the Housing Boom?” (working paper no. 16230, NBER, July 2010). 11. Nicola Gennaioli, Andrei Shleifer, and Robert Vishny, “Neglected Risks, Financial Innovation, and Financial Fragility,” Journal of Financial Economics 104 (2012): 452–68. 12. Solow, foreword to Manias, Panics and Crashes. 13. Jon Hilsenrath, “A 91-Year-Old Who Foresaw Selloff is ‘Dubious’ of Stock-Market Rally,” Wall Street Journal, July 25, 2002. Chapter Nine 1.

Profiting Without Producing: How Finance Exploits Us All
by Costas Lapavitsas
Published 14 Aug 2013

The bulk of Minsky’s output is concerned with developing his path-breaking treatment of financial instability that postulated destabilizing balance sheet behaviour by large capitalist enterprises over the cycle as optimism became increasingly unbridled and led to excessive debt accumulation.49 Minsky’s empirical knowledge of the US financial system also made him aware of the risks of financial innovation, including securitization. However, there is little discussion in his work of the long-term balance between finance and the rest of the economy. To be precise, there are brief references to ‘money manager capitalism’ in some very late work.50 Nonetheless, the characteristic features and broader implications of ‘money manager capitalism’ were not examined in depth by Minsky.

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Note that Robin Blackburn was one of the first Anglo-Saxon Marxists systematically to deploy the term financialization and to examine it in relation to the rise of pension funds. For Blackburn, functioning capitalists have come to terms with institutional investors accepting shareholder value. Power has been devolved to the ‘shady’ areas of the financial system, partly through financial innovation. See Robin Blackburn, Banking on Death, or Investing in Life: The History and Future of Pensions, London: Verso, 2002; and Robin Blackburn, ‘Finance and the Fourth Dimension’, New Left Review 39, 2006, pp. 39–70. 63 Paul Langley, The Everyday Life of Global Finance, Oxford: Oxford University Press, 2008; Paul Langley, ‘Financialization and the Consumer Credit Boom’, Competition and Change 12:2, pp. 133–47, 2008. 64 Randy Martin, Financialization of Daily Life, Philadelphia: Temple University Press, 2002; Michael Pryke and Paul du Gay, ‘Take an Issue: Cultural Economy and Finance’, Economy and Society 36:3, 2007. 65 Manuel B.

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When the bubble of 1999–2000 burst, the US Federal Reserve drastically loosened monetary policy. Official interest rates were kept at close to 1 percent during 2002–2003, promoting extraordinary activity in the US housing market. Moreover, private US banks took advantage of low interest rates to engage in financial innovation – above all, in securitization – thus feeding financial expansion. The real estate bubble in the US effectively came to an end in 2006 but booming conditions in the financial markets lasted until the summer of 2007. The bubble kept getting bigger after 2004, despite US interest rates beginning to rise, as the US received capital inflows from developing countries expanding dollar reserves.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

In The Origins of Value: The Financial Innovations That Created Modern Capital Markets, ed. William N. Goetzmann and K. Geert Rouwenhorst, 225–38. Oxford, UK: Oxford University Press. Narron, James, and David Skeie. 2013. “Crisis Chronicles: Tulip Mania, 1633–37.” Ritholz, September 22, https://ritholtz.com/2013/09/crisis-chronicles-tulip-mania-1633-37/. Nath, Virendra. 2015. Out of Aces? Fifty Steps to Financial Acuity. Bloomington, IN: Xlibris. Neal, Larry. 2005. “Venture Shares and the Dutch East India Company.” In The Origins of Value: The Financial Innovations That Created Modern Capital Markets, ed.

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They may reflect increasingly profitable opportunities. Were the rapid stock price increase and subsequent collapse of the Mississippi Company and the South Sea Company true bubbles? Again, Garber disputes this characterization, as does the historian Francois Velde.31 According to Garber, Law had a plan to revitalize the French economy through financial innovation and reform. As Law gained more power, his chances of economic success grew. The decline in the Mississippi Company share price coincided with the ascension of his enemies, who were bent on dismantling the company. Velde contrasts the common English name of the episode, the Mississippi Bubble, with the original French name, le système de Law.

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So, what I often say is get a financial adviser and get one that good people recommend. They generally are helpful.”100 The future of investments may look different from the past as new financial instruments and products are developed. “I think also that the Perfect Portfolio would involve some financial innovations. For example, I have been advocating for years now that governments issue GDP [gross domestic product]-linked bonds,”101 an idea that he has had since the early 1990s. Shiller elaborated, “The simplest GDP-linked bond—my work with Mark Kamstra at York University—is what we call a trill. It’s just a share in GDP.

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy
by Mehrsa Baradaran
Published 5 Oct 2015

The act, although anticompetitive and even inefficient, was a follow-through of Brandeis and Roosevelt’s desire to keep banks from getting too powerful. The act reinforced the long-held policy of the government stepping in to halt the natural movement of banks toward conglomeration. These hard-line rules stifled financial innovation and banking efficiency, but that was a tradeoff policymakers were willing to make to protect community banks and the public from too much bank power. Because the economy was booming, neither the government nor the banking industry agitated for a change of policy. That is, until the banking world was transformed in the 1970s.

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After years of operating a safe and boring model dictated by the regulations imposed during the New Deal, the model began to fall apart. Unit banking and the restrictions and prohibitions of the fifty years following the Great Depression had allowed banks to profit modestly by keeping their balance sheets focused on deposits and loans. But suddenly, technological advances, financial innovation, capital markets, and commercial paper markets started to offer safe and enticing alternatives to banks. Banks started hemorrhaging customers, a process called disintermediation, which means cutting out the middleman. Deposits went directly to high-yield markets and sidestepped highly regulated banks.99 Concerns about banks’ waning profitability led to growing pressure on the government to deregulate banks and allow them to compete more freely with other institutions.

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Paul Tucker, “Regimes for Handling Bank Failures—Redrawing the Banking Social Contract,” remarks, British Bankers’ Association Annual International Banking Conference “Restoring Confidence—Moving Forward,” London, June 30, 2009, accessed January 18, 2015, www.bis.org/review/r090708d.pdf. 21. Gary Gorton, “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007,” conference, Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference: Financial Innovation and Crisis, May 9, 2009, accessed March 13, 2015, www.frbatlanta.org/news/conferences/09-financial_markets_agenda.cfm. 22. See “Adding Up the Government’s Total Bailout Tab,” New York Times, July 24, 2011, accessed March 13, 2015, www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html?

The Great Divide: Unequal Societies and What We Can Do About Them
by Joseph E. Stiglitz
Published 15 Mar 2015

In some cases, companies were so embarrassed about calling such rewards “performance bonuses” that they felt compelled to change the name to “retention bonuses” (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin. SOME PEOPLE LOOK at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong.

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We could have a much simpler tax system without all the distortions—a society where those who clip coupons for a living pay the same taxes as someone with the same income who works in a factory; where someone who earns his income from saving companies pays the same tax as a doctor who makes the income by saving lives; where someone who earns his income from financial innovations pays the same taxes as a someone who does research to create real innovations that transform our economy and society. We could have a tax system that encourages good things like hard work and thrift and discourages bad things, like rent seeking, gambling, financial speculation, and pollution.

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Does he know that prior to these “reforms,” the U.S. had not had a financial crisis—now a regular occurrence around the world—for a half-century, and that deregulation led to a bloated financial sector that attracted many talented young people who otherwise might have devoted their careers to more productive activities? Their financial innovations made them extremely rich but brought America and the global economy to the brink of ruin. Australia’s public services are the envy of the world. Its health care system delivers better outcomes than that of the U.S., at a fraction of the cost. It has an income-contingent education-loan program that permits borrowers to spread their repayments over more years if necessary, and in which, if their income turns out to be particularly low (perhaps because they chose important but low-paying jobs, say, in education or religion), the government forgives some of the debt.

Derivatives Markets
by David Goldenberg
Published 2 Mar 2016

So no matter what state of the world prevails, you will end up having to buy the underlying commodity for $E. But that is exactly what a long forward contract is; the obligation to buy the underlying commodity for $E, no matter what happens at time T. 11.8 FINANCIAL INNOVATION USING EUROPEAN PUT-CALL PARITY 11.8.1 Generalized Forward Contracts Using these ideas linking forward contracts to European puts and calls, we can do a little financial innovation. When you take a long position in a ‘normal’ forward contract, the forward price must equal Ft,T=erτSt in order to avoid arbitrage. There is no up-front payment required because, at this forward price, the current value of the forward contract to all longs and shorts is zero.

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increment of ABM process 555; shifted arithmetic Brownian motion (ABM) model of prices 541–2; reduced process 570; stochastic differential equations (SDEs) 553, 559, 562–3, 564, 566, 567–8, 570, 571, 583; stochastic integral equations (SIEs) 559, 560, 561, 564, 565–6, 567; stochastic processes 540–1, 543, 562, 587, 588; transition density function for shifted arithmetic Brownian motion 545–6; Wiener measure (and process) 540–1 option sellers 328 option trading strategies 345–67, 415–34; basic (naked) strategies 347–63; ‘calling away’ of stock 422; concept checks: covered call strategies, choice of 426; solution to 434; covered call write, upside potential of 422; solution to 433; cushioning calls 422; In-the-Money covered call writes 421; solution to 433; market for call options, dealing with profit potential and 354; solution to 367; payout present value on longing zero-coupon riskless bond 362; solution to 367; positions taken, definition of risk relative to 427; profit diagram for long call option, working on 418; rationalization of profits, short call positions 357; stock price fluctuations, dealing with 353; solution to 366–7; upside volatility in short positions, dealing with 359; covered call hedging strategy 419–27; economic interpretation of 426–7; covered call writes, types of 420–6; covered calls and protective put strategies 419; diversification, maximum effect of 419–20; Dollar Returns, percentage rates of 366; economic characteristics 358; European Put-Call Parity 416, 417, 418, 419, 426, 429; exercises for learning development of 364–6, 431–3; finite-maturity financial instruments, options as 354; generation of synthetic option strategies from European Put-Call Parity 416–18; In-the-Money covered call writes 421–4; key concepts 364, 431; long a European call option on the underlying 351–5; economic characteristics 353; long a European put option on the underlying 348, 357–9; economic characteristics 358; long a zero-coupon riskless bond and hold to maturity 348, 360–2; economic characteristic 361; long call positions, difference between long underlying positions and 354; long the underlying 347–9; economic characteristics 349; Merck stock price fluctuations 346–7; natural and synthetic strategies 416; natural stock, economic equivalence with synthetic stock 418; Out-of-the-Money covered call writes 424–6; potential price paths 346–7; profit diagrams 346–7; protective put hedging strategy 427–30; economic interpretation of 429–30; insurance, puts as 427–9; puts as insurance 427–9; short a European call option on the underlying 348, 355–7; economic characteristics 357; short a European put option on the underlying 348, 359–60; economic characteristics 360; short a zero-coupon riskless bond and hold to maturity 348, 362–3; economic characteristic 363; short the underlying 348, 349–51; economic characteristics 351; synthetic equivalents on basic (naked) strategies 416–18; synthetic strategies, natural strategies and 416 option valuation: binomial option pricing model (BOPM) 445–8; risk-neutral valuation 624–33; direct valuation by risk-averse investor 626–31; manipulations 624–6; for risk-neutral investors 631–3 options and options scenarios 323–6 Options Clearing Corporation (OCC) 328 options markets 323–44; American options 328; anticipation of selling 339; anticipatory buying 339–40; basic American call (put) option pricing model 332–4; buying back stock 339; CBOE (Chicago Board Options Exchange) 324–5, 334; asked price entries 335, 336; bid entries 335, 336; equity option specifications 343; exchange-traded option contracts 325; last sale entries 335, 336; Merck call options and price quotes 334–7; mini equity option specifications 344; net entries 335, 336; open interest entries 335, 336; volume entries 335, 336; concept checks: individual equity options, product specifications for 326; solution to 342; mini equity options, product specifications for 326; solution to 342; MRK OV-E price quote 337; option positions 331; option sales 332; solution to 342; option’s rights 331; payoff diagram construction 338; put option positions 332; context in study of 326–7; decision-making, option concept in 324; delayed exercise premium 331, 337; European options 328; exercise price 328, 336; exercises for learning development of 341–2; exercising options 328; expiration date 336; expiration month code 336; financial engineering techniques 337–8; immediate exercise value 330; implicit short positions 340; importance of options 323–4; In-the-Money calls 337; insurance features, options and 327; intrinsic value 326, 330, 333, 337; key concepts 341; learning options, framework for 326–7; leverage, options and 327; liquidity option 333; long and short positions, identification of 339–40; long positions 339–40; long vs. short positions 339–40; maturity dates 328; moneyness 329; naked (unhedged) positions 327; non-simultaneous price quote problem 334–6; option buyers 328; option market premiums 328; option sellers 328; options and options scenarios 323–6; Options Clearing Corporation (OCC) 328; options embedded in ordinary securities 324; options in corporate finance 324; payoff and profit diagrams 326, 338; plain vanilla put and call options, definitions and terminology for 327–32; put and call options 323–5, 327, 328, 329, 338; puts and calls, infrastructure for understanding about 337–8; reading option price quotes 334–7; real asset options 324; short positions 339–40; short sales, covering of 339; speculation on option prices 327; standard equity option 336; standard stock option 334; strategic, option-like scenarios 324; strike price 328; strike price code 336; time premium 326, 330–1, 333, 337; underlying assets or scenarios 327, 334; identification of long and short positions in 339–40; see also binomial option pricing model (BOPM); equivalent martingale measures (EMMs); model-based option pricing (MBOP) in real time; rational option pricing (ROP) order execution 125–6; futures contract definition and 126 order submission 125–6 orders, types of 127–34 Out-of-the-Money covered call writes 424–6 over the counter (OTC): markets 12–13, 14, 17 over-the-counter (OTC): bilateral agreements 278 overall profits (and losses) 144, 150, 151, 153, 156, 157 overnight averages 11 par swap rate 294, 301 parameterization 454, 477–8, 502 partial equilibrium (PE) 453; models of, risk-neutral valuation and 614 participants in futures market 122–5 path structures: in binomial process 440–2, 442–4; multi-period BOPM model (N=3) 497; thinking of BOPM in terms of paths 493–9 paying fixed 293; in interest rate derivatives (IRDs) 278–9; and receiving floating in commodity forward contracts 276 payoff and profit: diagrams of 326, 338; difference between 66 payoff position with forward contracts 37 payoff to long forward position in IBM 40 payoff to short forward position in IBM 43 payoffs per share: to naked long forward contract 68–9; to naked long spot position 67, 68–9 perfect negative correlation 166 perfect positive correlation 609–11 performance bonds (margins) 144–5, 148 physical probability: measure of, martingale hypothesis for 530; risk-neutralization of 604 pit trading, order flow process and 136–9 plain vanilla interest-rate swaps 274; dealer intermediated swaps 284–93; non-dealer intermediated swaps 281–4 plain vanilla put and call options, definitions and terminology for 327–32 portfolio price dynamics, replication of 457 portfolio theory, hedging as 165–8 portfolio variance, calculation of 179–81 position accountability 214, 215, 228, 229 preference-free risk-neutral valuation 598, 600 present and future spot prices 20–3 present value (PV): valuation of forward contracts (assets with dividend yield) 94; valuation of forward contracts (assets without dividend yield) 69, 75 price contingent claims with unhedgeable risks 599–601 price paths: ending at specific terminal price, numbers of 442–4; numbers of 440–2 price quotes: in forward markets 9–11; in futures markets 17–19; in spot markets 6–7 pricing a swap 294 pricing by arbitrage and FTAP2 597–8 pricing currency forwards 105 pricing European options under shifted arithmetic Brownian motion (ABM) with no drift 542–51; Bachelier option pricing formula, derivation of 547–51; fundamental theorems of asset pricing (FTAP) 542–3; transition density functions 543–7 pricing foreign exchange forward contracts using no-arbitrage 106–7 pricing mechanism, risk-neutral valuation and 596 pricing options: at expiration (BOPM) 445–6; at time t=0 (BOPM) 446–8; tools for (MBOP) 448–53; relationships between tools 450–3 pricing states 509 pricing zero-coupon, unit discount bonds in continuous time 69–73 primitive Arrow-Debreu (AD) securities, option pricing and 508–14; concept check, pricing ADu(ω) and ADd(ω) 514; exercise 1, pricing B(0,1) 510; exercise 2, pricing ADu(ω) and ADd(ω) 511–14 probability density function 544 profit diagrams 346–7 protection, market orders with 127–9 protective put hedging strategy 427–30; economic interpretation of 429–30; insurance, puts as 427–9 put and call options 323–5, 327, 328, 329, 338; infrastructure for understanding about 337–8 puts as insurance 427–9 quality spreads 299 random variables 536 random walk model of prices 530–1 randomness, state of nature and 23 rate of return of risky asset over small time interval, components of 555–6 rational option pricing (ROP) 369–414; adjusted intrinsic value (AIV) for a European call, definition of 375–6; adjusted time premium (ATP) 397; basic European option pricing model, interpretation of 397–8; certainty equivalent (CE) cash flow 397; concept checks: adjusted intrinsic value (AIV) for calls, calculation of 413; solution to 413; adjusted intrinsic value (AIV) for puts, calculation of 381; solution to 413; directional trades and relative trades, difference between 372; dominance principle and value of European call option 376; solution to 413; exercise price of options, working with 391; forward contracts, overpaying on 403; generalized forward contracts, current value on 404; rational option pricing (ROP) or model-based option pricing (MBOP) 407; short stock position, risk management of 399; solution to 413–14; working from strategies to current costs and back 393; solution to 413; continuation region 385; convexity of option price 406; current costs and related strategies, technique of going back and forth between 393; directional trades 371–2; dominance principle 372, 373; implications of 374–88; equilibrium forward price 402; European Put-Call Parity, financial innovation with 401–5; European Put-Call Parity, implications of 394–400; American option pricing model, analogue for European options 396–8; European call option 394–6; European option pricing model, interpretation of 397–8; European put option 398–9; synthesis of forward contracts from puts and calls 399–400; exercises for learning development of 409–12; financial innovation using European Put-Call Parity 401–5; American Put-Call Parity (no dividends) 403–5; generalized forward contracts 401–3; full replication of European call option (embedded insurance contract) 391–2; generalized forward price 402; key concepts 408–9; LBAC (lower bound for American call option on underlying, no dividends) 374–5; LBACD (lower bound for American call option on underlying, continuous dividends) 383–5; call on underlier with continuous, proportional dividends over life of option 384–5; call on underlier with no dividends over life of option 384; LBAP (lower bound for American put option on underlying, no dividends) 378–80; intrinsic value lower bound for American put, example of 379–80; LBAPD (lower bound for American put option on underlying, continuous dividends) 387–8; LBEC (lower bound for European call option on underlying, no dividends) 375–8; implications of 377–8; LBECD (lower bound for European call option on underlying, continuous dividends) 382–3; LBEP (lower bound for European put option on underlying, no dividends) 380–1; adjusted intrinsic value (AIV) for European put, definition of 380–1; LBEPD (lower bound for European put option on underlying, continuous dividends) 386–7; model-based option pricing (MBOP) 371, 398; model-independent vs. model-based option pricing 370–1; model risk 372; No-Arbitrage in Equilibrium (NAIE) 372, 405–6; partial replication of European call option (embedded forward contract) 388–91; postscript on 405–7; relative pricing trades vs. directional trades 371–2; risk-free arbitrage 373; static replication, principle of 393–4; static replication and European Put-Call Parity (no dividends) 388–94; current costs and related strategies, technique of going back and forth between 393; fully replicating European call option (embedded insurance contract) 391–2; partially replicating European call option (embedded forward contract) 388–91; working backwards from payoffs to costs to derive European Put-Call Parity 393–4; sub-replication 404; super-replication 404; working backwards from payoffs to costs to derive European Put-Call Parity 393–4 raw price change, present value of 243 reading option price quotes 334–7 real asset options 324 realization of daily value 149 realized daily cash flows, creation of 243 receiving floating 293 receiving variable in interest rate derivatives (IRDs) 279–80 recontracting future positions 149, 151 Registered Commodity Representatives (RCRs) 122–3 relative pricing 65–6 relative pricing trades vs. directional trades 371–2 relative risks of hedge portfolio’s return, analysis of 618–24; risk-averse investor in hedge portfolio, role of risk premia for 620–4; risk neutrality in hedge portfolio, initial look at 618–20 replicability: option pricing in continuous time 588; risk-neutral valuation 597–8, 600, 601, 603, 605, 606, 614, 615, 631, 633 replicating portfolio, construction of 478–84; concept check, interpretation of hedge ratio 482; down state, replication in 481; hedge ratio, interpretation of 482–3; replication over period 2 (under scenario 1) 479–82; replication under scenario 2 (over period 2) 484; scenarios 478–9; solving equations for ?

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Directional Trades 11.3 The Dominance Principle 11.4 Implications of the Dominance Principle, ROP for Puts and Calls 11.4.1 Lower Bound for an American Call Option on an Underlying with no Dividends (LBAC) 11.4.2 Lower Bound for a European Call Option on an Underlying with no Dividends (LBEC) 11.4.3 Lower Bound for an American Put Option on an Underlying with no Dividends (LBAP) 11.4.4 Lower Bound for a European Put Option on an Underlying with no Dividends (LBEP) 11.4.5 Lower Bound for a European Call Option on an Underlying with Continuous Dividends (LBECD) 11.4.6 Lower Bound for an American Call Option on an Underlying with Continuous Dividends (LBACD) 11.4.7 Lower Bound for a European Put Option on an Underlying with Continuous Dividends (LBEPD) 11.4.8 Lower Bound for an American Put Option on an Underlying with Continuous Dividends (LBAPD) 11.5 Static Replication and European Put-Call Parity (No Dividends) 11.5.1 Partially Replicating a European Call Option (the Embedded Forward Contract) 11.5.2 Fully Replicating a European Call Option (the Embedded Insurance Contract) 11.5.3 From Strategies to Current Costs and Back 11.5.4 Working Backwards from Payoffs to Costs to Derive European Put-Call Parity 11.6 Basic Implications of European Put-Call Parity 11.6.1 What is a European Call Option? 11.6.2 The Analogue of the Basic American Option Pricing Model for European Options 11.6.3 What is a European Put Option? 11.7 Further Implications of European Put-Call Parity 11.7.1 Synthesizing Forward Contract from Puts and Calls 11.8 Financial Innovation using European Put-Call Parity 11.8.1 Generalized Forward Contracts 11.8.2 American Put-Call Parity (No Dividends) 11.9 Postscript on ROP CHAPTER 12 OPTION TRADING STRATEGIES, PART 2 12.1 Generating Synthetic Option Strategies from European Put-Call Parity 12.2 The Covered Call Hedging Strategy 12.2.1 Three Types Of Covered Call Writes 12.2.2 Economic Interpretation of the Covered Call Strategy 12.3 The Protective Put Hedging Strategy 12.3.1 Puts as Insurance 12.3.2 Economic Interpretation of the Protective Put Strategy CHAPTER 13 MODEL-BASED OPTION PRICING IN DISCRETE TIME, PART 1: THE BINOMIAL OPTION PRICING MODEL (BOPM, N=1) 13.1 The Objective of Model-Based Option Pricing (MBOP) 13.2 The Binomial Option Pricing Model, Basics 13.2.1 Modeling Time in a Discrete Time Framework 13.2.2 Modeling the Underlying Stock Price Uncertainty 13.3 The Binomial Option Pricing Model, Advanced 13.3.1 Path Structure of the Binomial Process, Total Number of Price Paths 13.3.2 Path Structure of the Binomial Process, Total Number of Price Paths Ending at a Specific Terminal Price 13.3.3 Summary of Stock Price Evolution for the N-Period Binomial Process 13.4 Option Valuation for the BOPM (N=1) 13.4.1 Step 1, Pricing the Option at Expiration 13.4.2 Step 2, Pricing the Option Currently (time t=0) 13.5 Modern Tools for Pricing Options 13.5.1 Tool 1, The Principle of No-Arbitrage 13.5.2 Tool 2, Complete Markets or Replicability, and a Rule of Thumb 13.5.3 Tool 3, Dynamic and Static Replication 13.5.4 Relationships between the Three Tools 13.6 Synthesizing a European Call Option 13.6.1 Step 1, Parameterization 13.6.2 Step 2, Defining the Hedge Ratio and the Dollar Bond Position 13.6.3 Step 3, Constructing the Replicating Portfolio 13.6.4 Step 4, Implications of Replication 13.7 Alternative Option Pricing Techniques 13.8 Appendix: Derivation of the BOPM (N=1) as a Risk-Neutral Valuation Relationship CHAPTER 14 OPTION PRICING IN DISCRETE TIME, PART 2: DYNAMIC HEDGING AND THE MULTI-PERIOD BINOMIAL OPTION PRICING MODEL, N>1 14.1 Modeling Time and Uncertainty in the BOPM, N>1 14.1.1 Stock Price Behavior, N=2 14.1.2 Option Price Behavior, N=2 14.2 Hedging a European Call Option, N=2 14.2.1 Step 1, Parameterization 14.2.2 Step 2, Defining the Hedge Ratio and the Dollar Bond Position 14.2.3 Step 3, Constructing the Replicating Portfolio 14.2.4 The Complete Hedging Program for the BOPM, N=2 14.3 Implementation of the BOPM for N=2 14.4 The BOPM, N>1 as a RNVR Formula 14.5 Multi-period BOPM, N>1: A Path Integral Approach 14.5.1 Thinking of the BOPM in Terms of Paths 14.5.2 Proof of the BOPM Model for general N CHAPTER 15 EQUIVALENT MARTINGALE MEASURES: A MODERN APPROACH TO OPTION PRICING 15.1 Primitive Arrow–Debreu Securities and Option Pricing 15.1.1 Exercise 1, Pricing B(0,1) 15.1.2 Exercise 2, Pricing ADu(ω) and ADd(ω) 15.2 Contingent Claim Pricing 15.2.1 Pricing a European Call Option 15.2.2 Pricing any Contingent Claim 15.3 Equivalent Martingale Measures (EMMs) 15.3.1 Introduction and Examples 15.3.2 Definition of a Discrete-Time Martingale 15.4 Martingales and Stock Prices 15.4.1 The Equivalent Martingale Representation of Stock Prices 15.5 The Equivalent Martingale Representation of Option Prices 15.5.1 Discounted Option Prices 15.5.2 Summary of the EMM Approach 15.6 The Efficient Market Hypothesis (EMH), A Guide To Modeling Prices 15.7 Appendix: Essential Martingale Properties CHAPTER 16 OPTION PRICING IN CONTINUOUS TIME 16.1 Arithmetic Brownian Motion (ABM) 16.2 Shifted Arithmetic Brownian Motion 16.3 Pricing European Options under Shifted Arithmetic Brownian Motion with No Drift (Bachelier) 16.3.1 Theory (FTAP1 and FTAP2) 16.3.2 Transition Density Functions 16.3.3 Deriving the Bachelier Option Pricing Formula 16.4 Defining and Pricing a Standard Numeraire 16.5 Geometric Brownian Motion (GBM) 16.5.1 GBM (Discrete Version) 16.5.2 Geometric Brownian Motion (GBM), Continuous Version 16.6 Itô’s Lemma 16.7 Black–Scholes Option Pricing 16.7.1 Reducing GBM to an ABM with Drift 16.7.2 Preliminaries on Generating Unknown Risk-Neutral Transition Density Functions from Known Ones 16.7.3 Black–Scholes Options Pricing from Bachelier 16.7.4 Volatility Estimation in the Black–Scholes Model 16.8 Non-Constant Volatility Models 16.8.1 Empirical Features of Volatility 16.8.2 Economic Reasons for why Volatility is not Constant, the Leverage Effect 16.8.3 Modeling Changing Volatility, the Deterministic Volatility Model 16.8.4 Modeling Changing Volatility, Stochastic Volatility Models 16.9 Why Black–Scholes is Still Important CHAPTER 17 RISK-NEUTRAL VALUATION, EMMS, THE BOPM, AND BLACK–SCHOLES 17.1 Introduction 17.1.1 Preliminaries on FTAP1 and FTAP2 and Navigating the Terminology 17.1.2 Pricing by Arbitrage and the FTAP2 17.1.3 Risk-Neutral Valuation without Consensus and with Consensus 17.1.4 Risk-Neutral Valuation without Consensus, Pricing Contingent Claims with Unhedgeable Risks 17.1.5 Black–Scholes’ Contribution 17.2 Formal Risk-Neutral Valuation without Replication 17.2.1 Constructing EMMs 17.2.2 Interpreting Formal Risk-Neutral Probabilities 17.3 MPRs and EMMs, Another Version of FTAP2 17.4 Complete Risk-Expected Return Analysis of the Riskless Hedge in the (BOPM, N=1) 17.4.1 Volatility of the Hedge Portfolio 17.4.2 Direct Calculation of σS 17.4.3 Direct Calculation of σC 17.4.4 Expected Return of the Hedge Portfolio 17.5 Analysis of the Relative Risks of the Hedge Portfolio’s Return 17.5.1 An Initial Look at Risk Neutrality in the Hedge Portfolio 17.5.2 Role of the Risk Premia for a Risk-Averse Investor in the Hedge Portfolio 17.6 Option Valuation 17.6.1 Some Manipulations 17.6.2 Option Valuation Done Directly by a Risk-Averse Investor 17.6.3 Option Valuation for the Risk-Neutral Investor Index FIGURES 1.1 Canada/US Foreign Exchange Rate 1.2 Intermediation by the Clearing House 1.3 Offsetting Trades 1.4 Gold Fixing Price in London Bullion Market (USD$) 2.1 Graphical Method to Get Hedged Position Profits 2.2 Payoff Per Share to a Long Forward Contract 2.3 Payoff Per Share to a Short Forward Contract 2.4 Profits per bu. for the Unhedged Position 3.1 Profits Per Share to a Naked Long Spot Position 3.2 Payoffs Per Share to a Naked Long Spot Position 3.3 Payoffs (=Profits) Per Share to a Naked Long Forward Position 3.4 Payoffs Per Share to a Naked Long Spot Position and to a Naked Long Forward Position 5.1 Order Flow Process (Pit Trading) 5.2 The Futures Clearing House 5.3 Offsetting Trades 5.4 Overall Profits for Example 2 6.1 Long vs.

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis
by Johan Norberg
Published 14 Sep 2009

How the U.S. central bank (the Fed) and the surpluses of fast-growing emerging economies made money cheaper than ever in the past decade, and why that money ended up in people's homes. Chapter 2: Housing policy. The story of how U.S. politicians-both Democrats and Republicans-worked systematically to increase the share of families who owned their homes, even when that undermined traditional requirements of creditworthiness. Chapter 3: Financial innovations. How to transform big risks into smaller risks by repackaging them, labeling them, and selling them. How regulations and bonuses caused everybody to flock into the market for mortgage-backed securities, and why even cows could have made a fortune from such securities. Chapter 4: The crisis.

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Their point is that nothing is more dangerous than good times because they encourage investors to borrow more and take bigger risks. If things look good, they are going to get worse. "Investors said, `I don't want to be in equities anymore, and I'm not getting any return in my bond positions,"' explains a financier who is the author of many financial innovations: "Two things happened. They took more and more leverage, and they reached for riskier asset classes. Give me yield, give me leverage, give me return."" It's the Deficit, Stupid U.S. households were not alone in opening wide their pocketbooks and bankbooks: The U.S. government did the same.

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See economic crisis (investment bank failure) crisis management, 99-100, 137-38 the great delusion, 100-109 politician and economist exploitation of crisis, 112-18 present form, 151-55 shorting and, 99, 109-12 See also bailouts Cuomo, Andrew, 32, 34-36, 110, 149 Day, Theodore, 31-32 deposit insurance, 50-51 deregulation, financial crisis and, 54, 86, 131, 132-34 developing countries, investment abroad, 15-19 Dillon, Rod, 110 discrimination against minorities Community Reinvestment Act and, 26-28 flexible underwriting of loans and, 31-32, 40, 43 Dodd, Christopher, 30, 114 Donovan, Paul, 111 downpayment requirements, 35 du Pont, Lammot, 107 Durst, Seymour, 20 early repayment penalties, 34 economic crisis (investment bank failure), 79-84, 132, 134-38 the bubble bursts, 69-75, 113 domino effect in global market, 77, 86 extent and range of exposure, 84-85 Federal Reserve's response to, 13-14 hedge funds and, 84-85, 111-12 Iceland example, 94-98 mark-to-market accounting and, 91-94 problem in the boom, 150-51 rational panic, 75-79 resembling 1970s, 155 size and scope, 84-91 universal banks and, 85 See also specific players Enron, 111 Erixon, Fredrik, 154 executive compensation, 33, 136-37 Citigroup, 76 Lehman Brothers, 81 Merrill Lynch, 56, 76 Falcon, Armando Jr., 36, 38 Fannie Mae (Federal National Mortgage Association), 25-28, 147 aggressive risk-taking, 40-43 collapse of, 36-43, 77-79 Cuomo and, 32 early repayment penalties, 34 exposure to housing market, 42-43 flexible standards and procedures, 31-32, 40, 43 fraud and abuse scandal, 37-39, 40 "junk loans," 42 monitoring of loans, 34 nationalized, 79 political contributions and other favors from, 30, 38-39 securitized mortgages, 47 special privileges for Countrywide, 30 stockholder dividends, 77 subprime project rollout, 32-34 Farley, James, 107 Federal Housing Administration (FHA), 34-36, 127-28 Federal Housing Enterprise Oversight, Office of, 36, 38 Federal Reserve Bank Greenspan on, I interest rates and, 2, 3-5, 12-13, 14, 21 lending to investment banks, 79-80 as a model, 3-4 short- and long-term interest rate behaviors, 17-18 Federal Reserve Bank of Boston, flexible underwriting standards and, 31-32, 43 Federal Reserve Board, monetary policy control, 103-4 federal spending, 19-20 Ferguson, Niall, 130 FHA. See Federal Housing Administration (FHA) financial innovations for risk pooling, 7 adjustable-rate mortgages, 7, 71 liberalization of financial markets and, 131 nonrecourse mortgages, 9 See also mortgage-backed securities; risk-taking, excessive financial markets, 129-31 confidence and cooperation, 131-38 false sense of security and, 138-45 regulation and supervision responsibilities, 145 fines for discrimination in lending, 31 First Boston, 47 First Union, oversubscribed securitized mortgages, 27 Fitch, 60, 61 fixed-rate mortgages, 7 Fixing Global Finance, 16 "flipping" real estate, 8-9 foreclosures, 24-25 Fortis, 119, 146 fraud and abuse, 144-45 Fannie Mae and Freddie Mac, 37-39, 40 Subprime XYZ package, 65-68 Freddie Mac (Federal Home Loan Mortgage Corporation), 25-28, 147 aggressive risk-taking, 40-43 collapse of, 36-43, 77-79 Cuomo and, 32 exposure to housing market, 42-43 flexible standards and procedures, 31-32, 40, 43 fraud and abuse scandal, 37-39, 40 "junk loans," 42 monitoring of loans, 34 nationalized, 79 political contributions and other favors from, 30, 38-39 securitized mortgages, 27, 47 stockholder dividends, 77 subprime project rollout, 33-34 free-market system, Bush (G.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One
by Meghnad Desai
Published 15 Feb 2015

Since then some economists such as Nouriel Roubini have claimed that they predicted the crisis. But if this is the case, no one took them seriously. Raghuram Rajan, formerly Chief Economist at the International Monetary Fund (IMF) and the current Governor of the Reserve Bank of India, is credited with having argued, in 2005, that the new set of financial innovations were increasing the volatility in financial markets and heightening risk.3 He was dismissed as a “luddite.” Once the crisis struck, people recalled that the Bank of International Settlements (BIS) and the IMF had made gentle warning noises. The noises had to be gentle because of the fear that acknowledging the problem could make it a self-fulfilling prophecy.

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A variety of agents grew up promising large wealth-holders higher than the widely available yields. Businesses such as hedge funds, private equity firms and “special vehicles,” which could treat money in imaginative ways to assure better than average returns, proliferated. They could borrow from banks on the strength of their collateral, and indeed behaved like shadow banks. Financial innovations also began to explode. The original idea of Black and Scholes on pricing options was extended to more sophisticated instruments using the calculation of risk based on statistical mathematics (stochastic calculus), allowing for the creation of new assets even when the buyers (and often even the sellers) could not quite grasp the principles underlying such assets.

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Interest rates in the US had averages at around 6 percent between 1971 and 2001. By 2005 they had come down to nearly 1 percent, falling steadily from above 5 percent in 2000. Raghuram Rajan, who was Chief Economist of the IMF and a professor at Chicago, did warn in 2005 that there were fault lines in the global financial architecture which financial innovations might expose. But he was dismissed as a “Luddite.” This was an amazing situation, with low inflation, low interest rates and plenty of credit. But then another aspect of globalization impinged on the world economy. GDP growth accelerated in China and this put pressure on raw material prices, especially oil prices.

Money for Nothing
by Thomas Levenson
Published 18 Aug 2020

Still, Pangloss is no more persuasive as an economic analyst than as an observer of social life. It is absolutely true that increasingly complex and mathematically intricate financial innovation has, for example, made it cheaper to buy a house or drive off in a new car. But as de Tocqueville feared almost two centuries ago, the modern, utterly interconnected and increasingly powerful financial system is not always the best of all possible worlds. Here again, the South Sea year has some lessons to teach about the risks of financial innovation. The Bubble may be past, that is, but its implications are not, as the world would be reminded, brutally, in the reverberations of a truly wretched Monday morning in September 2008.

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A host of men, gamblers like Neale, theorists of money like John Locke, Defoe’s “projectors,” and more, had used the moment to launch one experiment after another to extract the nation from its troubles. Two decades later, Harley faced a similar risk of a collapse of Britain’s ability to borrow. Trying to navigate that crisis within a financial milieu dominated by his political opponents, he was met by a round of offers similar to those proposed twenty years before, a renewed push for financial innovation that would, if its proponents could be believed, both save the nation and make those riding to the rescue very rich indeed. * * * — ONE SUCH SCHEME stood out. It had several moving parts, but it turned on a single, simple idea: a forced marriage of two of the financial revolution’s signature inventions, official debt and the joint-stock company.

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That particular bit of financial engineering became known as the Bowie Bond, in which for the first time musically inclined (or celebrity-dazzled) punters could buy and sell shares of a pop star’s future earnings. Selling shares in a bundle of royalties to come from his songs brought a tidy $25 million to the man behind Ziggy Stardust. That was exactly the result financial innovation is supposed to deliver: Bowie got cash in hand to use as he saw fit, while buyers of his bonds got a stream of income extending into the future, and, perhaps, an extra, unquantifiable happy jolt every time Major Tom spoke on their radio, floating in his most peculiar way. Isaac Newton and Robert Walpole might have been amazed by the reality of David Bowie, but they would have had no problem with the thinking behind selling a stream of future earnings.

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

It is thus wrong to simply assume that the dissemination of technology is a steady, even-paced process. It is distinctly shaped by government priorities: choices as to why certain products matter: railroads, steamships, aircraft, vaccines, and so on. What is true for technical development also applies to financial innovation. Thinking about new approaches, new financial instruments or forms of organization, often develops slowly over long periods of time; but then suddenly price signals indicate the possibility of extraordinary profits, and the necessity of new thinking and radical innovation. The problem might be considered more generally.

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Those poor areas such as Scandinavia with high levels of emigration saw living standards rise more quickly than poor areas with little emigration: for instance, Kevin O’Rourke and Jeffrey Williamson contrast Sweden with Portugal.36 Monetary expansion followed the crisis, pushed to some extent by the discovery of gold (the Californian Gold Rush of 1849) and in part by financial innovation of the crédit mobiliers that expanded the business of banking. In consequence, very quickly, Europe looked much less likely to experience a repeat of the simultaneous move to political revolution. Trade liberalization, which was given a model or template in the form of the 1860 Anglo-French agreement (the Cobden-Chevalier pact), international capital movements, and migration all took off after the political revolutions, although there was already a substantial growth of international trade before 1860.37 Contemporaries were quick to celebrate the meaning of trade policy for political stability, domestic and international, although there was some pushback, especially outside Britain, where critics depicted free trade as a doctrine that would give advanced British industry an unfair advantage.

…

One mechanism that drove the new linkages was a financial revolution, which transferred the large surpluses accumulated by oil producers into lendable funds in big international banks. The development of international capital markets, offshore and thus largely free of direct government control, was the major financial innovation of the period. The availability of money made resources available for governments all over the world that wanted to push development and growth, and international demand thus surged. The alternative strategies, such as British Labour’s siege economy, looked like a mechanism that would cut off access to markets and prosperity.

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram Rajan
Published 24 May 2010

We should not worry so much about rugged individualism as about undifferentiated groupthink, for that is the primary source of systemic problems. A competitive system is also likely to produce the financial innovation necessary to broaden access and spread risk. Financial innovation nowadays seems to be synonymous with credit-default swaps and collateralized debt obligations, derivative securities that few outside Wall Street now think should have been invented. But innovation also gave us the money-market account, the credit card, interest-rate swaps, indexed funds, and exchange-traded funds, all of which have proved very useful. So, as with many things, financial innovations span the range from the good to the positively dangerous.

…

Some progressive economists dispute whether the recent crisis was at all related to government intervention in low-income housing credit.49 This certainly was not the only factor at play, and to argue that it was is misleading. But it is equally misleading to say it played no part. The private financial sector did not suddenly take up low-income housing loans in the early 2000s out of the goodness of its heart, or because financial innovation permitted it to do so—after all, securitization has been around for a long time. To ignore the role played by politicians, the government, and the quasi-government agencies is to ignore the elephant in the room. I have argued that an important political response to inequality was populist credit expansion, which allowed people the consumption possibilities that their stagnant incomes otherwise could not support.

…

Another factor restricting mobility, certainly in the current downturn, is home ownership. Anecdotal evidence suggests that hard-to-sell homes, and homes that are worth less than the debt that is owed, are weighing down workers and preventing them from looking elsewhere for employment. A number of financial innovations that would allow households to purchase insurance against home-price declines have been proposed, and in light of the recent crisis, demand for these instruments may increase.33 This is also a reason why the government’s focus on encouraging home ownership needs to be revisited. Although the modern economy needs some workers to specialize, workers like Badri, encountered in chapter 4, may tend to grow overly specialized in one industry.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite
by Daniel Markovits
Published 14 Sep 2019

Silber, “The Process of Financial Innovation,” American Economic Review 73, no. 2 (1983): 89 (listing thirty-eight innovative financial products developed from 1970 to 1982, ranging from “Debit Cards” and ATMs to “Interest Rate Futures”). For more on financial innovation in the period, see Merton Miller, “Financial Innovation: The Last Twenty Years and the Next,” Journal of Financial and Quantitative Analysis 21, no. 4 (December 1986): 459 (describing the financial “revolution” of the previous twenty years as having occurred largely due to reactions to regulation and taxes), and Peter Tufano, “Financial Innovation,” in The Handbook of Economics of Finance, ed. George Constantinides, Milton Harris, and René Stulz (Amsterdam: North Holland, 2003), 307 (exploring the history of financial innovation and the explanations given for the extensive amount of innovation seen in both the past and the present).

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the services they made possible: See generally Dan Awrey, “Toward a Supply-Side Theory of Financial Innovation,” Journal of Comparative Economics 41, no. 2 (2013): 401, and Donald MacKenzie, “Is Economics Performative? Option Theory and the Construction of Derivatives Markets,” paper presented in Tacoma, WA, June 25, 2005, who argues that financial models, and in particular Black-Scholes option pricing, shape financial markets. between just 1970 and 1982: For a list, see William L. Silber, “The Process of Financial Innovation,” American Economic Review 73, no. 2 (1983): 89 (listing thirty-eight innovative financial products developed from 1970 to 1982, ranging from “Debit Cards” and ATMs to “Interest Rate Futures”).

…

Middle-class borrowing, in other words, bent upward just as middle-class incomes flattened out, and borrowing grew on a scale big enough to fill the income gap that middle-class households lost to stagnant wages.* The scale of the borrowing, moreover, approached the shift in wages from the middle to the top. As the Nobel Prize–winning economist Joseph Stiglitz has observed, “The negative impact of stagnant real incomes and rising income inequality . . . was largely offset by financial innovation . . . and lax monetary policy that increased the ability of households to finance consumption by borrowing. . . . The support for the bubble thus depended on expansionary monetary policy together with financial sector innovation leading to ever-increasing asset prices that allowed households virtually unlimited access to credit.”

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives)
by David Birch
Published 14 Jun 2017

While not the subject of this book, I do find it interesting to note the role that the City of London played in shifting the new technology of the tally from debt to medium of exchange. London has always survived and thrived through the introduction of money technologies: ranging from banknotes and bills of exchange, through derivatives and EFT. The City has always been associated with financial innovation and, crucially, the creation of markets. Look at insurance, where it is pre-eminent. London didn’t invent insurance: the preamble to the Insurance Act of 1601 talks about it as a long-established business (Raphael 1994). Indeed, it starts with the words: ‘Whereas it hath bene tyme out of mynde an usage amongste Merchantes…’.

…

— Sir Dudley North in Discourses upon Trade (1691) New technology brings along new opportunities. In the Western, capitalist tradition, new technology works with long cycles of change in a well-understood way. The recession that follows the collapse of a bubble once again creates conditions for the emergence of a new economics and of new policies. In the context of financial innovations, these policy tools will have to conform closely to the characteristics of the current technological revolution and its paradigm (Perez 2005), which is why I think it important to separate the present paradigm from the present time, if you see what I mean. Thus, technological evolution often leads to crises as the technology races ahead of institutions and legal systems, but the crises may be an indispensable part of the co-evolution of financial services, because they in turn lead to regulation that puts markets onto a firm footing and allows them to grow even more.

…

After the low-profit late 1970s and the loss-making early 1980s, credit cards were profitable and the business exploded. In the United Kingdom, regulators opted for a light touch and allowed Barclaycard to grow. In both countries credit cards became a mass-market phenomenon, leading to increased competition, which in turn drove financial innovations and additional products and services ranging from frequent flyer miles and cash rebates to credit towards future purchases and a wide variety of ‘cobranding’ in all sorts of industries. A note about card fraud Dee Hock’s earlier comment on card fraud is very interesting because the co-evolution of cards and fraud helps us to learn a great deal about putting new money technology in place.

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It
by Stephen Davis , Jon Lukomnik and David Pitt-Watson
Published 30 Apr 2016

That was the view of the IMF, the global institution charged with warning of instability, whose “banner message was one of continued optimism within a prevailing benign global environment.” In evaluating why it had made such a gigantic mistake, the IMF subsequently reflected, “To a large extent this was due to the belief that, thanks to the presumed ability of financial innovations to remove risks off banks’ balance sheets, large financial institutions were in a strong position, and thereby, financial markets in advanced countries were fundamentally sound.”19 In other words, banks’ borrowing and lending had increased dramatically, but their understanding of risk was thought to reduce the threat of a breakdown.

…

US Department of Labor, “Fact Sheet: Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)–Type Retirement Plans” (US Department of Labor, February 2012). 64. Ibid. 3 The Return of Ownership 1. Robert Monks and Allen Sykes, “Capitalism without Owners Will Fail: A Policymaker’s Guide to Reform” (Center for the Study of Financial Innovation, 2002). 2. Merriam-Webster.com defines capitalism as “an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.”

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John Sutherland, discussion at ICGN Annual Conference, Amsterdam, 2014. 8 Capitalism 1. One area where banks can claim to have made substantial productivity improvements is in transferring money. Indeed, Paul Volcker, former chairman of the US Federal Reserve, declared that in the past generation, “the ATM is the only financial innovation he [Volcker] can think of which has improved society.” Alan Murray, “Paul Volcker: Think More Boldly,” Wall Street Journal, December 14, 2009. 2. For example, a US federal court found that an electrical engineering company and the record keeper of its 401(k) plan had violated fiduciary duty.

Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Published 30 Sep 2018

Rather, the ready availability of leverage made it easy to invest heavily in assets whose prices had risen a great deal, and in innovative, untested, synthetic, levered investment products, many of which would go on to fail. Perhaps most importantly among the contributing factors, the period was marked by risky behavior on the part of financial institutions. When the world is characterized by benign macro events, hyper-financial activity and financial innovation, there is a tendency for providers of capital to compete for market share in a process I call “the race to the bottom” (I’ll make reference later on to a memo of that name). The mood in the years 2005–07 was summed up by Citigroup CEO Charles Prince in June 2007, virtually on the eve of the Global Financial Crisis, in a statement that became emblematic of the era: “When the music stops, in terms of liquidity, things will be complicated.

…

Levered mortgage backed securities (and financial derivatives, most of which contain high levels of built-in leverage) generally switched from being return-enhancing tools to weapons of financial mass destruction, as levered funds and securities breached loan covenants, and issuers ultimately proved unable to service their debt. Of course, the new financial products demonstrated—as usual—that financial innovations promising high returns with low risk rarely keep that promise. As for the relaxed regulations, the financial conglomerates permitted by revocation of the Glass-Steagall Act had extensive problems; the repeal of the uptick rule allowed the stocks of financial institutions to be driven down relentlessly; and several banks proved unable to survive under the high levels of leverage that had been allowed.

…

Thus far I’ve covered a lot of the past and a bit of the present. Now, as I conclude, I want to turn to the future. Over the course of my career, I’ve witnessed numerous occasions on which pundits said the occurrence of one type of cycle or another had come to an end. Whether because of economic vitality, financial innovation, astute corporate management, or the supposed omniscience of central bankers and heads of Treasury, they observed that the fluctuations of either the economic cycle or the cycle in profits would be seen no more. I spent some time on this subject in “Will It Be Different This Time?” (November 1996).

Listen, Liberal: Or, What Ever Happened to the Party of the People?
by Thomas Frank
Published 15 Mar 2016

The collapse of the ultra-creative Lehman Brothers investment bank came a scant three months later, and I would like to be able to say that these dreams of prosperity-through-tastefulness followed—right down the drain with the hedge funds and subprime lenders of the world. After all, one of the greatest deeds of the creative class was … financial innovation—meaning, among other things, the poisoned mortgage-backed securities that brought the global economy so close to death. But the ideas I have described in this chapter did not suffer the same fate. As with free trade and welfare reform, there seems to be no refutation that can dissuade their supporters.

…

And yet recent history is littered with exactly such stuff: Innovations that allow companies to spy on us. Innovations that allow terrorist groups to recruit online. Innovations that allowed Enron to do all the fine things it used to do. Come to think of it, the whole economic debacle of the last ten years owes its existence to the financial innovations of the Nineties and the Aughts—the credit default swaps, or the algorithms companies used to hand out mortgage loans—innovations that were celebrated in their day in the same mindlessly positive way we celebrate tech today. Somehow that stuff never comes up, however. We know what innovation is about, and it’s righteousness and triumph.

…

Airbnb allows consumers and providers to get around various safety and zoning rules with which conventional hotels must comply.15 Amazon allows customers in many places to avoid paying sales taxes. The circumvention strategy isn’t restricted to software innovations, either. One of the great attractions of credit default swaps—a big financial innovation of the last decade—is that they were completely unregulated. Monopoly is the telos of innovation, the holy grail fervently sought after by every young coder sweating away in the incubator. The reason is plain enough: monopoly is the most direct road to profit, and the online world offers countless opportunities to achieve it.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

Robert Merton, the Nobel Prize–winning financial economist who’d invented the key techniques that made the derivatives markets possible, was outraged by what he considered grandstanding after the crisis by Paul Volcker (who said there hadn’t been a useful financial innovation since the automatic teller machine) and Warren Buffett (who called derivatives “financial weapons of mass destruction”); Merton went around the world giving presentations about how “an explosion of extraordinary financial innovation” had rescued the world from the “major financial and economic crisis” of the 1970s. When the Financial Crisis Inquiry Commission finished its forensic work, it sent to the Obama Justice Department a list of nineteen financial executives, including Rubin, who the commission thought might be investigated for breaking the law.

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Morgan Stanley got the most: Bradley Keoun, “Morgan Stanley at Brink of Collapse Got $107 Billion from Fed,” Bloomberg News, August 22, 2011. “perfect storm”: Author’s interview with Robert Reich. Just after Obama took office: Author’s interview with Brooksley Born. “an explosion of extraordinary financial innovation”: Robert C. Merton, “On the Role of Financial Innovation and Derivative Markets in Financial Globalization and Capital Markets,” slide presentation prepared for International Capital Markets Conference, Bangkok, Thailand, November 30, 2015. “I wouldn’t trust you!”: Lloyd Blankfein, testimony before the Senate Government Affairs Subcommittee on Government Relations, April 27, 2010.

…

Elmendorf wrote: One specific effect of asymmetric information [meaning that in over-the-counter derivatives markets, no party to a transaction knew the underlying economic condition of the other parties] is to increase the risk of a general financial panic (“systemic risk”). Because market participants cannot judge the financial health of institutions they deal with, bad news about one institution has a contagion effect on other institutions, reducing their access to capital as well. The doctrine of “too big to fail” is based on this point … Financial innovation has worsened this problem. Institutions have many new avenues for taking risk that are difficult for even sophisticated market participants to fully understand, and the interrelationships are even more complex … In the case of banks, the existence of deposit insurance coupled with access to the payments system [operated by the Federal Reserve] creates moral hazard with a clear incentive for excessive risk-taking.

Firefighting
by Ben S. Bernanke , Timothy F. Geithner and Henry M. Paulson, Jr.
Published 16 Apr 2019

The danger was heightened because so much risk had migrated to financial institutions that operated outside the constraints and protections of the traditional banking system, and because so much of the leverage was in the form of unstable short-term financing that could vanish at the first hint of trouble. These vulnerabilities were allowed to fester by America’s balkanized financial regulatory bureaucracy, a hodgepodge of agencies and authorities and regulations that for decades had failed to keep pace with changing market realities and rapid financial innovations. And one of those innovations, securitization, the mechanism Wall Street used to slice and dice mortgages into complex financial products that became ubiquitous in modern finance, helped transform panic about the risks embedded in underlying mortgages into panic about the stability of the entire system.

…

There was also widespread confidence that if the economy did stumble, the financial system would be resilient. It had, after all, weathered a series of modest recessions and other tests reasonably well in the previous decades, and banks seemed to have plenty of capital to absorb losses in case of a downturn. At the time, serious economists were arguing that financial innovations like derivatives, because of their purported ability to better diversify risks, had made crises a thing of the past. But financial crises will never be a thing of the past. Long periods of stability can create overconfidence that breeds instability, as the economist Hyman Minsky famously observed.

…

And as the CEO of Goldman Sachs, Hank had lived through episodes like the collapse of the hedge fund Long-Term Capital Management and the Russian default. We had all learned how quickly overheated markets could collapse, and while none of us was as worried as we should have been, none of us thought that financial innovations and the sophistication of modern finance had immunized us against crisis. The financial system is vital to the economy. But finance, at least as it’s organized in modern economies, is inherently fragile. Before we discuss the specific factors that made the system unusually vulnerable to panic a decade ago, it’s worth touching on why the system is, was, and always will be vulnerable to panic.

The Finance Curse: How Global Finance Is Making Us All Poorer
by Nicholas Shaxson
Published 10 Oct 2018

Banks’ safety cushions were profitably smaller now, but they still wanted to pare the rules down further. And this is where those two great financialising innovations, derivatives and securitisation, came into the picture, and where things really began to go crazy. At each stage of this process the financial innovators found regulatory and other obstacles in their way, and at each stage they found ways around them with the help of the British spider’s web. Securitisation is an old craft, which emerged in its modern form in the US in the 1970s. This is where a bank takes income-generating assets like mortgages or government bonds and bundles them all together and sells them to a special purpose vehicle, which is typically a company set up for a particular function – in this case, to own these assets.

…

And that is what began to happen. Bankers began to joke that ‘Bistro’ stood for ‘BIS total rip-off’ – referring to the Bank for International Settlements, which oversaw the Basel Accord. And the CDS concept at the heart of it all would turn out to be one of the most profitable – and dangerous – financial innovations of all time. But before their full power could be unleashed, there were still a few hurdles to overcome. For one thing, regulators hadn’t formally accepted the concept yet. Once again, the banks were able to find help in the usual place, light-touch London. To understand what happened next, it is helpful to take a brief diversion to a blog written a few years ago by Jolyon Maugham, a UK tax lawyer.

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He had also said, channelling the wisdom of British tax havens, that he didn’t believe there should be laws against fraud because it wasn’t necessary: people would simply stop doing business with bad actors, he opined, and they’d be driven from the market.27 Greenspan joined deregulatory forces with President Bill Clinton’s treasury secretary, the former Goldman Sachs banker Robert Rubin, and Rubin’s deputy Lawrence Summers, and this Third-Wayish trio cheer-led the frenzy of financial innovation now exploding across US trading rooms. In November 1999 this new breed of American anti-regulators brought down their biggest trophy kill, the repeal of the Glass-Steagall Act, a singularly effective piece of antitrust legislation which had for six and a half decades prevented banks from gambling with their depositors’ money.

Capitalism in America: A History
by Adrian Wooldridge and Alan Greenspan
Published 15 Oct 2018

This creates a delicate problem: how do you guard against the destructive side of financial innovation without blunting the constructive side? One unhelpful solution has been to produce detailed rules about what financial institutions can do. This was the approach that was adopted by the Dodd-Frank legislation, on the basis of a notion of how the financial system works that significantly deviated from the reality of markets. This approach is replete with dangers: it promotes a culture of box ticking, slows down innovation, empowers lobbying groups, and, most fatally of all, leaves lots of room for financial innovators to outthink bureaucrats. A much better solution is also a simpler one: increase the amount of capital reserves that banks are required to keep in order to operate.

…

Peter Drucker, who had made his name dissecting big companies, most notably General Motors in Concept of the Corporation, published a spirited book on entrepreneurship, Innovation and Entrepreneurship (1985). The new generation of entrepreneurs could draw on three resources that existed more abundantly in America than elsewhere, and that, when combined with an entrepreneur-friendly president in Washington, produced a business revolution. Financial innovators provided new sources of cash such as junk bonds from Michael Milken and venture capital from Silicon Valley’s well-established venture-capital industry. Great universities provided science parks, technology offices, business incubators, and venture funds. A liberal immigration policy provided a ready supply of willing hands and brains.

…

Day traders, sitting at home surrounded by their television screens and computer monitors, had more financial information at their disposal than lords of finance, ensconced in their paneled offices, had had in the nineteenth century. The overregulation of Main Street banks also had the paradoxical effect of encouraging further financial innovation. The banks were so imprisoned by New Deal regulations that, by the 1980s, not a single one of the world’s top ten banks was based in the United States. Half of them had been based there in the 1950s. While banks stagnated, other intermediaries innovated to take up the slack: over the thirty years after 1970, the share of financial assets held by “new” intermediaries such as money-market mutual funds, mortgage pools, and securitized loans mushroomed, while the proportion held by “traditional” intermediaries such as commercial banks, mutual savings banks, and life insurance companies declined.

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope
by John A. Allison
Published 20 Sep 2012

In addition, as discussed earlier, they had a significant economic incentive to rate the bonds as highly as possible to increase their revenues. This is where the investment banks (Goldman Sachs, Morgan Stanley, Bear Stearns, Merrill Lynch, and Lehman Brothers) magnified the misallocation of credit to the housing market. They created a series of financial “innovations” (collateralized debt obligations [CDOs], derivatives, swaps, and others, which I discuss later) that leveraged an already overleveraged product. The explanation typically given for these ultimately very bad decisions by investment bankers is greed. However, there was plenty of greed on Wall Street before the bubble.

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In October 2010, as an ex-CEO, Mozilo settled out of court on civil fraud charges for misleading investors on risky mortgages, but Countrywide’s buyer (Bank of America) ended up paying most of the $67 million to the SEC. Bank of America also paid $600 million to settle a class-action lawsuit filed by Countrywide’s robbed shareholders. 6. See Bert Ely, “Financial Innovation and Deposit Insurance: The 100% Cross-Guarantee Concept,” Cato Journal (Winter 1994), pp. 413–445, and Bert Ely, “Regulatory Moral Hazard: The Real Moral Hazard in Federal Deposit Insurance,” Independent Review (Fall 1999), pp. 241–254. 7. See Michael Keeley, “Deposit Insurance, Risk, and Market Power in Banking,” American Economic Review (1980), pp. 1183–1200, and Gary Gorton and Richard Rosen, “Corporate Control, Portfolio Choice and the Decline of Banking,” Journal of Finance (1995), pp. 1377–1420. 8.

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Accounting: loan loss reserves, 152–154 principles-based, 109 private accounting systems, 177–178 rules-based, 109 (See also Fair-value accounting) AEI (American Enterprise Institute), 64 Affordable housing efforts, 43, 216 Afghanistan, 198 African Americans, 43, 55 AIG: bailout, 128–130, 164 CDSs of, 126–127 TARP funds for, 168 Ally Financial, 178 Alt-A portfolios, 64 Altruism, 215–218, 222–223, 252 Ambac, 86 American Enterprise Institute (AEI), 64 Antitrust laws, 174–175 Argentina, 8 Arthur Andersen, 109 Asian Americans, 43 Assets, valuation of, 106–108 Atlas Shrugged (Ayn Rand), 225 Auction-rate municipal bond market, 85–87 Authority, of regulatory agencies, 46–47 Auto finance market, 178–180 Bank bailout (see Troubled Asset Relief Program (TARP)) Bank of America, 116, 150, 237 counterparty risk at, 124 credit decisions at, 238 funding of shadow banking system, 120 “too-big-to-fail” firms, 173 Bank runs, 75–76 Banking industry, 67–72 competition with risk-taking financial institutions, 39–40 economic role of, 67–69 and Federal Reserve, 22–23 fractional reserve banking, 69–70 in Great Depression vs. recent financial crisis, 70–72 (See also Shadow banking system) Banking industry reforms, 187–193 Dodd-Frank bill, 193 and Federal Reserve, 187–188 and gold standard, 188–189 reducing risk of economic cycles with, 189–193 Banking regulation, 133–147 in Bush administration, 133–136 effects on small businesses, 144–147 impact of, 147 and lending policies of banks, 138–146 and mathematical modeling for risk management, 136–138 reform of, 190 Bankruptcy, 8, 124 Banks: capital requirements for, 190 economic forecasting by, 28 FDIC and risk-taking by, 38–41 healthy, effects of TARP on, 172–174 lending policies of, 138–146 leverage ratios of, 70–72 misinvestment effects on, 12–14 private, 97–99, 187–188 self-insurance at, 48–52 start-up, 38–39 stress tests for, 171 (See also Investment banks) Barclays Bank, 164 Basel Accords, 51, 71, 125, 137, 151 BB&T Corporation, 23–24 and AIG bailout, 128 auditors of, 134 in auto finance market, 178 bonds of, 76, 84–85 competition with risk-taking financial institutions, 39–40, 98 conservatism of, 30 culture of, 240–241 failed bank takeover by, 38–39, 47–48 financial crisis for, 1–2 and flight to quality, 87, 105 home mortgages by, 97–98 and Lehman Brothers failure, 162–163 and liquidity crisis, 105–106 loan loss reserves of, 153–154 and mathematical modeling, 136–137 and misinvestment in residential real estate, 12–14 mortgage servicing rights, 111–112 and pick-a-payment mortgages, 91–92 post-crisis lending policies, 139–140, 142–145 racial discrimination in lending accusation, 42–45 selling of mortgages by, 113 TARP participation by, 170–172 trader principle of, 223 underwriting standards of, 141 use of derivatives, 122, 123 wellness program of, 202–203 Bear Stearns, 70, 71 bailout of, 104, 162 Cdss on bonds of, 127–128 counterparty risk at, 124 derivatives from, 123 financial “innovations” of, 101 Bernanke, Ben: and 2008 panic, 164, 167 and development of TARP, 76, 169–171 monetary policy of, 27–31, 33, 35, 40, 125, 213 response to financial crisis, 7, 70 Blair, Tony, 164 Bond insurance, 86–87 bonds: auction-rate municipal bond market, 85–87 effects of FDIC for, 40–41 fair-value accounting for, 105 subprime mortgage, 82–84 of Washington Mutual, 75–76 Borrowers: CRA, 56–57 of pick-a-payment mortgages, 90–91 post-crisis treatment of, 142–145 and racial discrimination in lending, 42–45 regulated changes in grading for, 140–141 Borrowing for consumption, 57–58 Boston Federal Reserve bank, 42 Budget, federal, 182–183 Bush, George W., and administration: action in financial panic, 161, 167 banking regulations, 133–136 economic proposals, 15 Patriot Act, 45, 46 regulation of Fannie Mae and Freddie Mac, 63 California, 21, 74, 90 CalPERS (California Public Employees’ Retirement System), 93, 116, 121, 131 Canada, 192 Capital: against GSE loans, 137 and leverage, 70–71 and loan loss reserves, 153 misinvestment of, 9–11, 14 wasting of, 159–160 Capital markets, 85–87, 101 Capital standards: for banks, 190 for loans, 51–52 and TARP, 170–171 Capitalism: crony, 6, 102, 129, 179 and freedom, 253–254 at universities, 231–233 Capitalism (Alan Greenspan), 32 Carter, Jimmy, 161, 179 Cash basis accounting, 110 Cash flows, 106–107, 115 Cato Institute, 201 CDOs (collateralized debt obligations), 124–126 CDSs (credit default swaps), 126–128 CEOs (Chief Executive Officers): behavior of, 2–3 decisions of Federal Reserve vs., 34 and rules-based accounting, 109 wage rates of, 210 China: currency standard, 77 demographics, 205 education, 230 GDP of U.S. vs., 183 government debt in, 200 manufacturing in, 10, 25–26, 161 market-based pricing in, 34 military spending in, 198 stimulus fund use, 181–182 trade with, 204–205 U.S. investment by, 29, 159 Chrysler, 130, 179–180 Citigroup: bailout of, 50, 104, 130, 177 CDOs of, 125–126 credit decisions, 238 crony capitalism, 6 funding of shadow banking system, 120 long-term debt of, 71 and panic during financial crisis, 163 pragmatism at, 217–218 reason at, 245 “too-big-to-fail” firms, 173 Clearing, 104 Clinton, Bill: lending reforms, 42–44, 56 subprime lending requirements, 58–60 Collateralized debt obligations (CDOs), 124–126 Colonial Bank, 47–48 Commercial real estate, 11, 97 Common good, 215–216 Community Reinvestment Act (CRA), 42, 55–57, 59 Compensation, 50, 83–84, 197–198 Confidence, 84–87, 184–185 Conservatives, 108 Consumer compliance, 193 Consumer Price Index (CPI), 26–27 Consumption: borrowing for, 57–58 housing as, 9–12, 54–55, 73–74 Contagion risk, 123 Corporate debt, 107 Counterparty risk, 123, 124 Countrywide: crony capitalism at, 6 and fair-value accounting change, 114, 118 and FDIC insurance, 39, 41, 46 necessary failure of, 159 pick-a-payment mortgages of, 91–93 subprime business at, 99 thrift history of, 98 CPI (see Consumer Price Index) CRA (see Community Reinvestment Act) Creativity, 7, 247 Credit default swaps (CDSs), 126–128 Credit rating agencies (see Rating agencies) Crony capitalism, 6, 102, 129, 179 Cross-guarantor insurance fund, 48–52 Cuba, 34, 247, 252 Cuomo, Andrew, 58 Currency, debasing, 22 Debt, 21–22, 107 Declaration of Independence, 220, 252 Defaults, 90–91, 126–128 Defense spending, 198–199, 227 Deflation, 22 Demand, supply and, 104, 185, 209, 210 Department of Housing and Urban Development (HUD), 15, 58 Deposits, disintermediation of, 120–121 Derivatives, 3, 120, 122–124 Disclosure requirements, 150–152 Dodd, Christopher, 7, 46, 61, 63, 64 Dodd-Frank Wall Street Reform and Consumer Protection Act: deficiencies of, 193 introduction of, 63–64, 183 as misregulation, 147 results of, 130 and TARP, 173, 174 Dollar, U.S., 77, 188, 229 Durbin amendment, 193 Earnings, operating, 103–106 East Germany, 34, 247 Eastern Europe, 34, 252 Economic cycles, 108, 189–193 Economic health, 159–161 Economic recovery, 1, 207–208 Economy, banking industry in, 67–69 Edison, Thomas, 19, 158–159 Education, 230–235, 247 Egypt, ancient, 230 Elitism, 7 Ely, Bert, 48 Employee Retirement Income Security Act (ERISA), 82, 149 Enron, 60, 109, 133, 149 Entitlement programs, reforms for, 199–204 Equal Credit Opportunity Act, 42, 55 ERISA (Employee Retirement Income Security Act), 82, 149 Ethical incentives, lending, 57–58 Euro, 189 European banking crisis, 51–52, 137 Expensing (stock options), 114–117 Experiential learners, 244–245 Fair Housing Act, 55 Fair-value accounting, 103–118 asset valuation in, 106–108 and expensing of stock options, 114–117 and losses on CDSs, 126–127 private accounting systems vs., 177–178 SEC involvement in, 151–152 for selling vs. servicing mortgages, 113–114 Fannie Mae: accounting scandal, 112–113, 149 in current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 and fair-value accounting, 118 in housing policy, 58–61 misallocation of resources by, 14 misleading of rating agencies by, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 FASB (see Financial Accounting Standards Board) FDIC (see Federal Deposit Insurance Corporation) FDIC insurance, 37–52 and bank liquidity, 171 and failing banks, 140 and fractional reserve banking, 68–69 and pick-a-payment mortgages, 91 reform of, 190 and S&L failures, 97 Federal Deposit Insurance Corporation (FDIC), 37–38 as external auditors, 134 and failing banks, 47–48 misallocation of resources by, 14 and pick-a-payment mortgages, 91 as regulator, 41–48, 143 take over of Washington Mutual, 75–77 Federal Housing Administration (FHA), 15, 190–192, 252 Federal Reserve, 22–23, 102, 189 antitrust policy, 174 bailouts by, 120–121, 190, 192 and banking industry reforms, 187–188 as external auditors, 134 and federal debt, 21–22 and leverage, 72 mathematical modeling by, 136 misallocation of resources by, 14, 208 misleading information from, 46, 83, 101, 125 monetary policy of, 17–20, 31–35, 96 overreaction by, 154 stimulus from, 152, 153, 208 and TARP, 165, 167–168, 171 and unemployment, 213 and Washington Mutual, 75 Federal Reserve Board, 18 Federal Reserve Open Market Committee, 31 Federal Savings and Loan Insurance Corporation (FSLIC), 37–38, 50, 96 FHA (see Federal Housing Administration) Financial Accounting Standards Board (FASB), 105, 106, 114–117 Financial crisis (2007-2009), 1–3, 251–254 banking industry in, 70–72 derivatives in, 122–124 Freddie Mac and Fannie Mae in, 65 free-market response to, 177–186 and Great Depression, 25 lessons from, 251–252 SEC role in, 154–155 Financial reporting requirements, SEC, 150–152 Financial Services Roundtable (FSR), 32, 61–62 First Horizon, 237 Fitch, John Knowles, 150 Fitch Ratings: investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Flat tax, 197 Forbes, Steve, 197 Ford, 179 Foreclosure laws, 77–80 Fractional reserve banking, 69–70 Frank, Barney, 7, 61, 63, 64 Fraud, 109–113 Freddie Mac: accounting scandal, 112–113, 149 current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 in housing policy, 58–61 misallocation of resources by, 14 misleading information from, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 Free markets: experimentation in, 19 justice in, 92, 177 market corrections in, 157–159 and monetary policy, 31–35 risk taking by banks in, 40–41 wage rates in, 210–211 Free trade, 204–205 Friedman, Milton, 20, 189 FSLIC (see Federal Savings and Loan Insurance Corporation) FSR (Financial Services Roundtable), 32, 61–62 GAAP accounting, 116, 117 Gates, Bill, 216 GDP, 183, 197–199 General Electric, 168, 169 General Motors (GM), 169, 178–180 General Theory of Employment, Interest and Money, The (Keynes), 181 Germany, 52 GM (General Motors), 169, 178–180 GMAC, 168, 169, 178–180 Gold standard: and deflation, 25–26 and economic future of U.S., 188–189 Greenspan’s view of, 32 Golden West, 39, 91, 92, 98, 159 Goldman Sachs, 71, 173 as AIG counterparty, 128–129 bailout of, 104, 164, 179 CDSs of, 126 counterparty risk at, 124 crony capitalism at, 6 financial “innovations” of, 101 Government policy: as cause of financial crisis, 1, 5–6, 251 and residential real estate bubble, 6 (See also Housing policy; Policy reforms) Government regulation, 5–8, 41–48, 204 Government spending, 180–183, 197–199 Government-sponsored enterprises (GSEs), 59, 64–65, 98, 137 (See also Fannie Mae; Freddie Mac) Great Depression: and avoidance of stock market, 74 banking industry in, 70–72 economic policies after, 161 and Federal Reserve, 19–20, 24, 188 and gold standard, 188 and government interference, 170 and Smoot-Hawley Tariff Act, 205 Great Recession, 1, 251–254 and Federal Reserve, 188 Freddie Mac and Fannie Mae in, 65 and interest-rate variation, 33 market corrections and depth of, 160 and monetary policy, 17 and residential real estate, 9–15 Great Society, 6, 55, 96 Greece, 51, 52, 137, 228 Greenspan, Alan, 23–30, 32, 33, 160 Gross domestic product, 183, 197–199 Hamilton, Alexander, 19 Harvard University, 43, 131 Hayek, Friedrich, 31 Health insurance, 201–202 High-net-worth shareholders, 93 Home Builders Association, 60 Home foreclosure laws, 77–80 Homeownership, 53–55 Hoover, Herbert, 24, 161, 205 Housing: as consumption, 9–12, 54–55, 73–74 government support of, 12 Housing policy, 53–65 HUD (Department of Housing and Urban Development), 15, 58 Human Action (von Mises), 238 Immigration, 19, 205–206 India, 10, 25, 205 IndyMac, 39, 75, 98 Inflation: CPI as indicator of, 26–27 and fair-value accounting, 103 and Federal Reserve, 21–22 and prices, 24–25 (See also Monetary policy) Initial public offerings, 150 Insurance: bond, 86–87 cross-guarantor, 48–52 FDIC (see FDIC insurance) health, 201–202 private deposit, 48–52 self-insurance at banks, 48–52 unemployment, 212–213 Interest rates, 26–27, 31–35 Inverted yield curves, 27–29 Investment banks: disclosure requirements for, 151 government bailout of, 162 “innovations” of, 101–102 leverage ratios of, 71–72 IPOs, 150 Iran, 198, 199, 227 Iraq, 198 Ireland, 77 Isaac, Bill, 107–108, 161–162 Italy, 51, 52 Japan, 159, 200, 205 Jefferson, Thomas, 19, 220 Johnson, Lyndon Baines, 6, 55, 96, 161, 188 JPMorgan Chase, 75 and Bear Stearns, 162 and shadow banking system, 120 as “too-big-to-fail” firm, 173 and Washington Mutual, 163 Keynes, John Maynard, 181 Labor: allocation of, 10–11, 14 minimum-wage laws, 209–212 Lehman Brothers, 71, 76, 101, 104, 129, 164 and Bear Stearns bailout, 162–163 corporate debt at, 107 counterparty risk at, 124 derivatives from, 123 Limited government, 182–183, 195, 231, 253 Liquidity: of banks, 68–69 and FDIC insurance, 171 and financial crises, 70–72 and housing prices, 74–75 and TARP, 171–172 Loan loss reserves accounting, 152–154 Loans: capital standards for, 51–52 qualified, 98 substandard, 140–141 Madoff, Bernie, 149, 225 March of Dimes, 241 Market corrections, 157–165 Federal Reserve’s prevention of, 23, 32 prevention of, 13 residential real estate, 78 and response to financial crisis, 177–180 Market discipline, 21, 38 Market-based monetary policy, 31–35 Market-clearing price, 209 Mathematical modeling: for loan loss reserves, 152–153 by ratings agencies, 82–83 for risk management, 136–138 MBIA, 86 Medicaid, 6, 55, 201 Medicare, 6, 8, 55, 201, 203 Meltdown (Michaels), 35 Merrill Lynch, 101, 124–125 Michaels, Patrick J., 35 Microsoft, 217 Military spending, 198–199, 227 Minimum-wage laws, 209–212 Mises, Ludwig von, 34, 238 Monetary policy, 17–35 of Bernanke, 27–31, 33, 35, 40, 125, 213 and federal debt, 21–22 and Federal Reserve, 17–23 of Greenspan, 23–27 market-based, 31–35 and unemployment, 208–209 Money market mutual funds, bailout of, 120–121, 192 Money supply, 21–22, 24, 189 Moody, John, 83, 150 Moody’s, 81–87 investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Morgan Stanley, 71, 101, 124, 173 Mortgage lending, 95–102 by Fannie Mae and Freddie Mac, 97–101 and investment bank innovations, 101–102 prime, 59, 97–99 by private banks, 97–99 savings and loan industry in, 95–97 subprime, 43, 56–57, 99–101 Mortgages: by BB&T Corporation, 97–98 jumbo, 62 pick-a-payment (see Pick-a-payment mortgages) selling vs. servicing, 113–114 Mozilo, Angelo, 46 Multiplier effect, 181 Naked shorting, 127–128, 151 Nationally recognized statistical rating organizations, 82 Negative real interest rates, 26–27 Neo-Keynesian response to financial crisis, 185–186 Neutral taxes, 197 New Deal, 53, 170, 232 Nixon, Richard, 96, 161, 188 North Korea, 34, 198, 227, 247, 252 NRSROs, 82 Obama administration, 142–144: and Dodd-Frank Act, 64 economic policies of, 15, 161 healthcare bill, 183, 201 and Patriot Act, 45 stimulus plan, 181–182 Office of the Comptroller of the Currency (OCC), 40, 154 Office of Thrift Supervision, 40, 41, 45–46 Operating earnings, 103–106 OTS, 40, 41, 45–46 Panics, 137–138, 161–165 Patriot Act, 45, 46, 48, 133–136, 147 Paulson, Henry: in 2008 panic, 164, 167 and AIG bailout, 128, 129 credibility of, 164 development of TARP, 76, 168–170, 172 Pick-a-payment mortgages, 89–93 borrowers using, 90–91 and FDIC, 91 and rise of Fannie Mae/Freddie Mac, 98 Policy reforms, 195–206 for entitlement programs, 199–204 and free trade, 204–205 and government regulations, 204 for government spending, 197–199 for immigration, 205–206 for political system, 206–207 and tax rate, 196–197 Politics: in banking regulation, 42–46 and crony capitalism, 129 and failure of Fannie Mae/Freddie Mac, 59–62 and Federal Reserve appointments, 18 policy reforms for, 206–207 Poor, Henry Varnum, 150 Portugal, 51 Price fixing, 31, 193 Price setting, 31–32 Prime lending, 59, 97–99 Prince, Charlie, 217 Principles-based accounting, 109 Privacy Act, 133, 135 Private accounting systems, 177–178 Private banks, 97–99, 187–188 Private deposit insurance, 48–52 Public schools, 228, 233–235 Racial discrimination (in lending), 42–45 Raines, Frank, 59 Rand, Ayn, 225, 231 Rating agencies, 81–87 investor confidence in, 84–87 mathematical modeling by, 136 and subprime mortgage bonds, 82–84 and “too-big-to-fail” firms, 173 and SEC, 81–82, 149–150 Real estate: commercial, 11, 97 residential (see Residential real estate market) Recessions, 28, 29, 160 Recovery (see Economic recovery) Reforms: banking industry (see Banking industry reforms) government policy (see Policy reforms) Regions Bank, 237 Regulation: of banking industry (see Banking regulation) by government (see Government regulation) Reporting, financial, 150–152 Reserve currency, U.S. dollar as, 77, 188, 229 Residential real estate market: economics of, 73–74 misinvestment in, 9–15 Residential real estate market bubble, 73–80 and government policy, 6 international impact of, 77 and job creation, 80 and state home foreclosure laws, 77–80 Risk: contagion, 123 counterparty, 123, 124 with derivatives, 122–124 diversification of, 67–69 and economic cycles, 189–193 and FDIC insurance, 38–41 and government regulation, 50–51 liquidity, 68–70 mathematical modeling for, 136–138 and “originate and sell” model, 100 systemic, 50–51 RMBS (residential mortgage-backed securities), 81 Roman empire, fall of, 230 Roosevelt, Franklin D., 24, 37, 103, 161 Rules-based accounting, 109 Russia, 198 Samuelson, Paul, 238 Sarbanes-Oxley Act, 133–134 and fair-value accounting, 106 and Fannie Mae/Freddie Mac, 99 misregulation by, 48, 147 and SEC, 150 violations of, 136 SARs (Suspicious Activity Reports), 136 Satchwell, Jack, 57 Savings and loan (S&L) industry, 95–97, 110, 191 Securities and Exchange Commission (SEC), 149–155 capital ratio guidelines, 71–72 and complexity of accounting rules, 116–117 and expensing of stock options, 114, 115 loan loss reserves accounting for, 152–154 misallocation of resources by, 14 and rating agencies, 81–82, 149–150 requirements for shorting stock, 127–128, 151 and rules-based accounting, 109, 110 and Sarbanes-Oxley Act, 150 Self-insurance, 48–52 Selgin, George, 189 Senate Banking Committee, 46 Shadow banking system, 119–131 and AIG bailout, 128–130 credit default swaps in, 126–128 and derivatives, 122–124 Federal Reserve’s role in, 30 losses from, 131 S&L industry, 95–97, 110, 191 Small businesses, 144–147, 183–184 Smoot-Hawley Tariff Act, 205 Social Security, 8, 199–204 South Financial, 237 South Korea, 247 Soviet Union, 34, 195–196, 252, 254 S&P (see Standard & Poor’s) Spain, 51, 52, 77 Spitzer, Eliot, 71, 134–135, 151 Stagflation, 181, 208 Standard & Poor’s (S&P), 81–87 investor confidence, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Standard of living, 6–7, 10, 161, 177 Start-up banks, 38–39 State home foreclosure laws, 77–80 Stimulus plan, 181–182 Stock options, expensing of, 114–117 Stocks, shorting, 127–128, 151 Stress tests, banks, 171 Subprime lending: and CRA, 56–57 by Fannie Mae and Freddie Mac, 99–101 and racial discrimination in lending study, 43 Subprime mortgage bonds, 82–87 Substandard loans, 140–141 SunTrust, 152, 237 Suspicious Activity Reports (SARs), 136 Tails (mathematical models), 137 TARP (see Troubled Asset Relief Program) Tax rate, 196–197 Tea Party Movement, 218, 231 Technology industry, 5 “Too-big-to-fail” firms, 130, 173, 193 Trader principle, 92, 223–224 Troubled Asset Relief Program (TARP), 167–175 and 2008 panic, 165 and FDIC, 37 Underwriters Laboratories, 117, 150 Unemployment, 207–213 in economic recovery, 207–208 and minimum-wage laws, 209–212 and misinvestment in residential real estate, 10–11 and monetary policy, 208–209 Unemployment insurance, 212–213 Unions, 179, 180, 212 United Auto Workers, 179, 180 United States: demographic problem in, 228 economic future of, 8, 227–230, 252–253 educational system of, 230–235 founding concepts of, 219–220 as free trade zone, 204–205 GDP of China vs., 183 mixed economy of, 5–6 public schools of, 233–235 university system of, 230–233 United Way, 224, 241 University system, 230–233 U.S.

Straight Talk on Trade: Ideas for a Sane World Economy
by Dani Rodrik
Published 8 Oct 2017

Should executives’ compensation be set by directors, with no regulatory controls? What should the capital and liquidity requirements be? Should all derivative contracts be traded on exchanges? What should be the role of credit-rating agencies? And so on. A central trade-off here is between financial innovation and financial stability. A light approach to regulation will maximize the scope for financial innovation (the development of new financial products), but at the cost of increasing the likelihood of financial crises and crashes. Strong regulation will reduce the incidence and costs of crises, but potentially at the cost of raising the cost of finance and excluding many from its benefits.

…

“Economics is a science of thinking in terms of models,” Keynes once said, “joined to the art of choosing models which are relevant.” It was the art that fell short in this instance. Economists (and those who listen to them) became overconfident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. The science of the profession was fine—its craft and sociology, not so much.

…

The second complication with presuming convergence toward free capital mobility is that even advanced countries with well-developed institutions are moving toward different models of financial regulation. Along the efficient frontier of financial regulation, one needs to consider the trade-off between financial innovation and financial stability. The more we want of one, the less we can have of the other. Some countries will opt for greater stability, imposing tough capital and liquidity requirements on their banks, while others may favor greater innovation and pursue a lighter regulatory touch. Free capital mobility poses a severe difficulty here.

The Man Who Knew: The Life and Times of Alan Greenspan
by Sebastian Mallaby
Published 10 Oct 2016

He trusted financiers too much, failing to imagine that their dazzling inventions could destabilize the economy. But the truth is more subtle and more complex than this account implies. Greenspan never was a simple efficient-market believer, and he sometimes voiced grave doubts about the risks in financial innovation.13 If he nonetheless welcomed the advent of options, swaps, and newfangled securities, it was partly because he felt he had no choice. The inflation of the late 1960s had destroyed the comforting system of fixed exchange rates and regulated caps on bank interest rates; meanwhile, technological change and globalization made it impossible to resist the explosion of trading in derivatives.

…

Fannie and Freddie were creating spending power that had already pushed CPI inflation back above 8 percent a year, and the effect was all the more powerful because the Federal Reserve was too weak willed to counter it. With a clarity that is ironic in hindsight, Greenspan described how the Fed was falling down on the job. Rather than pushing back against the stimulus from financial innovation by raising short-term interest rates more, the Fed was letting the financial system have its way, with the result that there was “a huge excess of credit in the system.”33 When the Fed finally got tough, the party would stop. But the longer it delayed, the more the bursting of the housing bubble would be painful.

…

As growth slowed, inflation paradoxically sped up: price controls and other regulatory meddling had succeeded in suppressing investment and productivity gains, dampening growth; meanwhile, they also created bottlenecks, fueling inflation. The resulting stagflation left policy makers wondering whether to stimulate the economy or apply brakes to it. Money-supply data were not much help in resolving this dispute; financial innovation rendered the numbers hard to interpret. Spending power concealed itself in places that the familiar monetary measures missed: in money-market funds; in instant credit provided by department stores; or in a truly futuristic innovation known as the automated teller machine, which facilitated shopping sprees at all times of the night or weekend.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition
by Kindleberger, Charles P. and Robert Z., Aliber
Published 9 Aug 2011

(The Fisher and Wicksell explanations were effective descriptions of the changes in nominal and real interest rates in the 1970s.) This model relies on the ad hoc assumption that two groups of market participants systematically differ in their susceptibility to money illusion. Too low an interest rate is a special case of what is perhaps a wider phenomenon – the pricing of financial innovations. Initially these innovations may be under-priced as ‘loss leaders’ so they will be more readily accepted, but the low price also may lead to excess demand. Alternatively, undue risks may be taken by recent entrants in an industry as they reduce their selling prices to increase their market shares.

…

By 1890 the French syndicate owned 60,000 tons of high-priced copper plus contracts to buy more; the older mines were reworked and firms began to process scrap while the copper price was declining rapidly. The collapse of the copper price from £80 to £38 a ton in 1889 almost took with it the Comptoir d’Escompte, which was saved by an advance of 140 million francs from the Bank of France, reluctantly guaranteed by the Paris banks.50 Financial innovation in the form of deregulation or liberalization has often been a shock. In the early 1970s Ronald McKinnon led an intellectual attack on ‘financial repression’, that is, the segmentation of financial markets in developing countries that led to preferential treatment of government borrowers that were involved in foreign trade, and large firms.51 The message appealed particularly to Latin American countries already influenced by the Chicago doctrine of liberalism.

…

The firms that borrowed US dollar funds from the offshore banks in London were as likely to spend these funds in the United States as if they had borrowed the US dollar funds in New York or some other US city. Should the US dollar deposits produced in London and other offshore banking centers be included in the US money supply? The home-equity credit line is a recent financial innovation; banks and other lenders offer to lend homeowners an amount that may be equal to the value of the equity in their homes or in some cases a modestly larger amount. (At an earlier period the loans that used the equity in the home as collateral were known as second mortgages; a home-equity credit line represents potential borrowing until the homeowner draws on the line, while the second mortgage was an actual loan.)

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis
by Anatole Kaletsky
Published 22 Jun 2010

With risks of bankruptcy and unemployment diminished in the stabilized economies of the 1990s, businesses and consumers felt that they could borrow more than ever before and banks were more willing to lend. Meanwhile, the demystification of money meant that debt ceased to be a moral or theological issue and became just another consumer product. Financial innovation also meant that savings previously locked up in property and other illiquid assets could be used as collateral to support consumer and business borrowing. This attractive new feature of property, summed up in the saying “my home is an ATM machine,” led to an increase in the value of homes in relation to other more traditional investments such as stocks and bonds.

…

Prolonged stability caused by the Great Moderation suppressed financial risk, as explained by Minsky, and thereby transformed expectations, creating the herd behavior and reflexive changes in reality described by Soros. At the same time, the long period of low interest rates due to excess savings in Asia encouraged Austrian-style malinvestment in low-income housing, as well as the aggressive financial innovation predicted by Minsky. This happened despite the fact that low-income consumers and homeowners were becoming less creditworthy because of the widening income inequality anticipated by Kalecki and the New Keynesians. The boom in finance, meanwhile, interacted with the ideological super-bubble described by Soros and, through the process of reflexivity, created an excessive faith in markets that changed political realities.

…

If that sounds like a parody from the Academy in Laputa in Gulliver’s Travels,15 consider the following tribute to Friedman’s theories about inflation and monetary growth. It was delivered, appropriately enough, to celebrate the fiftieth anniversary of Free to Choose, Friedman’s political credo, which could be described as the intellectual bible of Capitalism 3.3. The speaker was one of the world’s top academic economists, one Ben Bernanke: “For reasons of financial innovation and institutional change, the rate of money growth does not seem to be an adequate measure of the stance of monetary policy, and hence a stable monetary background for the economy cannot necessarily be identified with stable money growth. Nor are there other instruments of monetary policy whose behavior can be used unambiguously to judge this issue . . .

No Slack: The Financial Lives of Low-Income Americans
by Michael S. Barr
Published 20 Mar 2012

his career to finding it.” k SHEILA BAIR, former chair of the Federal Deposit Insurance Corporation “It is inspiring to see such a thoughtful analysis of the deep financial problems that make life miserable for so many people, and to see that many of these problems can be solved with suitable behaviorally informed financial innovations. Barr faces the real subtlety and complexity of the problems that leave so many people with no slack.” k ROBERT SHILLER, Arthur M. Okun Professor of Economics, Yale University “In many respects the American economy is too financialized. But as Michael Barr highlights in this important book, millions lack access to basic financial services and protections.

…

his career to finding it.” k SHEILA BAIR, former chair of the Federal Deposit Insurance Corporation “It is inspiring to see such a thoughtful analysis of the deep financial problems that make life miserable for so many people, and to see that many of these problems can be solved with suitable behaviorally informed financial innovations. Barr faces the real subtlety and complexity of the problems that leave so many people with no slack.” k ROBERT SHILLER, Arthur M. Okun Professor of Economics, Yale University “In many respects the American economy is too financialized. But as Michael Barr highlights in this important book, millions lack access to basic financial services and protections.

…

Through these no-action letters, safe harbors, supervision, and other regulatory guidance, the CFPB could develop a body of law that would increase compliance across the diverse financial sectors involved in mortgage lending, while reducing the uncertainty facing lenders from the new opt-out requirement and providing greater freedom for financial innovation. Restructuring Broker Incentives One can reduce market incentives to exploit behavioral biases by restructuring brokers’ duties to borrowers and reforming broker compensation schemes. Mortgage brokers have dominated the subprime market. Brokers generally have been compensated with yield spread premiums (YSP) for getting borrowers to pay higher rates than those for which the borrower would qualify (Jackson and Burlingame 2007; Guttentag 2000).

Against Intellectual Monopoly
by Michele Boldrin and David K. Levine
Published 6 Jul 2008

Thurston, R. (1878), “A History of the Growth of the Steam-Engine,” in The Cambridge History of Science, Vol. 4, ed. R. Porter et al., 854. New York: Cambridge University Press. Tirole, J. (1988), The Theory of Industrial Organization. Cambridge, MA: MIT Press. Tufano, P. (1989), “First-Mover Advantages in Financial Innovation,” Journal of Financial Economics 3, 350–70. Tufano, P. (2003), “Financial Innovation,” in The Handbook of the Economics of Finance, ed. G. Constantinides, M. Harris, and R. Stulz. Amsterdam: North Holland. Urban, T. N. (2000), “Agricultural Biotechnology: Its History and Future,” available at http://www.dieboldinstitute.org. U.S.

…

The rapid pace of innovation in financial securities prior to 1998 is well documented, for example by Tufano.17 Tufano estimates that roughly 20 percent of new security issues involve an innovative structure. He reports P1: KNP head margin: 1/2 gutter margin: 7/8 CUUS245-03 cuus245 978 0 521 87928 6 May 8, 2008 13:56 58 Against Intellectual Monopoly developing a list of some 1,836 new securities over a twenty-year period and remarks: [This] severely underestimate[s] the amount of financial innovation as it includes only corporate securities. It excludes the tremendous innovation in exchange traded derivatives, over-the-counter derivative stocks (such as the credit derivatives, equity swaps, weather derivatives, and exotic over-the-counter options), new insurance contracts (such as alternative risk transfer contracts or contingent equity contracts), and new investment management products (such as folioFN or exchange traded funds.)18 Three features of this market particularly deserve note.

…

It excludes the tremendous innovation in exchange traded derivatives, over-the-counter derivative stocks (such as the credit derivatives, equity swaps, weather derivatives, and exotic over-the-counter options), new insurance contracts (such as alternative risk transfer contracts or contingent equity contracts), and new investment management products (such as folioFN or exchange traded funds.)18 Three features of this market particularly deserve note. The first is that innovating in the financial securities industry is very costly, as those that create new securities are highly paid individuals with Ph.D.’s in economics, mathematics, and theoretical physics. The second is that competitors quickly imitate financial innovations. The third is that there is a pronounced advantage of being first, with the innovator retaining a market share between 50 percent and 60 percent even in the long run. Accounts in the popular press of investment banking in the 1980s, such as Lewis’s vivid portrayal, also document that innovation was widespread, despite the complete lack of intellectual monopoly.

Money Free and Unfree
by George A. Selgin
Published 14 Jun 2017

A study by James Stock and Mark Watson (2002: 200; see also 2005) attributes between 75 percent and 90 percent of the Great Moderation in U.S. output volatility to “good luck in the form of smaller economic disturbances” rather than improved monetary policy. Subsequent research has likewise tended to downplay the contribution of improved monetary policy, either by lending support to the “good luck” hypothesis or by attributing the Great Moderation to financial innovations, an enhanced “buffer stock” role for manufacturing inventories, an increase in the importance of the service sector relative to that of manufacturing, a change in the age composition of the U.S. population, and other sorts of structural change.20 As usual, there are exceptions, prominent among which is the study of Jordi Gali and Luca Gambetti (2009), which finds that improved monetary policy, consisting of an increased emphasis on inflation targeting in setting the federal funds target, did play an important part in the Great Moderation.

…

Louis Review 76 (3): 31–55. ——— (2000) U.S. Bank Deregulation in Historical Perspective. New York: Cambridge University Press. ——— (2009a) “Banking Crises and the Rules of the Game.” NBER Working Paper No. 15403 (September). Cambridge, Mass.: National Bureau of Economic Research. ——— (2009b) “Financial Innovation, Regulation, Reform.” Cato Journal 29 (1): 65–91. Calomiris, C. W., and Gorton, G. (1991) “The Origins of Bank Panics: Models, Facts, and Bank Regulation.” In G. Hubbard (ed.), Financial Markets and Financial Crises. Chicago: University of Chicago Press and National Bureau of Economic Research.

…

Federal Reserve Bank of St. Louis Economic Review (May/June): 43–61. Dwyer, G. P. Jr., and Saving, T. R. (1986) “Government Revenue from Money Creation with Government and Private Money.” Journal of Monetary Economics 17 (2): 239–49. Dynan, K. E.; Elmendorf, D. W.; and Sichel, D. E. (2006) “Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?” Journal of Monetary Economics 53 (1): 123–50. Economopoulos, A. (1994) “A Discriminating Taste for Money: An Examination of the New York Antebellum Banking Market.” In J. L. DiGaetani (ed.), Money: Lure, Lore, and Literature, 87–99.

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud
by Ben McKenzie and Jacob Silverman
Published 17 Jul 2023

On the internet, through a pseudonymous author (or authors), another story was born. On Halloween night 2008, someone or some people calling themselves Satoshi Nakamoto published what would come to be known as the Bitcoin white paper. We still don’t know who Satoshi was, but their white paper would have a profound impact on financial innovation and the future of digital money. Satoshi had a clear vision: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. . . . The network itself requires minimal structure.” Satoshi’s proposal was bold, billed as a new method that would allow people to transact directly with one another, bypassing financial institutions.

…

He argued that Washington needed to offer “respect for consumers” to make their own investment choices, despite the fact that the very lack of disclosures inherent in cryptos not being classified as securities kept investors in the dark as to how they might be getting swindled. Both he and Lummis were also deeply worried about losing the competition over financial innovation, now spreading to noted innovation hubs such as Kazakhstan and Romania. The politicians weren’t the only problem. A swiftly revolving door between high-level government positions and far more lucrative jobs in private industry meant that the oversight process seemed hopelessly compromised.

…

The Sternlichts were accustomed to the extreme self-confidence, if not outright arrogance, of many of their Wall Street clients, but in crypto the attitudes were even more pronounced. Crypto addicts believed themselves to be superior investors, ahead of the curve, educated in what was surely the next phase of financial innovation. The seeming boundlessness of crypto feeds this sensation; to someone mesmerized by it, the possibilities are infinite and the egos of those under its spell swell in tandem. Crypto addicts’ extreme confidence in their abilities often blinds them to their losses, opening them up to the same mistake compulsive gamblers (and most forex traders) make when it comes to money: chasing their losses until they are bled dry.

Pity the Billionaire: The Unexpected Resurgence of the American Right
by Thomas Frank
Published 16 Aug 2011

Those were the golden years of libertarianism, a time when our choice and master spirits agreed on the uselessness of big government and took the benevolent rationality of markets for granted. And while they did so, the American financial establishment proceeded to cheat the world to the very edge of the abyss. Indeed, what brought the nation down were the very aspects of business practice that our choice and master spirits admired the most—the financial innovation and risk-taking that were routinely described as America’s unique offerings to the world. We didn’t manufacture much anymore, but we could sure dream up awesome ways to securitize debt and slice up the risk in every imaginable situation. One testament to the zesty innovativeness of markets was the industry that had sprung up to supply credit to “subprime” borrowers, selling off the loans thus made to the investment banking industry on Wall Street.

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But now this comatose, money-hole of a corporation—AIG was being kept alive only so its bad bets could be unwound in an orderly way—showed us that the bonus-grabbing culture of the trader would not die. It was an inconceivable ripoff. The people who had nearly succeeded in shoving the world off a cliff were now going to walk away rich. Wall Street pay, we suddenly understood, had never been a reward for “performance” or a grateful recognition of what financial innovation did for the nation—it was strictly about what Wall Streeters could get away with. The AIG bonus scandal thus became a symbol for the larger scandal of the crisis/bailout, another one of those moments that shreds people’s faith. The public’s disgust was volcanic this time; it seemed to erupt more violently with each passing day.

…

A South Dakota participant in the farm strike told Studs Terkel in 1970 that “it was close in spirit to the American Revolution.” Hard Times: An Oral History of the Great Depression (New York: Pantheon, 1970), p. 256. Chapter 2. 1929: The Sequel 1. Joshua Cooper Ramo, “The Three Marketeers,” Time, February 15, 1999. 2. On financial innovation and its application to real estate, see Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon, 2010), pp. 105–13. 3. These examples are all drawn from the first eighty pages of the Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (New York: Public Affairs, 2011). 4.

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

It was only after the Fed’s easy money policy was launched that credit growth picked up, financial leverage soared, housing markets bubbled, underwriting standards declined and the repackaging of subprime mortgage debt into collateralized debt obligations took off. Low interest rates fed the demand for credit, while financial innovation increased its supply. The explosive growth of the market for complex mortgage securities was driven in large part by a desperate search for yield at a time when interest rates were at multi-decade lows. Long after the financial crisis, economists at the Federal Reserve continued to deny that house prices were affected by monetary policy.33 A handful of American central bankers, however, admitted that errors had been made.

…

William Poole, President of the St Louis Federal Reserve, acknowledged that low interest rates had fuelled the housing boom. Poole told a meeting of the Fed’s rate-setting committee in 2007, a year before Lehman’s bankruptcy: ‘We had a boom driven by a period of very low interest rates. The period really got started when we were holding the Fed funds rate at 1 per cent. Then you had a lot of financial innovations and subprime mortgages that added to a sector that hadn’t traditionally been there.’34 Likewise, Poole’s counterpart at the Kansas City Fed, Thomas Hoenig, found ‘strong supporting evidence’ for the argument that negative real interest rates between 2002 and 2004 had contributed to the housing and credit boom.35 Some leading economists concurred.

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As the tenth anniversary of the stimulus approached, the departing Governor of the People’s Bank, Zhou Xiaochuan, warned of ‘hidden, complex, sudden, contagious and hazardous’ risks in China’s credit system.115 The Governor pointed to Ponzi lending schemes operated by internet companies.fn13 (A few months earlier, the collapse of a peer-to-peer lending scheme had prompted large public protests in Beijing’s financial district.116) He also warned of financial risks from zombie companies, poor risk models, speculative bubbles and financial innovation. The country’s top banker feared that China faced its own ‘Minsky moment’.117 Not long after, the government seized control of Baoshang Bank, a regional lender based in Baotou, Inner Mongolia. Baoshang had grown rapidly by issuing negotiable certificates of deposit to other banks. Its controlling shareholder had reportedly misused these funds.

Why We Can't Afford the Rich
by Andrew Sayer
Published 6 Nov 2014

Yet Apple is famously quick to litigate against any companies who borrow or appear to borrow Apple’s ideas. As Ferguson puts it, ‘Most of us have no problem with copying (as long as we’re the ones doing it).’27 In recent decades, the scope of ‘intellectual property’ claims has expanded these sources of rent extraction, most notably in seeds,28 software and business methods and in so-called ‘financial innovations’ such as new types of derivatives. Whereas patent law protected specific inventions, software claims can be much looser and broader in their coverage as designers have sought to expand the range of their claims. Sixty-two per cent of all patent disputes are now over software. As intellectual property rights have grown, litigation has itself become big business, not only extracting huge rents but stifling the emulation and adaptation of ideas that are so important for the growth of knowledge and culture.29 You can come up with an idea and sue someone for reproducing it, even if you had no intention of using it yourself.

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The problems are not merely technical, to be fixed by an engineering approach that takes for granted the legitimacy and rationality of the basic institutions and practices and merely identifies malfunctions. The crisis is also a product of economic injustice. To understand it requires more than the usual narrative of who did what in a sequence of financial innovation and euphoria followed by disaster: we need to identify the basic mechanisms of wealth extraction that are involved. TWELVE The roots of the crisis There are scores of different accounts of the origins of the crisis. The causes are complex, and different experts give different emphasis to them.

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It claims that the US, Canada, UK and Australia are the only plutonomies; much of continental Europe and Japan, which haven’t experienced such major upturns in wealth controlled by the rich, are ‘the Egalitarian Bunch’. According to the report, plutonomies have three key characteristics: 1. They are all created by ‘disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants … the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.’ 2. There is no ‘average’ consumer in Plutonomies. There is only the rich ‘and everyone else’.

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

Productivity can be enhanced by relatively simple new gadgets, such as the cotton gin developed by Eli Whitney, which removed seeds and waste from the cotton buds (although, by boosting the cotton crop, this invention perpetuated the US slavery system). But output can also be improved by new ways of organising production, such as the moving assembly line that allowed Henry Ford to produce cars more cheaply. Financial innovation, such as letters of credit, or legal reforms like the creation of the limited liability company, made it easier for traders to take risks and expand their operations. Perhaps the most important area of innovation has been agriculture. Thomas Malthus, an 18th-century vicar, is famed for his gloomy forecasts about the dangers of population growth.

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For the investor, the answer, where possible, was to split one’s capital among as many voyages as possible. In Venice, ownership of the ships and cargoes were divided into shares called loca. A wide range of citizens could invest; individuals could hold one-24th of a locum.10 Ownership of a locum could be pledged as security for loans. Another Italian financial innovation was public debt. Venice set up a loan office called the Monte Vecchio in the 13th century. Rich citizens were compelled to make loans to the city but they received an annual interest rate of 5% in return. The debt was tradable and citizens bought the loans as a home for their savings; a 5% yield at a time of zero long-term inflation was a pretty good deal.

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So bankers operated at the fairs, acting as clearing houses for all the trades; a merchant would end up with a credit or debit that could be settled later, or simply rolled over to the next fair. In this way, credit allowed more trade to occur; as one author wrote, “credit enabled a small investment of hard cash to go to work simultaneously at more than one place”.14 Financial innovation thus lowered transaction costs, allowed cash that would otherwise be hoarded to be put to work, and allowed merchants to take more risk. Without it, trade would not have flourished as it did. There was a general shortage of coins in Europe in the Middle Ages. At the start of the period, Europe was surviving with the help of coins from the Byzantine and Islamic worlds.

What's Next?: Unconventional Wisdom on the Future of the World Economy
by David Hale and Lyric Hughes Hale
Published 23 May 2011

Gave reviews the four key factors that have driven economic performance in the West over the past decade, and suggests that some of the factors are still driving Asian growth. These factors are the emergence of three billion new producers, creation of a global economy, and the great moderation of steady low-inflation economic growth, and financial innovation. The financial revolution that drove markets in New York and London is still evolving in East Asia. East Asia is also free of two problems that now loom over the old industrial countries—a legacy of private debt that financed asset inflation and large fiscal deficits. Gave’s new concern is that China could soon confront labor shortages.

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Monetary Policy in Europe Is Tighter and Less Pragmatic Than in the United States While it is widely believed that monetary policy has “always” been traditionally tighter in Europe than in America, the figures do not bear this out. In the years before the crisis, the ECB was generally somewhat more expansive than the Fed, probably because Europe was experiencing a slower rate of financial innovation and remained more of a cash economy. Money supply grew more rapidly in Europe whether attention focused on the monetary base, which is directly controlled by central banks, or at broad money, which is the monetary gauge that has correlated best with long-term inflation and GDP growth (see Figure 5.8).

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With risks of bankruptcy and unemployment diminished in the stabilized economies of the 1990s, businesses and consumers felt that they could borrow more than ever before, and banks were more willing to lend. Meanwhile, the demystification of money meant that debt ceased to be a moral or theological issue and became just another consumer product. Financial innovation also meant that savings that were previously locked up in property and other illiquid assets could be used as collateral to support consumer and business borrowing. This attractive new feature of property, summed up in the saying “My home is an ATM machine,” led to an increase in the value of homes relative to other more traditional investments such as stocks and bonds.

Big Business: A Love Letter to an American Anti-Hero
by Tyler Cowen
Published 8 Apr 2019

Still, in the broader historical view, siding with banking and finance has meant siding with economic development and with the unfolding of the glories of civilization more broadly, be it the arts, philosophy, or the growth of the modern nation-state. Yale finance professor William N. Goetzmann makes this point in his book Money Changes Everything: How Finance Made Civilization Possible. Had banking and financial innovation not been allowed to proceed, the Western world would be a far less developed, creative, and indeed happy place. A few hundred years from now, our descendants probably will look back and say the same. But since the financial crisis of 2007–2008, attitudes have swung in the other direction and critics have hit the financial sector with virulent attacks.

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I think of this as a nascent market, a bit like junk bonds, still going through its teething phase and not quite ready for prime time. But someday it will be, and online lending will be a permanent part of the financial landscape, as is already the case in China. Some of today’s most significant financial innovations are relatively invisible. Consider Stripe, a payments company based in San Francisco, founded by two Irish entrepreneurs, brothers Patrick and John Collison. Among other services, such as making it easier to accept payments over the internet, it supplies back-end information storage to merchants.

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Bernstein, Elizabeth best sellers See also publishing Bezos, Jeff See also Amazon Big Brother See privacy Big Data Big Pharma Big Tech disappearance of competition impact on intelligence innovation and loss of privacy and overview Bing Bird, Larry Bitcoin Black, Leon BlackBerry Blackstone blockchain Bloxham, Eleanor Blue Cross/Blue Shield brand loyalty Brexit Brin, David Brooks, Nathan bubbles, financial sector Bullshit Jobs: A Theory (Graeber) Burger King cable TV cable companies cable news Capital One capitalism “creative destruction” and Friedman on logic of market churn and media and public’s view of short-termism venture capitalists workers and young people and See also crony capitalism Capitalism for the People, A (Zingales) Carr, Nicholas Carrier CEOs deaths of increases in salary overview pay for creating value short-termism and skill set China American manufacturing and Apple and facial recognition technology financial innovations financial institutions multinational corporations and productivity retail and tech companies and See also Alibaba Cialdini, Robert Cisco Citibank Citizens United decision See also Supreme Court Civil War Clark, Andrew E. class Clinton, Hillary Coase, Ronald cognition cognitive dissonance cognitive efficiency cognitive strengths Collison, Patrick and John compensating differential conspiracy theories control firms co-ops copyright corporations attempts to sway public opinion downside of personalization public dislike of Countrywide “creative destruction” credit cards credit card information credit card system privacy and crony capitalism business influence on government class and multinational corporations overview privilege and state monopoly status quo bias See also capitalism cryptocurrencies See also Bitcoin Csikszentmihalyi, Mihaly Curry, Stephen CVS cybersecurity “daily effective experiences” See also Kahneman, Daniel; Krueger, Alan Daley, William Damaske, Sarah Damore, James daycare defense spending DejaNews Democratic Party Desan, Mathieu Deutsche Bank discrimination Dollar General Dow Scrubbing Bubbles Dream of the Red Chamber DuckDuckGo Dying for a Paycheck (Pfeffer) eBay education email employment/unemployment European Union ex post Exxon eyeglass companies Facebook advertising and AI and “anti-diversity memo” censorship and China and competition and complaints about employees “filter bubble” income inequality and information and innovation and monopoly and News Feed politics and privacy and Russian-manipulated content venture capital and See also Zuckerberg, Mark facial recognition technology “fake news” See also media Fama, Eugene fast-food Fehr, Ernst Ferguson, Niall financial crisis financial sector America as tax and banking haven American stock performance banks “too big” global importance of US growth information technology and intermediation overview venture capital and American innovation Financial Times fintech flow Ford Motor Company Foreign Corrupt Practices Act Foroohar, Rana fraud, businesses and CEOs in laboratory games comparative perspective cross-cultural game theory nonprofits vs. for-profits overview research on corporate behavior spread of information and tax gap trust and free trade French, Kenneth Friedman, Milton Friendster Fritzon, Katarina fundraising Gabaix, Xavier Gates, Bill GDP General Agreement on Tariffs and Trade General Electric General Motors Gilens, Martin Glass-Steagall Act Gmail Goetzmann, William N.

MacroWikinomics: Rebooting Business and the World
by Don Tapscott and Anthony D. Williams
Published 28 Sep 2010

This is not such a crazy idea, and other serious players agree. Rick Bookstaber was the former head of risk management for Salomon Brothers and Moore Capital, and is the author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.10 He currently has a fulltime job at the SEC as a senior policy adviser for risk, strategy, and financial innovation and knows as much about the weird, opaque world of derivatives as anyone. Bookstaber calls for opening up derivatives to understand their value. “If we want to go down the path of standardized valuation and comparability in these complex portfolios, we need open derivatives models,” he says.

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Those that are willing to subject their valuations to public vetting will be trusted, and those that are not will soon find their cost of funds increasing and their customers going someplace else. Banks once spoke of their fiduciary responsibilities, and through that their behavior established trust. Today it will take actions, not words. A process such as that proposed by Open Models to vet complex assets could go a long way toward restoring confidence in the system. Indeed, if financial innovation got the industry into trouble in the first place, perhaps forward-thinking initiatives such as Open Models may show a way out by challenging long-standing practices and assumptions. To be sure, Open Models is facing an uphill battle and success is far from assured. But any amount of transparency and openness that permeates the modus operandi of the industry will have a positive influence.

…

Innovators such as Open Models, VenCorps, and the myriad of P2P lenders are just the first sign of what’s to come. Opportunities for wikinomics-style collaborations abound. Financial regulators, investors, entrepreneurs, and banking customers are increasingly seeing the benefits of transparency, openness, and sharing. While financial innovation earned a bad name during the crisis, we feel that at the end of the day innovation will help the industry overcome its current challenges. As Gord Nixon puts it, “developing new products where you lend money to people who don’t have income is not innovation, that’s just bad risk management and faulty regulation.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

In Latin America in the 1980s, support for debtor countries from the IMF got most of the banks off the hook. In Europe, support from the IMF and from other Eurozone countries since 2010 has also limited the damage. The Belgian-French bank Dexia and Germany’s Hypo Real Estate, however, would have been insolvent without direct government support.39 Financial Innovation to the Rescue? As we have seen, the traditional model of deposit banking has important weaknesses. Activities might be disrupted by runs, the renewal of funding might be impossible or too costly, or returns from investments might not be sufficient to pay depositors. Deposit insurance has all but eliminated the problem of runs by depositors, but it has not addressed the other problems.

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Banks’ risks from changes in refinancing costs and from changes in returns on loans and other investments have increased.40 In the early 1980s and again in the late 1980s, traditional depository institutions turned out to be very vulnerable to these risks. In this risky new world, the 3-6-3 model of specialized savings banks that take deposits and make mortgage loans was no longer viable.41 In this much riskier world, the needs of savings banks like the Bailey Building and Loan Association drove financial innovations in the 1980s and 1990s. Many tools were developed to transfer risks from savings banks to other investors. In this context a major role was played by what is called securitization, a procedure that allows commercial banks and savings banks to sell their loans and mortgages to other investors.

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First, the equity levels of recent decades were artificially low because banks and their creditors had become used to the government safety net. Second, the increases in the intensity of competition in financial markets that we have seen since the 1970s have decreased the banks’ ability to withstand shocks. Third, the high degree of interconnectedness in the system that has come with financial innovation and with globalization has magnified the potential fallout from the failure of a systemically important financial institution for the global economy. Moreover, institutions tend to be exposed to the same shocks and therefore run into trouble at the same time. All these concerns lead to the conclusion that the levels of equity banks have had in recent decades do not provide appropriate guidance as to what bank equity should be.55 Since 2010, when we became more outspoken about the need for an ambitious reform of capital regulation, we have engaged in many discussions on the subject, yet we have never received a coherent answer to the question of why banks should not have equity levels between 20 and 30 percent of their total assets.56 (A caveat on providing specific ratios is that their meaning will depend on accounting conventions.)

Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World
by Don Tapscott and Alex Tapscott
Published 9 May 2016

Clippinger, CEO, ID3, Research Scientist, MIT Media Lab Bram Cohen, Creator, BitTorrent Amy Cortese, Journalist, Founder, Locavest J-F Courville, Chief Operating Officer, RBC Wealth Management Patrick Deegan, CTO, Personal BlackBox Primavera De Filippi, Permanent Researcher, CNRS and Faculty Associate at the Berkman Center for Internet and Society at Harvard Law School Hernando de Soto, President, Institute for Liberty and Democracy Peronet Despeignes, Special Ops, Augur Jacob Dienelt, Blockchain Architect and CFO, itBit and Factom Joel Dietz, Swarm Corp Helen Disney, (formerly) Bitcoin Foundation Adam Draper, CEO and Founder, Boost VC Timothy Cook Draper, Venture Capitalist; Founder, Draper Fisher Jurvetson Andrew Dudley, Founder and CEO, Earth Observation Joshua Fairfield, Professor of Law, Washington and Lee University Grant Fondo, Partner, Securities Litigation and White Collar Defense Group, Privacy and Data Security Practice, Goodwin Procter LLP Brian Forde, Former Senior Adviser, The White House; Director, Digital Currency, MIT Media Lab Mike Gault, CEO, Guardtime George Gilder, Founder and Partner, Gilder Technology Fund Geoff Gordon, CEO, Vogogo Vinay Gupta, Release Coordinator, Ethereum James Hazard, Founder, Common Accord Imogen Heap, Grammy-Winning Musician and Songwriter Mike Hearn, Former Google Engineer, Vinumeris/Lighthouse Austin Hill, Cofounder and Chief Instigator, Blockstream Toomas Hendrik Ilves, President of Estonia Joichi Ito, Director, MIT Media Lab Eric Jennings, Cofounder and CEO, Filament Izabella Kaminska, Financial Reporter, Financial Times Paul Kemp-Robertson, Cofounder and Editorial Director, Contagious Communications Andrew Keys, Consensus Systems Joyce Kim, Executive Director, Stellar Development Foundation Peter Kirby, CEO and Cofounder, Factom Joey Krug, Core Developer, Augur Haluk Kulin, CEO, Personal BlackBox Chris Larsen, CEO, Ripple Labs Benjamin Lawsky, Former Superintendent of Financial Services for the State of New York; CEO, The Lawsky Group Charlie Lee, Creator, CTO; Former Engineering Manager, Litecoin Matthew Leibowitz, Partner, Plaza Ventures Vinny Lingham, CEO, Gyft Juan Llanos, EVP of Strategic Partnerships and Chief Transparency Officer, Bitreserve.org Joseph Lubin, CEO, Consensus Systems Adam Ludwin, Founder, Chain.com Christian Lundkvist, Balanc3 David McKay, President and Chief Executive Officer, RBC Janna McManus, Global PR Director, BitFury Mickey McManus, Maya Institute Jesse McWaters, Financial Innovation Specialist, World Economic Forum Blythe Masters, CEO, Digital Asset Holdings Alistair Mitchell, Managing Partner, Generation Ventures Carlos Moreira, Founder, Chairman, and CEO, WISeKey Tom Mornini, Founder and Customer Advocate, Subledger Ethan Nadelmann, Executive Director, Drug Policy Alliance Adam Nanjee, Head of Fintech Cluster, MaRS Daniel Neis, CEO and Cofounder, KOINA Kelly Olson, New Business Initiative, Intel Steve Omohundro, President, Self-Aware Systems Jim Orlando, Managing Director, OMERS Ventures Lawrence Orsini, Cofounder and Principal, LO3 Energy Paul Pacifico, CEO, Featured Artists Coalition Jose Pagliery, Staff Reporter, CNNMoney Stephen Pair, Cofounder and CEO, BitPay Inc.

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The first era of the Internet, rather than bringing transparency and impairing violations, seems to have done little to increase security of persons, institutions, and economic activity. The average Internet user often has to rely on flimsy passwords to protect e-mail and online accounts because service providers or employers insist on nothing stronger. Consider the typical financial intermediary: it doesn’t specialize in developing secure technology; it specializes in financial innovation. In the year that Satoshi published his white paper, data breaches at such financial firms as BNY Mellon, Countrywide, and GE Money accounted for over 50 percent of all identity thefts reported that year, according to the Identity Theft Resource Center.24 By 2014, that figure had fallen to 5.5 percent for the financial sector, but breaches in medical and health care jumped to 42 percent of the year’s total.

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Masters said, “The entire life cycle of a trade including its execution, the netting of multiple trades against each other, the reconciliation of who did what with whom and whether they agree, can occur at the trade entry level, much earlier in the stack of process, than occurs in the mainstream financial market.”25 Greifeld put it this way: “We currently settle trades ‘T+3’ (that is, three days). Why not settle in five to ten minutes?”26 Wall Street trades in risk, and this technology can materially reduce counterparty risk, settlement risk, and thus systemic risk across the system. Jesse McWaters, financial innovation lead at the World Economic Forum, told us, “The most exciting thing about distributed ledger technology is how traceability can improve systemic stability.” He believes these “new tools allow regulators to use a lighter touch.”27 The blockchain’s public nature—its transparency, its searchability—plus its automated settlement and immutable time stamps, allow regulators to see what’s happening, even set up alerts so that they don’t miss anything.

The End of Accounting and the Path Forward for Investors and Managers (Wiley Finance)
by Feng Gu
Published 26 Jun 2016

The search for a full understanding of this phenomenon goes on, but stabilizing factors like improved inventory management by companies, better control of firms’ operations brought about by information technology, smarter government interventions in crises, and the increased use by companies of stabilizing (risk hedging) financial innovations are among the volatility-reducing factors already identified. And what about the substantial business disruptions caused by the 2007−2008 crisis, you ask? Just a hiccup. A 2014 study by Furman shows that the pre-crisis declining volatility was resumed after the financial crisis (“ . . . but overall volatility still appears to be at a lower level than in the past.”)9 So, our documented declining usefulness of financial information cannot be blamed on an increasingly turbulent business environment.

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See Financial Accounting Standards Board Field, Marshall 4 Financial Accounting Standards Board (FASB) 6, 18, 181, 222 regulatory record, examination 213–214 Financial capital 82 Financial crisis, real estate (depression) 32–33 Financial data estimates 124 relevance, decrease 36 Financial indicators, impact (share) 36f 252 Financial information basis, problems 35–36 damage, accounting/nonaccounting (impact) 90 deterioration, accounting estimates (impact) 98–100 interpretation, experts (usage) 62 irrelevance 37 market, competition 41–42 quality 68 role 37 stock prices, contrast 29 usefulness decline 56, 67–68, 206 loss, investor interest 68–70 measurement 29–31 Financial innovations 71 Financial reporting direction, change 214 purpose (FASB) 30 Financial reports 46f contextual role 47 contribution 47 estimation, statistical methodology (usage) 44–45 economic condition 62 estimate-related terms, frequency (increase) 99f indicators, role 67 opaqueness 86–87 performance 62 performance-related information source 44 structure, freezing 8 structure/information, similarity 2 timelines, measurement 43–45 Firm operations, bottom line 154 Firm-specific errors 54 First-in-class product (Pfizer) 169–170 Follow-on patenting 166 Footprint size 187 Ford, Henry 52, 116 Ford Motor Company, car production 1 Forecasts, verification (enabling) 220–221 Fortune Global 500 Companies, 180 SUBJECT INDEX Full revelation, economic principle 202 Fundamentals 51 Funds decrease 69–70 sources 32 uses 32 Future earnings (prediction), earnings reporting ability (decline) 55f Geico advertising 147 brand, re-creation (impossibility) 148 General Electric, earnings per share (EPS) uncertainty/vagueness 94–95 Generally accepted accounting principles (GAAP) 96, 115 information 204 mandate 217 non-GAAP customer information 137 non-GAAP disclosure, problem 169 non-GAAP earnings, merits 205 non-GAAP measure 176 reforming 218 ROE 216 total sales, relevance (limitation) 174–175 Gilead, product pipeline 170–171 Goldman Sachs, investment dominance 83 Goodwill 109 GAAP mandate 217 value, impairment 61 write-offs 96, 219 Google car streaming market 140 intangible investment, increase 85 Great Depression 71 Great Moderation 71 Gross Domestic Product (GDP) growth 232 Gross margin ratio 154 Hedge fund managers, returns 17 Hewlett-Packard, Autonomy acquisition 84 Historical values 96–98 Subject Index Human capital, development 86–87 Hurricane Sandy claims 158 I/B/E/S data 23–24 First Call 48 IBM shares, decline 20 turnaround 122 IFRS.

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See Financial information backward-looking information 52 company-related information sources 44 competition/litigation concerns 205–206 contribution 44 disagreement 63 quantification 63–65 importance 42 increase, requirement 87–88 intermediaries 62 manager cooperation 204–205 problems 84–86 proposed information, elicitation process 199–200 regulatory burden, lightening 206–208 253 SEC role 203 sources 68–69 alternative 70 ranking 30 theory (communication theory) 42 timelines, issue 43 uniformity 169 usefulness, measurement 30 uselessness 32 vagueness 63 Infringement 123 In-line products box 169–170 Innovation 166, 168 disruption 123 financial innovations 71 investment 164–165 revenues 176 In-process-R&D (IPRD) 96 balance sheet value 97 Insurance company operations 154f operations, risk 158 Intangible assets accounting problems 83–84 relevance, loss 88–90 rules, change (demand) 90 treatment 77–78 acquisition 85–86 amortization 216 asset treatment 214–217 capitalization 216 conspiracy of silence, application 86 disclosure, improvement 217–219 economic role, increase 37 emergence 37–38 increase 81–83 information increase, requirement 87–88 problems 84–86 investment, Google increase 85 nontradability 87–88 revolution 82f treatment, problem 78 uniqueness 87–88 valuation 215 254 Intangible capital increase 83 U.S. private sector investment 82f Intangible investments, expensing 216 Intellectual assets, economic role (increase) 37 Intellectual capital reports 113 Internal controls, gross inadequacies 123–124 International Financial Reporting Standard (IFRS) 217 Internet chat rooms 7 Internet service providers, patents 234 Inventory account 233 contribution 78 improvement 72 taking 233–235 Investments 156 efficiency 122 mapping 121–123 returns 18–19 risk, diversification 158 Investors agreement 63 contribution, example 45–46 decisions erosion 37–38 reported financial information, role 37 triggering 30 disagreement 63 fault 50 importance 119 information contribution 46f demand, SEC role 203 needs 114 relevance 185 investor-relevant information system 159 irrationality 50–51 necessity 142–144 operating instructions, Strategic Resources & Consequences Report issue 197, 230 SUBJECT INDEX reaction, measurement 43–44 usefulness 122 valuation process 219–220 IPRD.

Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace
by Matthew C. Klein
Published 18 May 2020

These financial flows necessarily corresponded to trade flows, and large changes in the financial account were always accompanied by equal and opposite shifts in the trade account. History of global financial cycles To put it differently, trade flows were determined by financial flows. The financial innovations that led to massive British capital outflows to Latin America in the early 1820s, for example, were directly connected to Britain’s massive trade surpluses with Latin America during the same period. These trade relations cannot be explained by analyses of British manufacturing efficiency or the comparative advantages of Latin American producers.

…

Until 1873, imports and exports more than doubled in the United Kingdom, the United States, France, Austria, and Belgium. Investment boomed in the high-tech industries of railways, steamships, and telegraph cables, while the United States led a revolution in the production of agricultural commodities. The strong growth in the real economy coincided with another burst of financial innovation. In the United States, Treasury secretary Salmon P. Chase marketed bonds to middle-class Americans in the North to finance the Civil War with the help of banking newcomer Jay Cooke & Company. France under Emperor Louis Napoleon created the first universal investment banks: Crédit Industriel et Commercial (1859), Crédit Lyonnais (1863), and Société Générale (1864).

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France under Emperor Louis Napoleon created the first universal investment banks: Crédit Industriel et Commercial (1859), Crédit Lyonnais (1863), and Société Générale (1864). These developments radically improved the banking system’s ability to collect and channel middle-class household savings into new investment projects. By the mid-1860s, Paris was beginning to rival London as a market for new international loans.21 Financial innovation was not limited to France and the United States. Germany also saw a similar expansion of its banking system and in the creation of joint-stock corporations. So many joint-stock companies were created in 1866–73 that still exist today that the period is known in Germany as the Gründerzeit, or founders’ era.

Money, Real Quick: The Story of M-PESA
by Tonny K. Omwansa , Nicholas P. Sullivan and The Guardian
Published 28 Feb 2012

The idea is not just to maintain or acquire customers but to deliver sufficient value to stores that are acting as cash merchants, and to businesses managing employees and supply chains. Without a broader perspective that includes ecosystem development, most providers will not have the wherewithal to drive mobile money or branchless banking forward at sufficient scale and speed. SCALING THE NETWORK Historically, financial innovations have been adopted slowly. Credit cards in the developed world, for example, were first introduced in the 1950s, but it wasn’t until the 1980s that credit cards began to reach critical mass. In 30 years, microcredit has extended loans to a mere 200 million people. Mobile money is moving much faster than that, thanks to familiarity with airtime scratch cards and transfer, and has reached 40 million people in seven years (16 million of which are through M-PESA).

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[Excerpted from Cash In, Cash Out Kenya: The Role of M-PESA in the Lives of Low-Income People, Cohen, Monique and Stuart, Guy, Financial Services Assessment, July 2011] ******ebook converter DEMO Watermarks******* ******ebook converter DEMO Watermarks******* ACKNOWLEDGEMENTS This book was made possible by a generous grant from The Rockefeller Foundation, initiated by Wiebe Boer in 2010 when he was director of the foundation’s office in Nairobi, Kenya. The primary mandate was to write a “journalistic, narrative-driven story” about the birth and development of MPESA, and to chart its “seismic impact on the lives of ordinary Kenyan people.” A secondary mandate was to show how “the ubiquity of mobile allows the potential for financial innovation in developing countries, especially among those at the base of the pyramid.” The grant was to the GSMA Development Fund (the global mobile phone association). Chris Locke, director of the Development Fund, administered and split the grant between the two authors. The authors’ research and writing was accelerated by matching Bellagio Fellowships from The Rockefeller Foundation, which allowed us to work together for a month at the Foundation’s Bellagio Center (Villa Serbelloni) in Bellagio, Italy, a (quasi) midpoint meeting spot between Nairobi and Boston.

Portfolios of the poor: how the world's poor live on $2 a day
by Daryl Collins , Jonathan Morduch and Stuart Rutherford
Published 15 Jan 2009

The same is true of the way that common informal devices are designed, like the local savings and credit clubs described below—and, indeed, it is similar to the way that many richer people pay for insurance or contribute to pensions. It is one of the features that microcredit pioneers adapted to form new financial innovations. We pay attention to this and other special features of the devices and strategies used by the diary households. We focus first on the borrowing side (the “accelerators”) and then turn to the various savings devices (the “accumulators”). In both their borrowing and their lending, households have discovered ways to deal with the economic, psychological, and social forces that make the job of amassing large sums of money so difficult. accelerators We started this chapter with the idea that large sums are formed by patching together resources—putting luck, skill, and assets together to amass a needed lump.

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They have shown an astonishing capacity to develop products and take them quickly to scale. That combination—a focus on poverty plus the capacity to scale up quickly—should enable them to exploit new ideas and technologies that can improve quality and build on the foundations laid by Grameen II, again providing a model of financial innovation from which the rest of the world can learn. 173 Chapter Seven BETTER PORTFOLIOS N ot having enough money is only one part of what it is to be poor. Households like those who feature in our diaries face many challenges of poverty that go beyond the lack of money. They may face discrimination because of their ethnicity or class, find that their legal rights are poorly enforced, or have to struggle with low-quality public services and low skill levels.

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Foreign investment in microfinance, for example, more than tripled between 2004 and 2006, to $4 billion. See Reille and Forester 2008. 4. For a review of early experiences with branchless banking, see Ivatury and Mas 2008. 5. New field research adapts methods from medical research, particularly the use of randomized controlled trials, to test the value and logic of financial innovations. Recently, the Financial Access Initiative, a consortium of researchers at New York University, Yale, Harvard, and Innovations for Poverty Action, has been formed to extend field trials in Latin America, Africa, and Asia. Working with microfinance providers, researchers are investigating, for example, how sensitive borrowers are to changes in interest rates, the value of structured savings devices, and the impact of business training alongside credit.

Red Flags: Why Xi's China Is in Jeopardy
by George Magnus
Published 10 Sep 2018

Nevertheless, in general the liberalisation of China’s financial markets has helped to spawn innovation, greater inter-connectedness between institutions, and more sophisticated financial products. These changes are widely viewed as a positive to the extent that they lower transaction and financing costs, enhance the flow of credit, and strengthen the process of intermediation, or transference of deposits into productive use. On the other hand, we also know that financial innovation has often been the harbinger of instability, and of complex challenges for the regulatory authorities. China is witnessing both the positive and negative aspects of such innovation. Between 2015 and 2017, the central bank and regulatory authorities had to deal with a stock-market crash, exchange-rate instability, currency-reserve depletion and capital flight, and then they had to backtrack on many of the liberalisation initiatives as they proceeded to implement a regulatory crackdown in 2017.

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They and regular banks engage in transactions in the shadow banking markets which are often ‘off-balance-sheet’, that is, they are not recorded on the formal statement of assets and liabilities, where they would be subject to conventional capital adequacy and liquidity regulations, and they can be hidden away from the eyes of regulatory agencies. While it is certainly true that shadow banking can be an agent of financial innovation and economic growth, our experience of the financial crisis has taught us to fear its other capacity, which is as an agent of systemic instability and financial and economic crisis. The biggest shadow banks are trust banks, which were once local investment funds set up by provincial governments, and which became very active after the stimulus programme was announced in 2008.

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(i) Butterfield and Swire Group (i) C929 (i) Cairncross, Sir Alec (i) Calcutta (i) Calomiris, Charles (i) Cambodia (i), (ii), (iii), (iv) Cameroon (i) Canada Chinese investment (i) immigration rates and WAP (i) TPP (i), (ii) US steel imports (i) Canton (i) Canyon Bridge Capital Partners (i) capital, movement of Asian crisis (i), (ii) insecurity manifested (i) problems with (i) reasons for and control of (i) Shanghai free trade zone (i) vigilance and restrictions (i) Caribbean (i) cars (i), (ii) Carter, Jimmy (i) Caucasus Mountains (i) Census Bureau (US) (i) Central Asia (i), (ii), (iii) central bank (i) see also banks Central Commission for Discipline Inspection (i), (ii), (iii) Central Military Commission (i), (ii), (iii) centralisation (i), (ii) ‘century of humiliation’ (i), (ii), (iii), (iv) CFIUS (Committee on Foreign Investment in the United States) (i) Chamber of Commerce (US) (i) Chengdu (i) Chiang Kai-shek (i) children (i) Chile (i), (ii) China (under Xi Jinping) economic contradictions (i) international relations divergence (i) politics back in command (i) Socialism with Chinese Characteristics for a new Era (i) technology divergence from the West (i) ‘China 2030’ (World Bank and Chinese State Council) (i) China Banking Regulatory Commission (CBRC) created (i) merger (i), (ii) national financial security campaign (i) new rules issued (i) WMPs (i) China Construction Bank (i), (ii), (iii) China Development Bank (i), (ii) China Development Forum (i) ‘China Financial Markets: A US Retreat on Global Trade Will Not Lead to a Shift in Power’ (Michael Pettis) (i) n12 China Foreign Exchange Trade System (i) China–Hong Kong Bond Connect Scheme (i) China Household Finance Survey (i) China Insurance Regulatory Commission (i), (ii), (iii), (iv) China Investment Corporation (i), (ii) n7 China Labour Bulletin (i) China Minsheng Bank (i) China Mobile (i) China–Pakistan Economic Corridor (i), (ii), (iii) China Railway Group (i) China Securities Regulatory Commission chief of dismissed (i) corporate governance guidance by (i) created (i) local government financing and (i) national financial security campaign (i) new rules issued (i) permission to use homes as security (i) stock market crash (i) China Telecom (i) China Unicom (i) ChinaChem (i) Chinalco (i) Chinese Academy of Social Sciences (i) Chinese Dream (i), (ii), (iii), (iv) Chinese People’s Political Consultative Conference (i) Chongqing (i), (ii), (iii), (iv) Christchurch (Dorset) (i) Christians (i), (ii), (iii) Cirque du Soleil (i) Cisco (i) Clinton, Bill (i) Clinton, Hillary (i) cloud, the (i), (ii), (iii) Club Med (i) CNR (i) Coalbrookdale (Shropshire) (i) colonialism (i) Columbus, Christopher (i) Comac C919 (i) Commerce, Department of (i), (ii), (iii) Commercial Bank of China (i) Communist Party see also Party Congresses in numerical order at head of index Belt and Road Initiative promises (i) Cultural Revolution’s effect (i) Deng’s commitment to (i) Department of Propaganda (i) destructive policy under Mao (i) embryo of (i) founding members (i) grip on power (i), (ii) legitimacy of (i), (ii), (iii) primacy of (i) movement towards (i) social and economic model of (i) SOEs and (i) state control, maintenance of (i) usurping machinery of government (i) vested interest opposed to reform (i) Xi and: anti-corruption campaigns (i); 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individual countries; West, the European Central Bank (i) European Commission (i) European Union Chinese investment (i) currencies (i) data protection regulation (i) frictions and insecurities (i), (ii) MES (i) pensions and healthcare spending (i) renewable energy comparison (i) TTIP (i) Eurozone (i) exchange rates (i), (ii), (iii) Export–Import Bank of China (i), (ii) exports (i), (ii) external surpluses (i) Facebook (i) failures, banks (i) family structures (i) Federal Reserve (i) Fenby, Jonathan (i) fertility rates (i), (ii), (iii) Finance Ministry (i), (ii) financial innovation (i) financial policy (i) financial stability (i) Finland (i) First Five-Year Plan (1953–57) (i) First Opium War (i), (ii), (iii) First World War (i), (ii), (iii) fiscal control (i) Fists of Righteous Harmony (i) Five-Year Plans see 1st Five-Year Plan; 13th Five-Year Plan Florida (i) Foochow (i), (ii) Ford, Henry (i) Foreign Affairs, Ministry of (i), (ii) foreign trade and investment (i) investment tensions (i) standing up for globalisation (i) TPP and US withdrawal (i) trade tensions with US (i) Forsea Life Insurance (i) Fort Meyers, Florida (i) Fosun International (i), (ii) four economic traps (i), (ii) Four Seasons Hotel (Hong Kong) (i) Foxconn (i) Fragile by Design (Charles Calomiris and Stephen Haber) (i) France Boxer Rebellion (i) early attempts in China (i), (ii) falling fertility (i) immigration rates (i) Qing dynasty and (i) treaty ports controlled by (i) Frankfurt (i) Fraser Institute (i) Free and Open Indo-Pacific Strategy (i) free trade agreements (FTAs) (i) Freedom House (i) freight trains (i) see also high-speed rail; transport Friedman, Milton (i) FTZs (free trade zones) (i) Fu Chengyu (i) Fujian (i), (ii), (iii) Fuzhou (i) see also Foochow G20 (i) Gate of Heavenly Peace (i) Gateway terminal (London) (i) GATT (General Agreement on Trade and Tariffs) (i) GDP 1st century to 18th century (i) 19th century (i) 2017 (i) assets and liabilities (i) bank assets and (i) budgetary revenues (i) changes in production (i) consumption share (i) credit growth and (i) credit intensity of (i) data bias (i) debt (i), (ii), (iii) economic stimulus package (i) education spending (i) Eurasia (i) exports and imports (i) external surpluses (i) government revenues (i) growth of financial assets (i) industrial investment share (i) investment rate (i) local government and (i) pensions and health care (i), (ii) problem with targeting (i) productivity increases (i) public sector debt (i) real estate (i) research and development (i) residential housing investment (i) service sector (i) shadow sector (i) SOEs (i) stimulus package (i) trade surplus (i) TVEs share (i) General Data Protection Regulation (EU) (i) General Motors (i) geo-economics (i) geography (i) Geography of Peace, The (Nicholas John Spykman) (i) George III, King (i) Germany Boxer Rebellion (i) claims and spheres of influence (i) control of treaty port (i) Deutschmark (i) research and development (i) robots (i) Gewirtz, Julian (i), (ii) n16 Gilgit-Baltistan (i) Gill, Indermit (i) Gini coefficients (i) Global Innovation Index (i) global leadership (i) global reserves (i) Global Trade Alert (i) globalisation (i), (ii), (iii), (iv) Goldman Sachs (i) Google (i) governance (i), (ii), (iii) ‘Governance Indicators’ (World Bank) (i) government departments see under name of department GPs (medical general practitioners) (i) GPT (general purpose technology) (i), (ii) Grand Canal (i), (ii) Grand Chip GmbH (i) Great Divergence (i) Great Divergence, The: China, Europe and the Making of the Modern World Economy (Kenneth Pomeranz) (i) Great Leap Forward (i), (ii), (iii), (iv) Great Wall of China (i) Greece (i), (ii), (iii), (iv) Green, Michael (i) Groningen Growth and Development Centre (i) growth (i) see also GDP Guangdong (i), (ii), (iii) Guangxi (i) Guangzhou free trade zone (i) growing importance of (i) real estate prices (i) SOEs in (i) Sun Zhigang (i) treaty ports (i) ‘Guidelines on AI Basic Research Urgent Management Projects’ (National Natural Science Foundation) (i) ‘Guiding Opinions of the Central Committee of the Communist Party of China and the State Council on Deepening State-Owned Enterprise Reform’ (i) Guizhou-Cloud Big Data (i) Guo Shuqing (i), (ii) Gutenberg, Johannes (i) Gwadar (i), (ii) Haber, Stephen (i) Hague, The (i) Hambantota (i) healthcare (i) Hebei province (i), (ii), (iii) Hewlett Packard (i) high-speed rail (i) see also freight trains; transport Hilton Hotels (i) Himalayas (i) HNA (i), (ii) Holland (i) Hong Kong ageing population (i) Asian Tiger economies (i) development of Western technology by (i) exports and insurance (i) fertility rates (i) handover anniversary (i) high growth maintained (i) importance of British era (i) middle- to high-income (i) Mutual Fund Connect (i) Renminbi bonds (i) separatism issue (i), (ii) Shanghai and China Hong Kong Bond Connect Schemes (i) Shanghai stock market and (i) trade with China (i) Treaty of Nanking (i) Hong Kong and Shanghai Bank (i) housing (i), (ii), (iii) Hu Jintao eruption of economy under (i) focus of (i) ‘lost decade’?

The Production of Money: How to Break the Power of Banks
by Ann Pettifor
Published 27 Mar 2017

Such excesses were possible because a decade of non-inflationary, consistent expansion turned initially well-founded confidence into dangerous complacency. Beliefs grew that globalisation and technology would drive perpetual growth, and that the omniscience of central banks would deliver enduring stability. With a growing conviction that financial innovation had transformed risk into certainty, underwriting standards slipped from responsible to reckless and bank funding strategies from conservative to cavalier. Financial innovation made it easier to borrow. Bonus schemes valued the present and discounted the future. Banks operated in a heads-I-win-tails-you-lose bubble …11 Inflation and deflation The creation of credit and the supply of money faces two major constraints.

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis
by Martin Wolf
Published 24 Nov 2015

The expansion in the scope of the assets that could be securitized was in part facilitated by the growth of the shadow financial system, which was largely unregulated, and the ability to borrow from non-deposit sources.41 In the event, central banks were driven to intervene. Yet, at its core, the failure was quite traditional: the excesses of a combination of financial innovation with mismanaged risk-taking generated a panic that devastated liquidity. As recounted in Part I, the markets froze. Leverage A fourth dimension of increased fragility, emphasized in a marvellous book, The Bankers’ New Clothes, by Anat Admati of Stanford University and Martin Hellwig of the Max Planck Institute for Research on Collective Goods, was unprecedented leverage or gearing (by which is meant ways of funding investments that multiply the returns to investors on the upside and the losses to investors on the downside).42 Leverage increased on three dimensions: leverage of non-financial borrowers, such as house buyers, who borrowed more relative to the value of houses; leverage embedded in new instruments, particularly derivatives; and leverage inside the financial sector itself, which became extraordinarily high in many institutions.

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(ii) The development of securitised credit, since [it is] based on the creation of new and more liquid markets, has improved both allocative efficiency and financial stability. (iii) The risk characteristics of financial markets can be inferred from mathematical analysis, delivering robust quantitative measures of trading risk. (iv) Market discipline can be used as an effective tool in constraining harmful risk taking. (v) Financial innovation can be assumed to be beneficial, since market competition would winnow out any innovations which did not deliver value added. Each of these assumptions is now subject to extensive challenge on both theoretical and empirical grounds, with potential implications for the appropriate design of regulation and for the role of regulatory authorities.58 Behind all this was the assumption that self-interest would, via Adam Smith’s invisible hand, ensure a stable, dynamic and efficient financial system.

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During the implosions, it creates panic, collapsing credit, de-leveraging and hunts for scapegoats and villains. It was ever thus. Indeed, contrary to the views of many academic Panglossians, informed observers have long known this (see Chapter Six). But it seems that, given contemporary information and communication technologies, modern financial innovations and globalization, the capacity of the system to generate complexity and fragility, surpasses anything seen historically, in its scope, scale and speed. Fortunately, the willingness and ability to respond has also increased. But it was quite a close-run thing in 2008 globally, and after 2009 in the Eurozone.

The Power of Gold: The History of an Obsession
by Peter L. Bernstein
Published 1 Jan 2000

Kenneth Galbraith has phrased the same thing more eloquently: "Men possessed of money, like men earlier favoured by noble birth and great title, have infallibly imagined that the awe and admiration that money inspires were really owing to their own wisdom or personality."26 Galbraith's characteristically acerbic wit contains much truth, but Croesus and the Lydians may be the exception that proves his rule. The political and financial innovations of the Lydians were remarkable enough in their own time. Viewed from the perspective of the 2500 years since the death of Croesus, however, their accomplishments were truly extraordinary. It was their wisdom and personality that inspired the awe and admiration for their money, not the other way around.

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As it was the lower classes who fell furthest behind in the inflationary process, government revenues lagged even as inflationcum-warfare was constantly driving government expenditures higher. Jumbo fiscal deficits and exploding government indebtedness were the inevitable consequences. Two resulting financial innovations were Spain's asientos and France's Grand Parti, both of which were forms of borrowing in the capital markets-the modern convention-which supplemented the traditional method of privately negotiated debts that piled up on the accounts of the bankers in Italy, Germany, and Holland. There was another method of royal finance that was by now an old trick: increasing the supply of money through devaluation of the currency.

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A young monk takes advantage of this situation to make advances on the merchant's lusty wife, who bangs on her husband's door crying, Nevertheless, the money changers were much less involved with developments in coinage than with the increasing substitution of papermoney instruments for the inconvenience and complications of payment in coin. The principal vehicle for these kinds of payment was the bill of exchange, an instrument developed by the Italians in the thirteenth century, perhaps earlier. This was a remarkable financial innovation that lent itself to a wide variety of uses and formats.se Here is a simple example of how a bill of exchange worked.* Two transactions take place: Franco in Italy buys wool from Berthold in Flanders, while David in Flanders buys wine from Carlo in Italy. Franco, however, does not pay Berthold directly, and David does not pay Carlo directly.

Money: 5,000 Years of Debt and Power
by Michel Aglietta
Published 23 Oct 2018

The ethical foundations of the double separation constitutive of what would become capitalism were elaborated by the Church, and they received juridical form in canon law. The encounter, over the course of the centuries, between the aspiration to salvation and what Max Weber called ‘the spirit of capitalism’ opened the way to the private financial innovations of the Middle Ages. Over centuries, the king of France would practise a pact of alliance with his people, for the coronation established him as a ruler by divine right. The king’s individual person was, in a sense, double: on the one hand, he was a mortal human person while on the other, he was the sovereignty expressed in the hereditary line of royal succession.

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Impact of liberalised financial structures Financial instability on account of the lever effect of indebtedness and asset speculation. Risk management. Strengthen prudential rules and monitor risky conduct. No monetary effect so long as inflation is unaffected. THE RISING POWER OF THE CENTRAL BANKS The great inflation of the 1970s traumatised savers and prompted financial innovations that opened the way to the liberalisation of finance. This inflation also drove sharp critiques of monetary policy. Ethical confidence was shaken, because the balance between the principles of monetary stability, growth, and justice was upset. The dramatic about-turn in US monetary policy in October 1979 reflected a will to break out of inflation, at any cost.

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The axis of the fascist government’s economic policy, inspired by the Chicago Boys, was the reprivatisation of the financial system and the liquidation of state-owned production. Up until July 1975, the banks remained trapped in a tight regulatory straitjacket. This allowed free reign for financial innovations. There was an upsurge in financial companies who lent to rich households and invested funds in very short-term securities at very high interest rates. This was the moment that radically changed the property structure. Those who were able to borrow in foreign currency centralised financial power in their own hands.

The Making of Global Capitalism
by Leo Panitch and Sam Gindin
Published 8 Oct 2012

As a paper prepared for the Federal Reserve of Boston in 1971 put it: “This asymmetry appears to be appropriate, for it corresponds to an asymmetry in the real world.”57 Far from necessarily representing a diminution of American power, the outflow of capital from the US and the balance-of-payments deficits that had so concerned economic and political elites through the 1960s had actually laid the basis for further dollar-based credit expansion and financial innovation both domestically and internationally in the 1970s. This is what Jeremy Seabrooke later would aptly term the “diffusion of power through the dollar.”58 Indeed, one could also speak of the concentration of US power through the dollar, as more and more capital flowed into the US in the wake of the demise of Bretton Woods.

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While the currency crisis destabilized the EMS and forced the adoption of a much looser Exchange Rate Mechanism, the embrace of these measures by Europe’s states meant that the march towards the single currency could be resumed with the assurance that “discipline” would prevail. Especially significant in this respect, and indeed for the overall shift in the balance of class forces in Europe, was the transformation of European financial markets along US lines.18 The City of London, which had since the 1960s served US banks “as a laboratory for financial innovation” at the center of the Euromarkets, was the leading site of this Americanization.19 The removal of UK capital controls in 1979, the City of London’s own “big bang” in 1987, and the new stock exchange system modeled on the automated NASDAQ in the US, were all about trying to compete with New York on a level playing field, reinforced by direct pressures from the Wall Street investment banks operating in London.

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The system is not well equipped to handle what one Government official calls ‘financial Armageddon’ . . . but the fallout from Armageddon is exactly what the Federal Reserve is designed to solve.”88 The increasingly enhanced role for the state as financial firefighter had evolved through the 1990s alongside regulatory changes that encouraged financial innovation, integration, and expansion. It was the goal of advancing this even further that led to the victory of the Treasury and the Fed in the very wake of the 1998 crisis in finally getting Congress to repeal the 1933 and 1935 banking rules. By this time, as we have seen, the old compartmentalization of banking hardly existed in its original form.

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right
by George R. Tyler
Published 15 Jul 2013

Sustained and robust productivity growth year after year is scarcely likely from a sector where output is highly volatile, risky behavior is routine, time horizons are measured in months, and income is highly skewed and gyrates wildly. In 2009, former Fed chairman Paul Volcker famously dismissed financial engineering, asserting that ATMs were the most useful financial innovation of the past 30 years. “I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy.”20 Financial Times columnist Wolfgang Münchau in December 2009 agreed with his theme: “We know that financial innovation, in combination with macroeconomic imbalances, produces bubbles. But there is not a shred of evidence, theoretical or empirical, that the financial instruments invented in the past 10 years produce sustainable growth.”21 Alan Greenspan couldn’t do it, acknowledging the absence of such evidence justifying his policies in a Financial Times column of his own in March 2011.

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These changes enabled the debt of the American private financial sector to quadruple, growing from an amount comparable to 26 percent of GDP in 1985 to 108 percent in 2009.20 We know how that ended, echoing the conclusion of Andrew Hilton, director of the London-based Centre for the Study of Financial Innovation: “You can make the case that banking is the only industry where there is too much innovation, not too little.”21 Rising household, business sector, and government debt were three elements of the Reagan era credit binge. The fourth element was monetary policy, managed during much of this period directly by Alan Greenspan in his role as chairman of the Fed.

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(economist), 352 Havnes, Tarjei (University of Oslo), 299, 415 Hayek, Friedrich (economist) about, 12, 37, 73, 79, 202–3, 219–20 The Road to Serfdom, 37, 202 Hayward, Tony (former CEO, British Petroleum), 110 Hazlitt, Henry (economist), 219, 260 Heckman, James (Nobel Laureate), 447, 448 Heron, Randall (University of Iowa), 141 Hetherington, Marc J. (author), 183 Hilton, Andrew (Centre for the Study of Financial Innovation), 219 Hindery, Leo (former chief executive, AT&T Broadband), 100 Hlatshwayo, Sandile (economist), 229 Hobbes, Thomas, 26, 92, 148 Hoffman, David E. (historian), 33 Holst, Hajo (sociologist), 454 Holzer, Harry, 301 House, Charles (Stanford University), 154–55 Households, savings, borrowing, 214–16 wealth, 22 Houseman, Susan (economist), 370 Hout, Michael, 293 Howe, Brian (former Australian deputy Prime Minister), 326, 419 Hubbard, Glenn (chairman of George W.

The New Depression: The Breakdown of the Paper Money Economy
by Richard Duncan
Published 2 Apr 2012

That flood of foreign capital threw fuel on the credit boom that was already underway there thanks to the elimination of the requirement that dollars be backed by gold and the near elimination of the requirement for the financial system to hold liquidity reserves. Thus, the creation of foreign fiat money and its investment into the United States was the third “financial innovation” responsible for the extraordinary proliferation of credit in the United States in recent decades. EXHIBIT 2.1 Total Foreign Exchange Reserves, 1948 to 2007 Source: IMF Fed Chairman Ben Bernanke blamed the flood of foreign capital entering the country on a global savings glut. That is nonsense.

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Dollars no longer represent a claim on a real commodity. Today, if a person attempts to redeem a dollar by presenting it to the Treasury Department, the government has no obligation to give that person anything other than another dollar. Dollars now, therefore, are simply credit instruments that do not pay interest. Meanwhile, because of financial innovation, credit has become more like money. Most credit instruments have long met the three criteria that define money. They can serve as a medium of exchange, they are a store of value, and they are a unit of account. In the past, however, they were not liquid. Now they are. The repo market makes them liquid.

In FED We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
Published 3 Aug 2009

To be sure, Fed policy during this first part of the decade kept the economy chugging along, but there is a potential downside to sustained very low interest rates — a downside that goes far beyond overpaying for assets. As economic historian Charles Calomiris of Columbia University observed, “The most severe financial crises typically arise when rapid growth in untested financial innovations” — such as complicated securities invented to invest in mortgages — “coincided with … an abundance of the supply of credit.” This is exactly what happened during the last years of the Greenspan Fed. With interest rates low, investors took greater and greater risks to get higher returns. This risky investing is called “reaching for yield” — and in the mid-2000s, there was a lot of reaching.

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GREENSPAN PUT TOO MUCH FAITH IN MARKETS AND THE CAPACITY OF BIG-MONEY PLAYERS TO POLICE THE MARKETS IN THEIR OWN SELF-INTEREST Greenspan’s libertarian leanings were well known, and his skepticism about the capacity of government regulators openly expressed. He often referred to the ten years he spent as a director of J. P. Morgan before going to Washington in 1987, making a point of how much more knowledgeable the bank’s loan officers were about borrowers than Fed regulators. Greenspan generally celebrated the benefits of financial innovation and downplayed the risks. In his memoirs, he says he took the Fed job committed to enforcing the laws of the United States — even those with which he didn’t agree — but “planned to be largely passive” in matters of regulation. The surprise, he wrote, was that the Fed staff wasn’t nearly as eager to regulate as he had feared — a fact that other bank regulators in Washington often attributed to the dominance of market-loving economists at the Fed.

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The new financial instruments, he said in a reprise of the Greenspan years at a 2005 Fed conference at Jackson Hole, Wyoming, “enable risk and return to be divided and priced to better meet the needs of borrowers and lenders … permit previously illiquid obligations to be securitized and traded, and … make obsolete previous divisions among types of financial intermediaries and across the geographical regions in which they operate.” Financial innovation made banks and other financial institutions “more robust” and made the financial system “more resilient and flexible” and “better able to absorb shocks without increasing the effects of such shocks on the real economy.” A more apt description might have been “originate and hide.” Banks hadn’t distributed nearly as much risk as even sophisticated observers thought.

Money: The Unauthorized Biography
by Felix Martin
Published 5 Jun 2013

It was not just brassed-off account-holders and exasperated taxpayers who expressed their doubts, but some of the leading lights of the financial industry itself. Adair Turner, Chairman of the U.K. Financial Services Authority, put it diplomatically in August 2009 when he said that at least some of the previous decade of financial innovation had been “socially useless.”5 Paul Volcker, the grand old man of global financial regulation, was more direct. The only financial innovation of the previous two decades that had added any genuine value to the broader economy, he said with withering contempt, was the ATM.6 The result of this powerful and widespread reaction to the crisis is that today, for the first time in decades, there are serious campaigns in progress in virtually all of the world’s most developed economies to reform banking, finance, and the entire framework of monetary policy and financial regulation.

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Hoover Institution Working Papers in Economics E91–3. Furness, W. (1910), The Island of Stone Money: Uap of the Carolines. Philadelphia, PA: Washington Square Press. Genovese, M., ed. (2009), The Federalist Papers. New York, NY: Palgrave Macmillan. Goetzmann, W.N., and Rouwenhorst, K.G., eds (2005), The Origins of Value: The Financial Innovations that Created Modern Capital Markets. Oxford: Oxford University Press. Goodhart, C. (1998), “The two concepts of money: implications for the study of optimal currency areas.” European Journal of Political Economy 14, 407–432. Goody, J., ed. (1968), Literacy in Traditional Society. Cambridge: Cambridge University Press.

Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond: The Innovative Investor's Guide to Bitcoin and Beyond
by Chris Burniske and Jack Tatar
Published 19 Oct 2017

First, Bloomberg Markets published an article titled “Blythe Masters Tells Banks the Blockchain Changes Everything: The banker who helped give the world credit-default swaps wants to upend finance again—this time with the code that powers bitcoin.”13 In emphasizing “the code that powers bitcoin,” this article quietly questioned the need for the native asset, instead emphasizing the underlying technology. Masters was a well-known and respected figure in financial services, one that people associated with financial innovation. Her choice to join a little-known firm at the time called Digital Asset Holdings, after having been the head of global commodities at JPMorgan Chase, was reason to believe that blockchain technology was no longer on the fringe of the business world. In the article, a quote from Masters brought everyone to attention: “You should be taking this technology as seriously as you should have been taking the development of the Internet in the early 1990s.

…

For example, if Alice trusts Bob, and Bob trusts Candace, and Candace trusts Dave, then Alice can send money to Dave (whom she doesn’t know) by first transferring value to Bob, who transfers that same value to Candace, who takes that value and deposits it in Dave’s account. Using this concept, payments can “ripple” through the network via these chains of trust. Fugger called this concept RipplePay.com. While Fugger’s RipplePay did grow to 4,000 users,22 it did not catch fire the way bitcoin did. In August 2012, Fugger was approached by the notable financial innovators Chris Larsen and Jed McCaleb. Larsen had founded E-Loan—one of the first companies to provide access to mortgage loans online—and Prosper, a leader in the peer-to-peer lending space.23 McCaleb was the founder of Mt. Gox, the biggest bitcoin and cryptocurrency exchange in the world at that time.

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Unfortunately, when the market turns and the prestige is gone, the contagion of terror spreads just as quickly through the speculative crowd. Tulipmania The most famous instance of mass speculation in a commodity happened in the Dutch Republic in the 1630s. As with most periods of mass speculation, the time was right. With their merchants fueling trade, the Dutch enjoyed the highest salaries of any in Europe, financial innovation was in the air, and money was free-flowing. Shares of the Dutch East India Company had been rewarding shareholders handsomely for their investments.9 Fueled by enthusiasm, wealthy citizens poured money into properties, leading to a robust housing market. The ongoing appreciation of asset values created an excess of wealth to fund further asset purchases, setting up a positively reinforcing feedback loop into asset bubble territory.10 While the wealthy sowed the grounds for an asset bubble, initially not everyone could take part.

Think Twice: Harnessing the Power of Counterintuition
by Michael J. Mauboussin
Published 6 Nov 2012

Brown, “Life’s Universal Scaling Laws,” Physics Today, September 2004, 36–42. 22. Charles Perrow, Normal Accidents: Living with High-Risk Technologies (Princeton, NJ: Princeton University Press, 1999). See also Richard Bookstaber, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation (New York: John Wiley & Sons, 2007); and Laurence Gonzales, Deep Survival: Who Lives, Who Dies, and Why (New York: W.W. Norton, 2003), 93–109. 23. John D. Sterman, Business Dynamics: Systems Thinking and Modeling for a Complex World (Boston: Irwin McGraw-Hill, 2000). 24. John D. Sterman, “Teaching Takes Off: Flight Simulations for Management Education,” http://web.mit.edu/jsterman/www/SDG/beergame.html. 25.

…

Bonabeau, Eric, Marco Dorigo, and Guy Théraulaz. Swarm Intelligence: From Natural to Artificial Systems. New York: Oxford University Press, 1999. Bonabeau, Eric, and Guy Théraulaz. “Swarm Smarts.” Scientific American, March 2000, 82–90. Bookstaber, Richard. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. New York: John Wiley & Sons, 2007. Bower, Chuck, and Frank Frigo. “What Was Coach Thinking?” New York Times February 1, 2009. Brodie, Richard. Virus of the Mind: The New Science of the Meme. Seattle, WA: Integral Press, 1996. Buchanan, Bruce G., Randall Davis, and Edward A. Feigenbaum.

Nerds on Wall Street: Math, Machines and Wired Markets
by David J. Leinweber
Published 31 Dec 2008

Fischer Black, after leaving MIT for Goldman Sachs, said, “Markets look a lot more efficient from the banks of the Charles than from the banks of the Hudson.”3 Someone gets to pick up that $100 bill. Back on the banks of the Charles in Boston 25 years later, Andy Lo wrote,“Profits may be viewed as the economic rents which accrue to [the] competitive advantage of . . . superior information, superior technology, financial innovation. . . .”4 If this conjures up images of ever faster, better, larger computing engines at giant quantitative hedge funds, you are getting the message. But this idea is not suddenly true today; it has been true forever. Innovations used to use less electricity, though. In 1790, the technology that produced vast alpha for innovative traders was boats.

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—Jane Bryant Quinn, Financial columnist, Bloomberg.com and Newsweek “Through the lenses of finance ‘nerds,’ Dave Leinweber recounts the quantitative and technological revolution in equity trading. The book is humorously written but it is serious and insightful. It makes an important contribution to our understanding of financial innovation and the evolution of the capital markets.” —André F. Perold, George Gund Professor of Finance and Banking, Harvard Business School “ Finally, a book that rightly honors the pocket-protected, RPN-loving, object-oriented, C-compatible, self-similar Wall Street quant! This is a delightfully entertaining romp across the trading floors and through the research departments of major financial institutions, told by one of the early architects of automated trading and a self-made nerd.”

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This is a delightfully entertaining romp across the trading floors and through the research departments of major financial institutions, told by one of the early architects of automated trading and a self-made nerd.” —Andrew W. Lo, Professor of Finance, MIT Sloan School of Management “ David Leinweber is one of the great financial innovators of our time. David possesses a unique combination of expertise in the fields of money management, artificial intelligence, and computer science.” —Blair Hull, Founder, Hull Trading & Matlock Trading “ An important, accessible, and humorous guide to today’s electronic markets. Like Capital Ideas mixed with Being Digital, as told by Steve Martin.”

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens
by Nicholas Shaxson
Published 11 Apr 2011

Immediately after the collapse of BCCI the president of the Cayman Islands Bankers Association, Nick Duggan, said: “BCCI, is a unique worldwide situation and does not reflect on the local banking community at all.”35 Another argument is like the one on tax: Offshore promotes “efficiency” by driving financial innovation and being what the offshore writer William Brittain-Catlin calls a “seller of novelties on the financial market, a sweetshop for capitalism, developing new flavours.” The financial crisis exposed what most of this financial “innovation” really involves. Innovative forms of abuse are to be resisted, not encouraged. The next offshore regulation argument involves deflection. Anthony Travers, chairman of the Cayman Islands Financial Services Authority, uses this technique widely.

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Plenty of good firms have gone bust as a result of this offshore debt-loading, which the New York Times in 2009 described as “a Wall Street version of ‘Flip This House.’”48 More than half of the companies that defaulted on their debt that year were either previously or currently owned by private equity firms. A lot of innovation that corporations do—I’m talking about useful innovations to make better and cheaper goods and services, not the financial innovations that simply shift wealth upward and risks downward along the social scale—happen in small and medium enterprises. But the offshore system works directly against this. First, it subsidizes multinationals by helping them cut their taxes and grow faster, making it harder for the innovative minnows to compete.

Life on the Rocks: Building a Future for Coral Reefs
by Juli Berwald
Published 4 Apr 2022

So, besides meeting Helen to learn about the Allen Coral Atlas, I’d wanted to go to Washington to visit The Nature Conservancy and try to understand their work developing three new financial tools that benefit coral: debt-for-reef swaps, blue bonds, and insuring coral reefs. To my ear, the words debt, bonds, and insurance hold all the allure of saltine crackers. But after talking with people involved in these projects, I felt like I’d substituted rosemary sea-salt flatbread for what I’d assumed were bland bits of the economic system. Whether or not these financial innovations can scale up fast enough to matter remains to be seen. “One project that I’ve really come to appreciate,” Lizzie had said the first time we met at her house in Austin, “is the debt swap.” I nodded my head, acting like I had any idea what that meant, and then asked if she would be able to put me in touch with some of the people involved.

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See also Great Barrier Reef Australian Institute of Marine Science, 42, 262 autoimmune disease, 76–77 axial polyps, 168 B baboons, 45 bacteria and coral farming techniques, 187 and cryopreservation of coral, 192 and living rocks, 95 and settlement of coral larvae, 213 and stony coral tissue loss disease, 102 strep infections and PANDAS, 76, 78–79 and symbiosis with corals, 79–82, 161, 213 Badi (Indonesian island), 135, 142 Bahamas, 5, 186, 216–19, 225, 231 Bali, Indonesia and coral bleaching events, 64 and coral restoration efforts, 146, 155, 164–65, 169–70, 176, 286 and coral trade, 164–65, 166–71 earthquake, 174–75 family trip to, 125, 174–77 and Indonesian Through Flow, 131 Bali Aquarium, 165 Bay, Line, 18, 271–75 Bayahibe, Dominican Republic, 193, 204–5, 208, 211, 212 “Beat It (the Heat): Combating Stress in Coral Reefs” (symposium), 71–74 Belize, 12–13, 93, 103, 181–82 Ben (son) attitudes on environmental issues, 250 diving trips, 291–92 family travels, 104, 174–75 and Isy’s struggles with OCD, 214–15, 251–52 and onset of COVID-19 pandemic, 254, 256 benefits of corals and aquarium trade, 94–97, 123, 130, 159–65, 171–73 economic value, 7, 11, 159–65, 181–82, 185, 238 “ecosystem services” approach to determining, 126–27 environmental, 7, 11, 184, 285 fishery support, 15, 123, 135–38 flood and storm protection, 7, 11, 104, 126, 171, 218–19, 241–42 Bermuda, 184 Biden, Joe, 288 biodiversity and Acropora genus, 167 and aesthetic value of corals, 7 and algal symbiosis, 69 and aquarium trade, 159 in Caribbean, 93–94 in Coral Triangle, 42, 117–18 and cryopreservation of corals, 188–92 in Dominican Republic, 202 and economic value of coral reefs, 127 ethnic diversity parallels, Scott on, 266 and 50 Reefs study, 231, 233 of Florida reef, 22 of Flower Garden Banks National Marine Sanctuary, 292–93 and genetic mixing, 44 and Indonesian Through Flow, 131, 167 and land restoration projects, 185 and Low Isles expeditions, 59–60 measuring reef health, 143 monoculture threat, 96 and stony coral tissue loss disease, 225 Black, Kristina, 265 Black Lives Matter, 267 Blanco, Macarena, 188, 193, 204–5 blast fishing, 23, 139–42, 232, 240, 313n141 bleaching of corals, 6–7 in Arabian Gulf, 62 and bacterial infections, 80–81 and Chasing Coral, 84 and Coral Reef Watch, 253 early research on, 55–60 etymology of term, 267, 268 in Florida and Caribbean, 62–63, 65, 94 at Flower Garden Banks National Marine Sanctuary, 292 and genetics research, 273–76, 277 global bleaching events, 6–7, 25, 64–67, 132 Great Barrier Reef, 11, 65, 66, 254, 258, 259–60 Gulf of Mexico, 107 in Hawai`i, 61–66 origins of research on, 61–66 patchiness of, 270 in Red Sea, 65 and reef acoustics, 146 satellite imagery, 233 in Seychelles, 240 and storm damage, 218 Bloomberg Philanthropies, 231 blue bonds, 237, 239–40 bluehead wrass (Thalassoma bifasciatum), 196 BNP Paribas, 284, 322n284 Bonaire, 88 Bontasua, 135–38, 148–54 boulder corals, 60, 64, 93, 96–98, 143, 199–200 BP, 288 branching corals and aquarium trade, 161, 164 and changing environmental conditions, 60 and coral farming, 168–69 and Indonesian restoration sites, 138, 143 and natural history collections, 42 propagation by fragmentation, 96 and reef tract disease, 21 and restoration projects, 182 and storm damage, 218 varied morphology of, 43–44 See also elkhorn corals; staghorn corals branding programs, 25–27, 147, 226 Brandt, Karl Andreas Heinrich, 67, 305n67 BRCA gene, 273 Brown, Margaret “Molly,” 235 Bruckner, Andrew, 101 Buddy Dive Resort, 181 Bugis people, 128–29 bumphead parrotfish, 176 C cactus coral (Mycetophyllia lamarckiana), 209 calcium carbonate, 50–52, 65, 86 Caldiera, Ken, 250 Cannery Row (Steinbeck), 116 carbon emissions and algae/coral symbiosis, 38 author’s offset practices, 300n9 and cloud-brightening proposals, 20 and coral bleaching, 7, 73 and geoengineering proposal, 248–50 impact of COVID-19 pandemic, 262 methane compared with, 247 Montreal Protocol on, 300n9 and ocean acidification, 50–53 and Paris Climate Accords, 288, 322n284 reduction efforts, 14 and Tragedy of the Commons model, 116 Caribbean and coral bleaching, 62, 64, 65 and evolution of corals, 93–94 reef damage in, 5–6, 94, 218–19 and tourism industry, 181–82 and tropical storms/hurricanes, 216–17 white band disease, 94 Carnegie Institute, 55 Cayman Islands, 65, 108–9 Center for Tropical Island Biodiversity Studies, 266 Centers for Disease Control and Prevention (CDC), 87, 256 Chalias, Vincent, 165, 166–71, 314n171 Chasing Coral (film), 24, 26, 27, 84 Chasing Ice (film), 26 China, 119, 162 chlorofluorocarbons (CFCs), 300n9 chlorophyll, 36, 38, 39, 68 chloroplasts, 82 Chozin, Muhammad, 141 Cladocopium, 69–70 clams, 52 Clean Air and Water Acts, 62, 116 climate change and global warming and coral bleaching, 6–7, 25, 64–67, 132 and coral genetics research, 34–35 Coral Reef Watch program, 253 and coral spawning, 131 and coral symbionts, 70 and ethical issues of coral restoration, 230 and 50 Reefs study, 231 financial impacts of, 240–42 and geoengineering proposals, 9, 18–20, 247–55, 258–59, 261–62 and Great Barrier Reef damage, 17 and heat waves, 291 and lessons of coronavirus pandemic, 287–88 and prioritization of environmental efforts, 131–32, 226–28, 234–35, 285, 289 and Reef Futures meeting, 9 and reticulated evolution, 45 See also carbon emissions climate change mitigation, 12, 18–20 cloud brightening and dust storms, 281–82 initial testing program, 251, 252–54, 258–59, 261–62 promise of, 300n17 and Reef Futures meeting, 19–20 viability of, 249–50 Wadhams on, 247–49 clown fish (Amphiprioninae), 143, 196 Club Méditerranée (Club Med), 203 Cocos Island, 48 Coles, Steve, 62, 66 Colombia, 64 colonialism, legacy of, 140–41, 203, 266 Columbia University, 273–74 Columbus, Christopher, 202 conservation ethic, 110 container ships, 99 continental drift, 47–48, 93 Convention on International Trade in Endangered Species (CITES), 162–64 Cook Islands, 64 coral atolls, 47–49, 52, 57, 134, 240 coral farming, 166–73 and aquarium trade, 159–65 and hospitality industry, 181–84, 204 and Reef Futures meeting, 12, 14, 20 and reef restoration, 94–98 and spawning, 205–9 See also aquarium trade Coral Probiotic Hypothesis, 80–82 Coral Reef Conservation Program, 102 Coral Reef Watch program, 253 Coral Restoration Consortium, 10–16 coral restoration efforts algae’s role in, 149, 188, 212–13 at Bontasua, 135–37, 148–51 and climate change, 231 cost of, 127 criteria for, 15 and financial innovations, 239–42 and genetics research, 35 Indonesia’s advantages, 131–32, 167, 176 and Mars, Inc., 122–24, 128–32 and measuring reef health, 143 and Reef Futures meeting, 11–12, 28–30 scale of, 17–22 and tetrapod structures, 211–14 See also coral farming; funding for coral research and restoration Coral Restoration Foundation, 96, 98, 225, 228, 284 Coral Sea, 253 coral trade.

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See Fundación Dominicana de Estudios Marinos (FUNDEMAR) funding for coral research and restoration and cloud-brightening proposal, 251 for combating stony coral tissue loss disease, 103 and corruption, 140 developing a budget for restoration, 227 and financial innovations, 237–43 and genetics research, 273 and Global Fund for Coral Reefs, 284–87 and hospitality industry, 181–86 and Mars, Inc., 122–24, 126–27, 154–55 and oil and gas companies, 291 philanthropic efforts, 229–36 and Reef Futures meeting, 14 and storm recovery, 217 XPRIZE, 13–15, 29–30, 223–25, 228, 285 fusing (reskinning), 98, 184, 225 G Galápagos Islands, 64 Galaxea fascicularis, 196–97 Galungan, 166, 175–77 Gates, Ruth, 15–16, 18, 234, 301n38 genetics and algae symbiosis, 69 and aquarium trade, 159, 172–73 and coral bleaching, 74–75 and coral farming, 167 and cryopreservation programs, 188–92 and evolutionary forces, 44–45, 73–74, 189–91, 195–96 genetic diversity of corals, 233, 270–76, 277 and genetic drift, 44 and Iberostar research program, 183 and thermal tolerance, 18, 33–35, 66, 272–76 Genome-Wide Association Study, 273 geoengineering, 9, 19, 247–51, 252–55 geologic history, 44–45, 47–48 Global Coral Reef Monitoring Network, 64 Global Fund for Coral Reefs (GFCR), 284–87 global warming.

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class
by Paul Pierson and Jacob S. Hacker
Published 14 Sep 2010

Tax Return Data,” working paper, Williams College, Office of Tax Analysis (March 17, 2009), Table 1. As for financial professionals, who make up a much larger proportion of the top 0.1 percent (nearly two in ten taxpayers), it strains credulity to say they are merely the talented tamers of technological change. After all, plenty of the so-called financial innovations that their complex computer models helped spawn proved to be just fancier (and riskier) ways of gambling with other people’s money, making quick gains off unsophisticated consumers, or benefiting from short-term market swings. Moreover, most of these “innovations” could occur only because of the failure to update financial rules to protect against the resulting risks—much to the chagrin of the rest of Americans who ended up bailing the innovators out.

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Moreover, most of these “innovations” could occur only because of the failure to update financial rules to protect against the resulting risks—much to the chagrin of the rest of Americans who ended up bailing the innovators out. Former Fed chairman Paul Volcker was no doubt channeling a widespread sentiment when he said in 2009 that the last truly helpful financial innovation was the ATM.7 What is more, government policy not only failed to push back against the rising tide at the top in finance, corporate pay, and other winner-take-all domains, but also repeatedly promoted it. Government put its thumb on the scale, hard. What’s so striking is that it did so on the side of those who already had more weight.

…

Computers helped Wall Street transform from million-share trading days in the 1980s to billion-share trading days in the late 1990s, magnifying the possibilities for gains—and losses.63 The shredding of the post–New Deal rule book for financial markets did not, however, simply result from the impersonal forces of “financial innovation.” In Canada, for instance, government effectively resisted many of the efforts of financial interests to rewrite the rules—and Canada was largely spared the financial debacle of the past few years. The transformation of Wall Street reflected the repeated, aggressive application of political power.

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It
by Lawrence Lessig
Published 4 Oct 2011

To the contrary: Derivatives serve a valuable purpose. As with any contract, their aim is to shift risk within a market to someone better able to carry it. That’s a good thing, for the market, and the economy generally. That we’ve just seen an economy detonated by derivatives gone wild shouldn’t lead us to ban (as if we could) these financial innovations. It should, however, lead us to be more careful about them. At the birth of this innovation, however, no one was thinking much about being careful. Nor thinking clearly. Too many made an error of aggregation: even if derivatives enabled individuals to diversify risk, they couldn’t reduce the risk for the system as a whole.7 That didn’t matter much at first, since the market for derivatives was initially tiny.

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A collapse in a tiny market doesn’t do much systemic harm. Technology soon changed all this, making it possible for the market in derivatives to explode. With the digital revolution distributing computing power to the masses, masses of financial analysts on Wall Street were able to use this computing power to concoct ever-more-complicated financial “innovations.” With each of these concoctions, a new and fiercely competitive market would race to catch up. For a brief time, the innovator had an edge (and huge profit margin). But very quickly, others copied and improved on his invention, driving down profits, and driving innovators to find new derivative markets.

…

The biggest winners here are financial executives. As Nobel Prize–winning economist Joseph Stiglitz writes, “Those who have contributed great positive innovations to our society—from the pioneers of genetic understanding to the pioneers of the Information Age—have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.”106 In 2004, “nonfinancial executives of publicly traded companies accounted for less than 6% of the top .01 percent of the income bracket. In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500.”107 The next big winners were the top executives from the S&P 500 companies.

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

We are partial to tinkerers and make folk-heroes out of people like Thomas Edison, Henry Ford, and Benjamin Franklin. But sometimes change seems to run amuck and things appear to be out of control. Then fear takes over and spoils our appetite for novelty. That is what has happened in Wall Street over the past fifteen or twenty years. The complexity and speed of financial innovation have reached a point where it is hard to grasp what is happening from moment to moment. Amateur investors and many professionals are wary of space-age trading strategies and kinky financial instruments that seem beyond their understanding. Individual investors grumble that they are the last to receive information about the stocks they own and the last to find buyers when security prices are dropping.

…

He engages in Buddhist meditation and can read Tibetan. His wife, June, who has a master’s degree in psychology and trained as an opera singer, joins him in these devotions. For most of Rosenberg’s career, he has considered himself more of an econometrician than an authority in finance. He nominates John McQuown as “the prototype financial innovator, who believed intensely in the new ideas and would unswervingly push them.” Rosenberg insists, “I’ve made no major contributions to the literature. There is nothing intrinsically new in the system,” He told me that he sees many of his ideas as “just great attention to details but very obvious . . . must seem very uninviting.”

…

They surveyed the scene from the top of the ivory tower. Let us now share their perspective, which reaches beyond the dickering business of eighths and quarters on a block trade and the flashing numbers on a computer screen. As the derring-do of Michael Milken and his cohorts fades from view, as financial innovation advances, and as the global economy fosters increasingly competitive financial markets, the vitality and flexibility of the capital markets come into sharp focus. These markets are the marvel of the capitalist system that the world yearns to emulate. The clatter of the computer and the roar of the trading floor are the sounds of a great battle in which investors compete with one another to determine who can buy at the lowest and sell at the highest.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

As Jones concluded in his Fortune piece, the price trends would cease. The market would be left to “fluctuate in a relatively gentle, orderly way to accommodate itself to fundamental economic changes only.” To an extent that he could not possibly have foreseen, Jones was anticipating the history of hedge funds. Over the succeeding decades, wave upon wave of financial innovators spotted opportunities to profit from markets, and many of them found that once their insight had been understood by a sufficient number of investors, the profit opportunity faded because the markets had grown more efficient. In the 1950s and 1960s, Jones himself was destined to impose a new efficiency upon markets.

…

Mark Rubinstein, a Berkeley economics professor and coinventor of portfolio insurance, descended into what he would later recognize as a clinical depression. He fretted that the weakening of American markets might tempt the Soviet Union to attack, making him personally responsible for a nuclear conflict.62 Not for the first time, financial innovation was being blamed too eagerly. Soros had believed that portfolio insurance created Black Monday; but markets had crashed periodically throughout history, and foreign markets, in which there was far less portfolio insurance, also suffered precipitous falls. Even in the United States, the postmortems on the crash found that of the $39 billion worth of stock sold on October 19 via the futures and the cash markets, only about $6 billion worth of sales were triggered by portfolio insurers.

…

Because of the open structure at Renaissance, the Russians understood a lot about how the system worked. If they started trading on Renaissance’s signals, they would siphon off part of its profits; it would be as though pirates were making generic copies of a pharmaceutical company’s blockbuster therapy. Patents do not protect financial innovations in the way that they protect medical ones, so Simons’s legal remedies were uncertain. And yet the remarkable thing was that Medallion’s performance continued to leave rivals in the dust. Like the magician who drinks poison and survives, Simons emerged looking more mysterious than ever. How could this survival act be possible?

Big Debt Crises
by Ray Dalio
Published 9 Sep 2018

As a historian later described it, “A great river of gold began to converge on Wall Street, all of it to help Americans hold common stock on margin.”13 The share of funds in the call loan market that were coming from lenders outside the Federal Reserve System (i.e., non-banks and foreigners) rose from 24 percent at the start of 1928 to 58 percent in October 1929.14 This added risk to the market, since the Federal Reserve couldn’t lend to these non-banks if they needed liquidity in a squeeze. The charts below show the explosion in margin debt through the bubble and the accompanying rise in prices. Investment trusts were another financial innovation that saw rapid growth during the bubble and helped draw new speculators into the market. First originated and popularized in Great Britain, investment trusts were companies that issued shares and invested the proceeds in the shares of other companies.15 The well-known economist Irving Fisher praised the “wide and well-managed diversification” that trusts provided investors who lacked sufficient capital to buy shares in multiple companies.16 As the stock market boomed, the number of trusts exploded.

…

There would have been less forced selling and a less dangerous margin spiral, as the FDIC’s systemic risk exemption powers to guarantee liabilities, combined with deposit insurance and the Fed’s discount window, would have had more power and reach. So it was not just low interest rates that fueled the bubble, but rather a combination of easy money, lax regulation, and risky financial innovations. As the Fed was looking at inflation and not debt growth when setting interest rates, and as policy makers allowed the lax regulation of shadow lending channels to continue, the bubble was allowed to grow. Borrowers and lenders had severe asset/liability mismatches, which left them especially vulnerable in a downturn.

…

Over the last few years, investment banks have been hard at work creating fancy new products where they can package up a bunch of assets and sell the package for more than the sum of the parts (CDOs, CMOs, synthetic CDOs, etc.). They do this by tranching them up and getting the ratings agencies to rate the best slice AAA, the next slice AA, and so on. This financial “innovation” makes everyone happy: insurance companies get an AAA-rated bond that yields a few basis points more than their other AAA options, and so on down the line. Often hedge funds end up with the bottom piece, and that makes them happy because they get a lot of leverage/volatility. This innovation opens up a source of credit to many risky borrowers (not just households) who previously would have had trouble accessing credit markets.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay
by John Lanchester
Published 14 Dec 2009

This is where we finally encounter the consequences arising from the fact that the invention of securitization broke banking by separating lender from borrower via selling the loan to somebody else. People wanted to find the money to buy houses, and the money in turn wanted to find a way to get to the people. The result was a huge wave of mortgage-linked financial innovation. So what now happens when the money is looking for new borrowers and the circuit breaker of risk assessment is no longer in place? Answer: the lending goes on regardless. A terrible changeover happens, in which the process of lending no longer is driven by the legitimate desire of poor-but-reliable people to own a house but is instead a manufactured process driven by capital, which is set loose looking for people to sign loans.

…

The FSA wasn’t like that: it didn’t have somebody saying “I don’t understand, please explain.” It was dedicated to what was often called the principle of “light touch” regulation. As Adair Turner, the head of the FSA, said in his postcrash report: An underlying assumption of financial regulation in the US, the UK and across the world, has been that financial innovation is by definition beneficial, since market discipline will winnow out any unnecessary or value destructive innovations. As a result, regulators have not considered it their role to judge the value of different financial products, and they have in general avoided direct product regulation, certainly in wholesale markets with sophisticated investors.4 This didn’t mean that nobody at the FSA, the Bank, or the Treasury—the third pillar of the “tripartite” regulatory system supposed to run the British financial system—had a clue what was happening.

Money Mischief: Episodes in Monetary History
by Milton Friedman
Published 1 Jan 1992

In addition, inflation in the United States produced a rise in nominal interest rates that converted the government's control, via Regulation Q, of the interest rates that banks could pay from a minor to a serious impediment to the effective clearing of credit markets. One response was the invention of money-market mutual funds as a way to enable small savers to benefit from high market interest rates. The money-market funds proved an entering wedge to financial innovation that forced the prompt relaxation and subsequent abandonment of control over the interest rates that banks could pay, as well as the loosening of other regulations that restricted the activities of banks and other financial institutions. Such deregulation as has occurred came too late and has been too limited to prevent a sharp reduction in the role of banks, as traditionally defined, in the U.S. financial system as a whole.

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For a modern society in which government taxes and spending have mounted to between 30 percent and 50 percent—occasionally even more—of the national income, this component is perhaps the least important of the three. Even if inflation did not reduce the ratio of the base to national income (which it unquestionably would do), a 10 percent annual increase in the base would currently yield as revenue to the U.S. government only about seven-tenths of 1 percent of national income. Further financial innovation is likely to reduce still further the ratio of base money to national income, even aside from the effect of inflation, making this source of revenue still less potent. I believe that the same tendencies have been present in many other countries, so that this source of revenue has become less important for them as well.

Rebel Cities: From the Right to the City to the Urban Revolution
by David Harvey
Published 3 Apr 2012

We are here looking at yet another transformation in scale of the urban process- one that m akes it hard to grasp th at what may be going on globally is in principle similar to the processes that Haussmann managed so exp ertly for a while in Se cond Empire Paris. B ut this urbanization b o om has depended, as did all the others before it, on the construction of new financial institutions and arrangements THE RIGHT TO THE CITY 13 to organize the credit requ ired to susta in it. Financial innovations set in train in the 1980s, p articularly the securitization and packaging of local mortgages for sale to investors world-wide, and the setting up of new financial institutions to facilitate a secondary mortgage market and to hold collateralized debt obligations, has played a crucial role. The ben­ efits of this were legion: it spread risk and permitted surplus savings pools easier access to surplus housing demand, and also, by virtue of its coordinations, it brought aggregate interest rates down (wh ile generat­ ing immense fortunes for the financial intermediaries who worked these wonders).

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New Cork: Monthly Review Press, 1 982; D avid Harvey, A Brief History of Neoliberalism, Oxford: OUP, 2005. Thomas Campanella, The Co ncrete Dragon: Ch ina's Urban Revolution and What it Means for the World, Princeton, NJ: Princeton Architectural Press, 2008. Richard Bookstaber, A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation, New York: Wiley, 2007; Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted Financial Markets, New York: Henry Holt, 2003. Harvey, A Brief History ofNeoliberalism; Thomas Edsall, The New Politics of Inequality, New York: Norton, 1 985. Jim Yardley and Vikas Bajaj, "Billionaires' Ascent Helps India, and Vice Versa;' New York Times, July 27, 20 1 1 .

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank
by John Tamny
Published 30 Apr 2016

Business sectors and economies don’t grow if the laggards are given a lifelong lifeline. Lest we forget, Silicon Valley’s wealth is not a function of all of its businesses succeeding. It thrives precisely because most of its start-ups fail. Failure is the driver of perfection. While Wall Street and the banks remain an important source of financial innovation, logic tells us that freedom to fail would make both even healthier. As discussed in chapter 13, the argument in favor of saving failed financial institutions was most prominently made by Ben Bernanke in 2008. As this book mentioned previously, he told then House Speaker Nancy Pelosi, “I spent my career as an academic studying great depressions.

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Washington’s involvement with Wall Street has changed Wall Street, and more realistically it has deformed Wall Street. The seen is a fairly prosperous financial sector, but the unseen is how much more prosperous it would be, how many more companies it would take public, how many more companies it would be merging, and how many more financial innovations it would be achieving absent government meddling. Government’s tight relationship weakens Wall Street, it realistically discredits Washington, and the combination weakens the economy by virtue of it limiting the flow of credit to the best ideas. It’s well past time to end a mutually abusive relationship that is neutering—and politicizing—a source of credit creation.

Global Governance and Financial Crises
by Meghnad Desai and Yahia Said
Published 12 Nov 2003

He was formerly Vice Dean and Director of Wharton Doctoral Programs and Executive Editor of the Review of Financial Studies, one of the leading academic finance journals. He is a past President of the American Finance Association, the Western Finance Association and the Society of Financial Studies. He received his doctorate from Oxford University. Dr Allen’s main areas of interest are corporate finance, asset pricing, financial innovation and comparative financial systems. Meghnad Desai is Professor of Economics, Director of the Centre for the Study of Global Governance and Chairman of the Asia Research Centre at the London School of Economics. He was created Lord Desai of St Clement Danes in 1991. His recent publications include: Money, Macroeconomics and Keynes, Essays in honour of Victoria Chick, Volume 1, edited with Arestis, P. and Dow, S.

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Schumpeter, J. A. (1982 reprinted) Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, Porcupine Press, Philadelphia. Shiller, R. J. (2000) Irrational Exuberance, Princeton University Press, Princeton, NJ. 18 Meghnad Desai Skott, Peter (1995) ‘Financial innovation, deregulation and Minsky cycles’, in G. A. Epstein and H. M. Gintis (eds) pp. 255–273. Soros, G. (1998) Towards an Open Society: The Crisis of Global Capitalism, Public Affairs, New York. Taylor, L. and O’Connell, S. (1985) ‘A Minsky Crisis’, Quarterly Journal of Economics, Volume C, Issue 3 (Supplement), 871–887.

Cogs and Monsters: What Economics Is, and What It Should Be
by Diane Coyle
Published 11 Oct 2021

Surely no regulator should have banned Professors Black, Scholes, and Merton from their research? Why has financial innovation proven so unrewarding for consumers, when innovation in every other sector of the economy generally benefits them, at least ultimately? These questions underline the fact that ideas do not live in a vacuum, but are embedded in institutional and social structures. For example, the benefits of innovation are usually spread through competition, whereas in finance there has been enough market power for financiers to extract monopoly ‘rents’, or excess profits. Moreover, financial innovation left effective regulation behind, allowing greed, fraud, recklessness and overconfidence to run unchecked (Lanchester 2010).

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order
by Paul Vigna and Michael J. Casey
Published 27 Jan 2015

Let’s not forget, also, that Nakamoto launched his project with a reminder that his new currency would require no government, no banks, and no financial intermediaries, “no trusted third party.” It offered the antithesis to the core problem of that moment in history. For all the technical and legal wizardry employed by Wall Street’s denizens, for all the financial innovation practiced by the Street’s bankers, trust was the most important element of capital markets—trust that counterparties were good for the money they pledged; trust that market prices really did reflect all available information at the time; trust that if an asset was represented on the balance sheet as being worth X amount of dollars, it actually was worth X amount of dollars.

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Even in the United Kingdom, which is within the European Union but often goes its own way on tax and regulatory rules, the prospect is for an easier hand for cryptocurrency. In August 2014, Chancellor of the Exchequer George Osborne said the United Kingdom would launch a comprehensive study to figure out how to take advantage of cryptocurrency technology and devise rules to turn Britain into “the global center for financial innovation.” Though some worried about a repeat of New York’s BitLicense disappointment, Osborne’s words certainly sounded encouraging. He said digital-currency-based “alternative payment systems are popular as they are quick, cheap, and convenient” and that he wants to “see if we can make more use of them for the benefit of the U.K. economy.”

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By extension, we end up with less need for central banks and certainly no need for centralized interest rates, as everything’s price would float against that of everything else, which—if the market is allowed to function—would mean all things ultimately find some equilibrium. Zurich-based investment manager and high-tech financial innovator Richard Olsen has talked up the prospect of this “digital barter society” with bankers, hedge fund managers, and anyone else who’ll listen. He says that as foreign as it sounds, it resonates with lots of people on Wall Street. Why? “Because it’s the only way out of the mess we’ve gotten ourselves into,” he says.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

Securities markets in general were believed to have near-magical properties of speed and randomness and correctness. The mortgage market had become a securities market. Yet it got things terribly wrong on the way up, and ceased to function on the way down. This reign of error could be attributed in part to the inevitable perils of financial innovation. Almost every great financial market bubble and crash through history has involved some new financial product or technology that market participants, without experience to call on, vastly underestimate the risks of. From tulip bulbs in seventeenth-century Holland to CDOs built around subprime mortgages, newness has always been a danger sign.

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Fisher’s belief in better data and better financial instruments squared pretty well with his economic theories. But Shiller had been arguing for decades that even well-designed markets populated by well-informed investors were prone to manias and panics—which made his belief in progress through financial innovation a bit paradoxical. At least, that’s what I told him. “I don’t think it’s a paradox,” he responded. “These are inventions that have to be human-engineered, and inventions can get people in trouble. When they first invented airplanes, there were a lot of crashes. I think it’s really the same thing.”

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The subsequent account of Long-Term Capital Management’s fall is, except where otherwise attributed, taken from the two books: Nicholas Dunbar, Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It (New York: John Wiley & Sons, 2000); Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000). 22. Joe Kolman, “LTCM Speaks,” Derivatives Strategy (April 1999): www.derivativesstrategy.com/magazine/archive/1998/0499fea1.asp. 23. Robert Litzenberger speech, Society of Quantitative Analysts. 24. Richard Bookstaber, A Demon of Their Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation (Hoboken, N.J.: John Wiley & Sons, 2007), 97. 25. The LTCM partner whose lecture Markowitz attended was David Modest. 26. The most detailed description of Greenspan’s and Corrigan’s actions is in Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Touchstone, 2001), 36–47, but better accounts of the market’s malfunctioning on the twentieth can be found in the Brady report and in James B.

Birth of the Euro
by Otmar Issing
Published 20 Oct 2008

I was once also of the opinion – at the time it was harmless, as I was only a professor and couldn’t do any damage, except perhaps to people’s heads, but not in actual decisions – that Milton Friedman’s idea of letting the money supply grow by a constant percentage year in year out, that is, adhering to the famous ‘k-per cent rule’, was the solution to the problems of monetary policy. I have changed my mind since. The facts have convinced me that financial innovations alter the content of monetary aggregates economically. You have to bear that in mind, we couldn’t foresee it at that time. You have to take account of the facts. Economics is not a matter of faith, but a science that has to be measured against The countdown begins • 41 real outcomes over and over.

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Besides other objections, the following argument and actual experience provide grounds for rejecting this rule: the money supply in question has to be defined in terms of a specific monetary aggregate; changes in payment behaviour and the emergence of new payment instruments (e.g. credit cards) – in short, financial innovations of all kinds – can radically change the economic content of a concrete monetary aggregate and hence reduce the predetermined growth rate ad absurdum.41 Other strict rules also call forth serious objections. Pursuing this analysis further42 would transcend the scope of this book. However, the discussion surrounding monetary policy rules does highlight the problem that faced the ECB – just like other central 40 41 42 M.

Stolen: How to Save the World From Financialisation
by Grace Blakeley
Published 9 Sep 2019

Financial deregulation reduced restrictions on lending and allowed banks to use this capital to create more money. International banks developed ever more ingenious ways to evade the restrictions on lending that continued to exist. Mortgages were the dynamite at the centre of the explosive device that caused the economic crisis, but the explosive device itself had been transformed due to the financial innovation seen before the crash. This transformation had several features. The removal of restrictions on capital mobility led to a wave of financial globalisation associated with significant increases in capital flows. The development of “securitisation” allowed ordinary mortgages to be turned into financial assets that could be sold to investors.

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Transatlantic Banking Crisis or Structural Crisis of Financial Capitalism? Reading this account on its own could lead one to conclude that what happened in 2007 was simply a transatlantic banking crisis with its origins in the US. It then spread around the world due to a combination of financial globalisation and financial innovations like securitisation. In the aftermath of the crash, this is the view that dominated. It was the parasitical rentiers in the international finance sector that had brought the global economy to its knees. Greedy bankers, out-of-touch economists, and regulators asleep at the wheel all shared the blame in popular readings of the crisis.28 Such accounts undoubtedly deliver an accurate analysis of the events surrounding 2008, but they do not tell the whole story.

China's Great Wall of Debt: Shadow Banks, Ghost Cities, Massive Loans, and the End of the Chinese Miracle
by Dinny McMahon
Published 13 Mar 2018

And whereas in the United States most households own shares in publicly traded companies, whether in a 401(k) or a mutual fund, in China families are most likely to hold short-term, fixed-income investments called wealth-management products, which are sold by banks as a no-risk, higher-return alternative to deposits. The curious shape of China’s financial institutions is not the result of some grand design hatched in Beijing. Rather, it’s the result of unprecedented tolerance by the Chinese authorities of financial innovation and experimentation. Consequently, members of the public now enjoy immense choice when it comes to how they invest their savings. But at the same time, Beijing’s tolerance has unleashed a perpetual-motion machine of debt creation over which it has seemingly lost all control. Were it not for the stack of white surgical masks and an air purifier on his desk—prophylactics against the Beijing air—Liu Yannan’s office could have stood in for that of any twentysomething start-up CEO anywhere in the world.

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That filters through to the lowest branches, where employees’ behavior is shaped by a long list of targets they’re expected to meet, governing loan growth, deposit growth, and income growth. When lending growth is constrained by government restrictions, the best way to grow is to find ways around the rules. That’s what Beijing’s tolerance of financial innovation has allowed the banks to do. China’s shadow-banking system came into existence soon after its counterpart in the United States had blown up in the subprime mortgage crisis. At the end of 2009, after a year of stimulus lending, China’s banks were told to rein in credit growth. China differs from most developed economies in that the government’s main tool for regulating the economy is not interest rates but the supply of credit.

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

Treasurers have come a long way since the days of Procter & Gamble, Gibson’s Greetings and Orange County, but not as far as you might think. In 2003, one in three big company treasurers still felt uncomfortable with derivatives, which is frightening considering that nine out of every ten used them.37 London’s Centre for the Study of Financial Innovation 2003 survey on business risk found that Complex Financial Instruments were regarded as being the biggest threat to the banking system. Mistakes were still being made. They were different and less naive than those of the nineties but could still be very damaging. General Electric, regarded by many as the model of a well-managed company, reduced its 2001 earnings by $502 million and cut shareholder equity by $1.3 billion because of changes in the way it accounted for derivatives.

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Derivatives encourage misrepresentation by helping organizations get round rules and regulations, avoid taxes and mislead shareholders, analysts and other observers. Although some free market economists follow Merton Miller in arguing that finding ways to avoid regulation is a positive and desirable stimulus to financial innovation, rules are usually there to protect against excessive risk-taking and it is no surprise that some institutions tripped up in their attempts to avoid them. Misrepresentation was encouraged by the unreported, unregulated nature of over-the-counter trades, the off balance-sheet status of many SPEs and the fiendish complexity of structured derivatives.

A Hacker's Mind: How the Powerful Bend Society's Rules, and How to Bend Them Back
by Bruce Schneier
Published 7 Feb 2023

One hack was a “dry sea loan,” which turned a prohibited loan into an allowed “sea loan” by linking it to arbitrary sea voyages. The response to those medieval usury hacks echoes everything in this chapter. Between the twelfth and fourteenth centuries, the Catholic Church updated its usury regulations to combat new financial innovations such as the dry sea loan, created more sophisticated enforcement mechanisms, and increased the prescribed punishments for convicted usurers. But the rich have a way of protecting their profit sources. Wealthy guilds had the resources and expertise to create financial products that successfully evaded Church scrutiny.

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This is the same philosophy that every company discussed in this part follows. To counter that, regulators need to be proactive in their regulatory efforts and consider possible vulnerabilities and industry responses in advance. By doing so, regulators can better anticipate and prevent socially deleterious industry action and financial innovation. Another is iteration and agility. While it’s nice to hope—or even believe—that effective regulations are put in place in advance to prevent these kinds of hacks, regulators need to be prepared for unexpected and socially deleterious innovation. To combat this, they need to monitor regulated parties and be ready to act quickly to police new products that emerge post-regulation, knowing that they won’t necessarily get it right the first time around—and patch all vulnerabilities as soon as they emerge. 31 Jurisdictional Interactions The Double Irish with a Dutch Sandwich tax loophole that companies like Cisco, Pfizer, Merck, Coca-Cola, and Facebook used to avoid paying US taxes stemmed from the limitation of laws by national borders.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Published 24 Jan 2013

Prior to the CDS, neither Smith nor Jones had any stake in whether GM defaulted. But after the transactions, they do. If GM defaults, Smith wins and Jones loses; and the reverse occurs if GM pays on time. Risk has been created, not extinguished. This evolution from hedging to gambling is typical of financial innovation. New instruments that are originally—or perhaps allegedly—designed to hedge away risk typically become innovative ways to create risk where none existed before. Total risk taking in society rises. Three other key features of CDS are worth noting because they, too, are typical of derivatives.

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Of course, his Treasury Department did make it a big public issue. They were just on the wrong side. Warren Buffett and Paul Volcker weren’t. Buffett famously termed derivatives “financial weapons of mass destruction” in 2003. Volcker, who had been decrying financial engineering for years, once sarcastically asserted, “The most important financial innovation I’ve seen in the last 25 years is the automatic teller machine.” In the Buffett-Volcker view, derivatives were not very useful but were very dangerous, which certainly suggests that they ought to be highly regulated. That’s quite a range of opinion, and both views contain elements of truth.

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But ask yourself whether all those fancy financial instruments actually do the economy any good. Or are they perhaps designed to enrich their designers? Economists are accustomed to thinking of innovation as unambiguously good; it raises standards of living. But is that always true in finance? Is it even usually true? I do not mean to imply that all financial innovations are harmful; as Paul Volcker pointed out, the ATM did a lot of good. So, most likely, did mutual funds, money market funds, and plain-vanilla mortgage pools. But who needed CDO-squared? What did those monstrosities contribute to the betterment of mankind? Of course, simplicity and complexity are in the eye of the beholder.

Robot Rules: Regulating Artificial Intelligence
by Jacob Turner
Published 29 Oct 2018

OJ C 250, 31 July 2015, 1–5. 151See, for example, various EU guidelines and guidance on sanctions: Maya Lester QC and Michael O’Kane, “Guidelines”, European Sanctions Blog, https://​europeansanction​s.​com/​eu-guidelines/​, accessed 1 June 2018. 152Willem Riphagen, “From Soft Law to Jus Cogens and Back”, Victoria University of Wellington Law Review, Vol. 17 (1987), 81. 153See “UNICTRAL Model Law on International Commercial Arbitration”, http://​www.​uncitral.​org/​uncitral/​en/​uncitral_​texts/​arbitration/​1985Model_​arbitration.​html, accessed 1 June 2018. 154Deanna Barmakian and Terri Saint-Amour, “Uniform Laws and Model Acts”, Harvard Law School Library, https://​guides.​library.​harvard.​edu/​unifmodelacts, accessed 1 June 2018. 155The Uniform Commercial Code is an example of a widely-adopted uniform law. 156“About the IMLI”, Website of the IMLI, http://​www.​imli.​org/​about-us/​imo-international-maritime-law-institute, accessed 1 June 2018. 157Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments, art. 67. 158Ibid. 159“Global Financial Innovation Network”, FCA Website, 7 August 2018, updated 9 August 2018, https://​www.​fca.​org.​uk/​publications/​consultation-papers/​global-financial-innovation-network, accessed 16 August 2018. There is further discussion of the functioning and nature of regulatory sandboxes in Chapter 7 at 7.3.4. 160Art. 15(2) of the Paris Climate Agreement 2015 provides: “The [compliance] mechanism referred to in paragraph 1 of this Article shall consist of a committee that shall be expert-based and facilitative in nature and function in a manner that is transparent, non-adversarial and non-punitive”. 161See, for example, the views of Israel on the International Criminal Court: “Israel and the International Criminal Court”, Office of the Legal Adviser to the Ministry of Foreign Affairs, 30 June 2002, http://​www.​mfa.​gov.​il/​MFA/​MFA-Archive/​2002/​Pages/​Israel%20​and%20​the%20​International%20​Criminal%20​Court.​aspx, accessed 1 June 2018. 162One successful example of a mechanism to ensure a balance of quality as well as geographic diversity is the EU’s “Article 255 Committee”, which since 2010 has assessed nominees for judicial appointment to the EU’s Courts.

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As well as these more punitive measures, national AI bodies could also provide facilitative services such as the “sandboxing” of new technologies, namely the ability to test them in safe environments, as well as the licensing and certification of individuals and AI systems for compliance with relevant standards. Section 3.4 of Chapter 7 elaborates further on the methodology of regulatory sandboxes. In an example of the type of international co-operation which could be applied to AI, in August 2018 the UK Financial Conduct Authority (FCA) and 11 other organisations created the Global Financial Innovation Network (GFIN). The FCA explained that GFIN “...will seek to provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas. It will also create a new framework for co-operation between financial services regulators on innovation-related topics, sharing different experiences and approaches”.

Evil Geniuses: The Unmaking of America: A Recent History
by Kurt Andersen
Published 14 Sep 2020

The financial industry actually coined the astonishingly shameless term of art incognito leverage for invisible corporate debt, debt kept off balance sheets, hidden from the clueless chumps among the investors. The “large banks start[ed] acting more like traders” than trustworthy advisers, the journalist Nicholas Dunbar explains in The Devil’s Derivatives, his history of financial innovation. The result was an “innovation race between ways of transferring risk”—such as the credit default swap, a derivative bought by financial firms that was actually predicated on unpaid loans and financial disaster, an invention that “Goldman Sachs quickly moved to exploit and was richly rewarded for its ambition and ruthlessness.”

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Forty years later, the research provides no consensus that paying executives in stock solves the problems of executive inattention or laziness. Indeed, now that the overriding goal of the managers of every public company was to get the stock price up, the focus of corporate “innovation” became doing that, financially innovating by any means necessary. I remember when I first read in the 1980s about companies buying up masses of their own shares on the stock market as a strategy for jacking up the price—by having fewer shares in circulation, their earnings per share magically rose—it struck me as…not a con, maybe, but not exactly kosher.

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But Born persisted, publicly announcing an inquiry into derivatives and their risks—prompting her fellow task force members to put out a joint statement that they had “grave concerns” about her rogue regulatory inquiry. Rubin’s deputy Lawrence Summers, soon to replace him as secretary of the treasury, warned Congress that by suggesting official skepticism of this latest financial innovation, Born had cast “a shadow of regulatory uncertainty over an otherwise thriving market.” She lost and resigned. The guys won and joined with the Republicans running Congress to write two big new laws, a kind of final grand spasm of the deregulation mania that allowed the financial industry to get even wilder and crazier.

Debt: The First 5,000 Years
by David Graeber
Published 1 Jan 2010

The reason that people were ready for such a conversation was that the story everyone had been told for the last decade or so had just been revealed to be a colossal lie. There’s really no nicer way to say it. For years, everyone had been hearing of a whole host of new, ultra-sophisticated financial innovations: credit and commodity derivatives, collateralized mortgage obligation derivatives, hybrid securities, debt swaps, and so on. These new derivative markets were so incredibly sophisticated, that—according to one persistent story—a prominent investment house had to employ astrophysicists to run trading programs so complex that even the financiers couldn’t begin to understand them.

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The Near West: Islam (Capital as Credit) Prices depend on the will of Allah; it is he who raises and lowers them. —Attributed to the Prophet Mohammed The profit of each partner must be in proportion to the share of each in the adventure. Islamic legal precept For most of the Middle Ages, the economic nerve center of the world economy and the source of its most dramatic financial innovations was neither China nor India, but the West, which, from the perspective of the rest of the world, meant the world of Islam. During most of this period, Christendom, lodged in the declining empire of Byzantium and the obscure semi-barbarous principalities of Europe, was largely insignificant.

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It seems significant here that in the Middle East, in the first round, those popular movements that most directly challenged the global status quo tended to be inspired by Marxism; in the second, largely, some variation on radical Islam. Considering that Islam has always placed debt at the center of its social doctrines, it’s easy to understand the appeal. But why not throw things open even more widely? Over the last five thousand years, there have been at least two occasions when major, dramatic moral and financial innovations have emerged from the country we now refer to as Iraq. The first was the invention of interest-bearing debt, perhaps sometime around 3000 bc; the second, around 800 ad, the development of the first sophisticated commercial system that explicitly rejected it. Is it possible that we are due for another?

Narconomics: How to Run a Drug Cartel
by Tom Wainwright
Published 23 Feb 2016

In the tech business, new services and inventions created by the likes of Google and Facebook present legal and moral dilemmas about privacy and data protection faster than courts can rule on them. In the banking industry, the pace of financial innovation in the run-up to the meltdown of 2007 made it hard for the authorities to notice that the pileup of credit-default swaps, collateralized-debt obligations, and other inventive products represented an accident waiting to happen. Even now, the regulators lag far behind the financial innovators. The Dodd-Frank Act, a mammoth piece of legislation designed to prevent bankers from taking the kinds of risks that nearly capsized the world economy in 2007, had still not been fully implemented five years after it was passed in 2010.

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America
by Matt Taibbi
Published 15 Feb 2010

Any sane person would have looked at these numbers and concluded that something was terribly wrong (and some, like Greenspan’s predecessor Paul Volcker, did exactly that, sounding dire warnings about all that debt), but Greenspan refused to admit there was a problem. Instead, incredibly, he dusted off the same old “new era” excuse, claiming that advances in technology and financial innovation had allowed Wall Street to rewrite the laws of nature again: Technological advances have resulted in increased efficiency and scale within the financial services industry … With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.

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The AIG bailout marked the end of a chain of mortgage-based scams that began, in a way, years before, when Solomon Edwards set up a long con to rip off an unsuspecting sheriff’s deputy named Eljon Williams. It was a game of hot potato in which money was invented out of thin air in the form of a transparently bogus credit scheme, converted through the magic of modern financial innovation into highly combustible, soon-to-explode securities, and then quickly passed up the chain with lightning speed—from the lender to the securitizer to the major investment banks to AIG, with each party passing it off as quickly as possible, knowing it was too hot to hold. In the end that potato would come to rest, sizzling away, in the hands of the Federal Reserve Bank.

Digital Bank: Strategies for Launching or Becoming a Digital Bank
by Chris Skinner
Published 27 Aug 2013

Why does the ECB bother to write a report and an in-depth analysis of Bitcoin and other virtual currencies? Because they are worried that they are unregulated value exchanges that could represent a challenge for public authorities and have a negative impact on the reputation of central banks. On the other hand, they do make note that “these schemes can have positive aspects in terms of financial innovation and the provision of additional payment alternatives for consumers.” To be honest, whether Bitcoin takes off or not, virtual currencies are going to explode thanks to in-app gaming on the mobile internet, something the ECB report misses. Most of us already top-up or bling our gaming on our iPhones and iPads via iTunes.

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Shouldn’t there be more ways to pool resources and make use of the SIWFT cooperative for more than it is now? This is especially important as we move towards mobile payment services and more, and this is what drove the Innotribe program in terms of proving that SWIFT could be used for much more than just messaging. What do you see as the big things happening in the future from a financial innovation viewpoint? I know for a fact that the new economies and new values that we discuss within Innotribe are driven by social media. Social media is creating new currencies and new economic models, and this will be very big and very important in the two to three years downstream from now. The question for the banks is how will they position in this new world of peer-to-peer currencies in social media.

The Post-American World: Release 2.0
by Fareed Zakaria
Published 1 Jan 2008

Goldman Sachs originally projected that the combined GDP of the four BRIC economies—Brazil, Russia, India, China—could overtake the combined GDP of the G-7 countries by 2039. These days, they say it could happen by 2032.11 The current global recession makes them more, not less, confident. Global power is, above all, dominance over ideas, agendas, and models. The revelation that much of the financial innovation that occurred in the last decade created little more than a house of cards erodes American power. Selling American ideas to the rest of the world will require more effort from here on out. Developing countries will pick and choose the economic policies that best suit them, and with growing confidence.

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During the go-go years of the mid-aughts, it kept interest rates low and encouraged homeowners to refinance, hedge fund managers to ramp up leverage, and investment banks to goose their balance sheets. China’s lending created cheap money, says the Financial Times columnist Martin Wolf, and “cheap money encouraged an orgy of financial innovation, borrowing and spending.” It was one of the major contributors to the global financial crisis, and the cycle continues even in its aftermath. Everyone agrees the status quo is unsustainable. “There can be no return to business as usual,” Wolf wrote after the financial collapse. But in the short term, we seem destined for more of the same.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril
by Satyajit Das
Published 9 Feb 2016

Complex instruments allowing risky loans to be repackaged into higher quality securities—a form of financial magic—compounded the problem. As the value of these securities fell sharply, investors who had borrowed against them were forced to sell, triggering ever larger losses. Risk turned out to have been egregiously underpriced; the potential problems of complex financial innovations had not been understood. Everyone, it seemed, including international bond-rating agencies and bank regulators, had relied on someone else to analyze the risk. The aggressive deregulation of the 1980s had left the banking system with low levels of capital and reserves with which to absorb rising losses, something that mathematical models had dismissed as highly improbable.

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These are frequently zero-sum games, entailing transfers of wealth between the parties to a transaction and adding little to overall economic activity. One problem is the global financial system's intricate linkages, which in 2008 became a conduit for transmitting contagion. This led to sharp falls in cross-border capital flows, which today remain well below the pre-crisis levels. Financial innovations create new risks, both for individual institutions and systemically. Financiers profit from and exploit the asymmetry of information between sellers and buyers of complex products. Bank managers, directors, and regulators are unable to keep up with new developments or provide adequate supervision.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

● ● ● ● ● FURTHER READING The fall 1988 issue of the Journal of Economic Perspectives contains a collection of articles, including one by Modigliani and Miller, that review and assess the MM propositions. The summer 1989 issue of Financial Management contains three more articles under the heading “Reflections on the MM Propositions 30 Years Later.” Two surveys of financial innovation include: F. Allen and G. Yago, Financing the Future: Market-Based Innovations for Growth, Wharton School Publishing-Milken Institute Series on Financial Innovations (Upper Saddle River, NJ: Pearson Education, 2010). P. Tufano, “Financial Innovation,” in G. M. Constantinides, M. Harris, and R. Stulz (eds.), Handbook of the Economics of Finance, vol. 1A (Amsterdam: Elsevier/North-Holland, 2003). Miller reviews the MM propositions in: M.

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He is active as a financial consultant. Franklin Allen Nippon Life Professor of Finance at the Wharton School of the University of Pennsylvania. He is past president of the American Finance Association, Western Finance Association, and Society for Financial Studies. His research has focused on financial innovation, asset price bubbles, comparing financial systems, and financial crises. He is a scientific adviser at Sveriges Riksbank (Sweden’s central bank). Preface This book describes the theory and practice of corporate finance. We hardly need to explain why financial managers have to master the practical aspects of their job, but we should spell out why down-to-earth managers need to bother with theory.

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The financial manager needs to know what kinds of market imperfection to look for. For example, the firm may invent some new security that a particular clientele of investors is willing to buy at a premium price, thereby increasing the overall market value of the firm. (We argue, however, that such financial innovations are easily copied and that any gains in value will be confined to the first few issuers.) In Chapter 18 we undertake a detailed analysis of the imperfections that are most likely to make a difference, including taxes, the costs of bankruptcy and financial distress, the costs of writing and enforcing complicated debt contracts, differences created by imperfect information, and the effects of debt on incentives for management.

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

“And the management of the trusts could be expected to have a far better knowledge of companies and prospects in Singapore, Madras, Capetown and the Argentine, places to which British funds regularly found their way, than the widow in Bristol or the doctor in Glasgow,” Galbraith wrote. “The smaller risk and better information well justified the modest compensation of those who managed the enterprise.” Soon the idea was exported to the United States, primarily under the guise that this was a financial innovation worth imitating, lest Wall Street be seen as falling behind the City of London as a repository of brilliant new ideas. At first, the trickle of such trusts to the New World was slow. In 1921, an SEC report of the phenomenon put the number at “about forty.” At the beginning of 1927, the same report noted there were 160 such trusts, and another 140 were established during the course of the year.

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“Goldman Sachs by now was applying leverage with a vengeance,” Galbraith observed. And why not? At the time of the Blue Ridge offering, according to the New York Times, Goldman Sachs Trading Corporation was worth $500 million, up fivefold in nine months, and Shenandoah had doubled in value in less than a month. Blue Ridge had the additional financial innovation that it allowed investors to exchange shares in a select group of twenty-one other blue-chip New York Stock Exchange companies—among them AT&T and General Electric—at fixed prices for shares in Blue Ridge. Why anyone would want to do this was not made clear, of course, especially if the fixed price offered for, say, a share of General Electric by Blue Ridge was less than where GE was trading in the market.

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According to Institutional Investor, the firm’s new leaders established an “Ad Hoc Profit Maximization Committee,” whose members were “intelligent men from Mars,” according to Friedman, and the purpose of which was “to bring new perspectives to the firm’s various businesses by questioning how things are run … without threatening the ethos.” Then there was the “bevy” of new consultants who showed up at the firm. Marketing consultant Anthony Buzan—a “creative provocateur,” Geoff Boisi said—had been hired to counter the perception that Goldman was a follower, not a leader, when it came to financial innovation. At an investment banking retreat in upstate New York, Buzan tagged along and got the Goldman bankers to engage in a little finger painting while also getting their creative juices flowing. Indeed, Boisi had implemented an annual award for financial creativity—$25,000 plus a slab of Baccarat crystal—that was won in 1989 by a woman banker whose name has been lost to history who created Goldman’s business in employee stock-ownership plans (then all the rage on Wall Street in facilitating employee buyouts of companies).

Liar's Poker
by Michael Lewis
Published 1 Jan 1989

The irony is that it achieved precisely what Ranieri had hoped: It made home mortgages look more like other bonds. But making mortgage bonds conform in appearance had the effect, in the end, of making them only as profitable as other kinds of bonds. Larry Fink, the head of mortgage trading at First Boston who helped create the first CMO, lists it along with junk bonds as the most important financial innovation of the 1980s. That is only a slight overstatement. The CMO burst the dam between several trillion investable dollars looking for a home and nearly two trillion dollars of home mortgages looking for an investor. The CMO addressed the chief objection to buying mortgage securities, still voiced by everyone but thrifts and a handful of adventurous money managers.

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Therefore, the trading risks were managed by mere tykes, a few months out of a training program, who happened to know more about Ginnie Mae 8 percent IOs than anyone else in the firm. That a newcomer to Wall Street should all of a sudden be an expert wasn't particularly surprising, since the bonds in question might have been invented only a month before. In a period of constant financial innovation, the youngest people assumed power (and part of the reason young people got rich was that the 1980s was a period of constant change). A young brain leaped at the chance to know something his superiors did not. The older people were too busy clearing their desktops to stay at the frontiers of innovation.

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
by George A. Akerlof and Robert J. Shiller
Published 1 Jan 2009

It can only be surmised that the regulators were asleep at the switch, dozing off in the confident but wrong minded notion that capitalist markets would police themselves because people would watch out for their own interest. Stricter regulation is needed; at the same time, however, any new financial rules have to be open to genuine financial innovation. • Bankruptcy Law. This should be a major agenda pursued by governments around the world. Some enterprises seem to have remarkably little difficulty going into bankruptcy, and then emerging out of it after a reorganization of debts and (sometimes) labor contracts. In the United States, Chapter 11 of the bankruptcy code allows them to continue to operate, and the difference between the bankrupt operations and the solvent ones seems to be almost negligible.

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Moreover, even the Federal Reserve System as it existed at the beginning of 2007 was apparently not up to the task of preventing behavior that looked very much like bank runs, as one financial institution after another failed. In response the Fed had to reinvent itself, with new lending facilities that went far beyond its original turf of depository institutions. The increasing complexity of our financial system makes it hard for economic institutions like deposit insurers or central banks to stay ahead of financial innovation. Central banks today are concerned about deflation, and they are unlikely to let it happen. But they are not necessarily going to stop it entirely—witness the deflation in Japan in the late 1990s and early 2000s.40 If there were deflation today, would we be more enlightened about nominal wage cuts than we were in the 1930s?

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay
by Guy Standing
Published 13 Jul 2016

Flows of $8 trillion into those economies generated $5 trillion of credit annually.14 Much of that went into fuelling property bubbles at home and abroad. Ben Bernanke, former chair of the US Federal Reserve, and economists at the International Monetary Fund (IMF) are among those arguing that the combination of loose monetary policy, financial innovation and the savings glut in emerging market economies is responsible for housing price bubbles in Britain, the USA and elsewhere.15 This has contributed to the growth of wealth inequality and a revival of landlordism. This time, however, many of the landlords are on the other side of the world.

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Epstein, ‘The Correlates of Rentier Returns in OECD Countries’, Political Economy Research Institute Work Paper 58A (Amherst: University of Massachusetts, 2007). 30 G. Krippner, What is Financialization? (Department of Sociology, University of Wisconsin, 2005), mimeo. 31 C. Roxburgh et al., Global Capital Markets: Entering a New Era (New York: McKinsey Global Institute, 2009), p. 9. 32 The hypothesis that financial innovation leads to Ponzi finance is associated with Minsky. H. P. Minsky, Stabilizing an Unstable Economy (New Haven, CT: Yale University Press, 1986). 33 B. Milanović, The Haves and the Have-Nots (New York: Basic Books, 2011). 34 R. Fuentes-Nieva, ‘Who is the richest man in history? The answer might surprise you’, Oxfamblogs.org, 2015. 35 Atkinson, 2015, op. cit., p. 182. 36 A.

Keeping at It: The Quest for Sound Money and Good Government
by Paul Volcker and Christine Harper
Published 30 Oct 2018

I spent the afternoon listening to bankers and traders warning that regulations must not inhibit trading and “innovation.” My impulsive reaction to their comments was later printed in full in the Wall Street Journal: “I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.” I predicted that my proposal of keeping certain speculative activities outside of the commercial banking system was “probably going to win in the end.” To that point, I received no evidence. But my forecast proved accurate.

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Only once in the past century, in the 1930s, have we had deflation, serious deflation. In 2008–2009 there was cause for concern. The common characteristic of those two incidents was collapse of the financial system. We can’t expect to prevent all financial excesses and recessions in the future. That is the pattern of history with free markets, financial innovation, and our innate “animal spirits.” The lesson, to me, is crystal clear. Deflation is a threat posed by a critical breakdown of the financial system. Slow growth and recurrent recessions without systemic financial disturbances, even the big recessions of 1975 and 1982, have not posed such a risk.

Ghost Road: Beyond the Driverless Car
by Anthony M. Townsend
Published 15 Jun 2020

Imagine new financial instruments, securitized by the highly predictable revenue streams produced by AVs. Yet when AVs and trading algorithms interact on a massive scale, unforeseeable and violent market swings may flare up. And who will wield this new financial power, and who does it put at risk? Much as Uber’s introduction of surge pricing showed, the expansion of financial innovation in the mobility sector will deliver highly unequal benefits. What’s worse, as the power of mobility financiers grows, the very same tools that cities will deploy to manage the AV invasion—such as congestion pricing—may be co-opted by speculators, weaponized, and turned back against local governments.

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I thought about my internet-connected phone, and TV, too, and all the casually clicked subscriptions that mounted up over the months. Was that the kind of thing to expect on the roads too? I posed the possibility, and Charlier pushed back, arguing that public authorities would find it difficult to impose such complicated, ever-changing toll schedules. Politics would severely limit their freedom for financial innovation. (See the Rebecca Riots, pages 162–63.) But private concessionaires like Sanef, he confessed, could and would push the technology to its revenue-maximizing potential. I left the meeting with an urgent lingering question—what sophisticated and possibly sinister tolling schemes lay ahead? Salama’s bold assertion started to take on a larger significance.

Rebooting Democracy: A Citizen's Guide to Reinventing Politics
by Manuel Arriaga
Published 1 Jan 2014

Conclusion Until now we have had such a low level of democracy, that it is about time we try something else.—Jón Trausti Reynisson, editor-in-chief of the Icelandic daily Dagbladid & Visir, interviewed in 2011 In 2008, Iceland found itself in a dire situation. Its banking sector, which had been too eager to participate in the global debt folly and other forms of “financial innovation,” collapsed and threatened to force Iceland into national bankruptcy. Financial chaos ensued, and the country is, to this day, still recovering from the resulting economic crisis. Over this period, Icelanders took to the streets and, eventually, the government fell. Along the way, however, something more curious happened.

Program Or Be Programmed: Ten Commands for a Digital Age
by Douglas Rushkoff
Published 1 Nov 2010

* * * 6. See the LETSystems home page at http://www.gmlets.u-net.com/ for some simple explanations of how this works. Or see the currency chapter in my own Life Inc: How Corporatism Conquered the World and How We Can Take it Back (New York: Random House, 2009). 7. See Alan Greenspan, “Fostering Financial Innovation: The Role of Government” in The Future of Money in the Information Age (Washington, DC: Cato Institute, 1997). Or watch any of Greenspan’s later testimonies to Congress. 8. See CreativeCommons.org for more detailed descriptions of these choices for publication without traditional copyright.

The Hidden Wealth of Nations: The Scourge of Tax Havens
by Gabriel Zucman , Teresa Lavender Fagan and Thomas Piketty
Published 21 Sep 2015

Switzerland has also left to other tax havens control over the techniques used to hide beneficiaries. Today numbered accounts are forbidden by anti-money-laundering legislation. They have been replaced by trusts, foundations, and shell corporations. In the 1960s, accounts in Switzerland were identified by a series of numbers. Today, through the miracle of financial innovation, they are identified by a series of letters: on bank statements the “account 12345” has become that of “company ABCDE.” In all cases, the true owner remains undetectable. In 2012 four scholars attempted to create anonymous companies through 3,700 incorporation agents all over the world: in about a quarter of the cases, they were able to do so without providing any identification document whatsoever.8 However, shell corporations are not domiciled in Switzerland, but for the most part in a handful of tax havens where their creation is cheap, rapid, and safe.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

If beating the market is a zero sum game before costs, it is a loser’s game after costs are deducted. Which is why costs must be made clear to investors, and, one hopes, minimized. Pointing this out routinely surely cannot earn Jack Bogle many friends among Wall Street, which depends on the mystery surrounding financial innovations—as they are called euphemistically. But Bogle doesn’t care much about “stirring the pot.” His friends have long learned to appreciate that his truth-telling is the key to his personality. Jack Bogle has spent a lifetime in study and active participation in financial markets. The amount of self-dealing and self-enrichment he has seen qualifies him to bear witness against not just a few individuals, but entire firms and certainly an entire industry.

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But technology cannot eliminate the frictional costs of the system. While unit-trading costs have plummeted, trading volumes have soared, and total costs of the financial system continue to rise. Too many innovations have served Wall Street at the expense of its client/investors. Pressed to identify useful financial innovations created during the past quarter-century, Paul A. Volcker, former Federal Reserve Chairman and recent chairman of President Obama’s Economic Recovery Board, could single out only one: “The ATM.” (Mr. Volcker recently told me that if the period of evaluation had been the past 40 years, he would have also included the creation of the index mutual fund in 1975 as an important and positive innovation that has served investors well.)

Rise of the Robots: Technology and the Threat of a Jobless Future
by Martin Ford
Published 4 May 2015

Still, it seems hard to make a strong case for financialization as the primary cause of, say, polarization and the elimination of routine jobs. It’s also important to realize that growth in the financial sector has been highly dependent on advancing information technology. Virtually all of the financial innovations that have arisen in recent decades—including, for example, collateralized debt obligations (CDOs) and exotic financial derivatives—would not have been possible without access to powerful computers. Likewise, automated trading algorithms are now responsible for nearly two-thirds of stock market trades, and Wall Street firms have built huge computing centers in close physical proximity to exchanges in order to gain trading advantages measured in tiny fractions of a second.

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Viewed from this perspective, financialization is not so much a competing explanation for our seven economic trends; it is rather—at least to some extent—one of the ramifications of accelerating information technology. In this, there is a strong cautionary note as we look to the future: as IT continues its relentless progress, we can be certain that financial innovators, in the absence of regulations that constrain them, will find ways to leverage all those new capabilities—and, if history is any guide, it won’t necessarily be in ways that benefit society as a whole. Politics In the 1950s, more than a third of the US private sector workforce was unionized.

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions
by Dan Ariely
Published 19 Feb 2007

The belief has been that a move from multiple and semi-independent markets toward one big market increases liquidity, encourages financial innovation, and allows friction-free trade. As a consequence, today, in case you haven’t noticed, there is not much difference between the Japanese, British, German, and American stock markets. We see them rise and fall almost in unison, if to varying degrees. But as we witness the effects of increased globalization, we should ask ourselves what are the benefits and the costs of having one large market. I suspect that one large market can, in fact, reduce financial innovation, be dangerous to our financial health, and ultimately fail to protect us against financial meltdowns.

The Future of Money
by Bernard Lietaer
Published 28 Apr 2013

All barter income is treated as normal income by the IRS. 1990s: Expansion of barter within all developed countries. In parallel, Internet commerce starts taking off. 1997: Alan Greenspan, Chairman of the Federal Resave Board, gives implicit OK to corporate currency initiatives: 'If we wish to foster financial innovation, we must be careful not to impose rules that inhibit it.' The cyber economy is estimated at $35.6 billion per year. 1998: In the VS no fewer than 400,000 businesses are members of 686 barter exchanges, totalling a volume of $8.5 billion in domestic exchanges. Annual growth rate is 15%, three times faster than commercial exchanges facilitated by dollars. 1999: Internet traffic doubles every 100 days. 2000: The cyber economy reaches 5200 billion per year, about half of which is between corporations.

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However, it is predictable that the hedge funds - mutual funds specialising in currency speculation - will be the ones that will bear the brunt of the public relations backlash if a global meltdown occurs, as they are the 'last kid on the block'. In all financial crisis - from the Dutch tulips in 1637 to the US stock market crash of 1987 - it is invariably the most recent financial innovation which bears the brunt of the blame. Figure P.3 provides a synthetic overview of the currency flows which triggered three crises between 1983 and 1998. A monetary crisis can be seen as the result of sudden ebb of the global cash flow out of the target country, brutally reversing an earlier inflow.

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World
by Adam Lebor
Published 28 May 2013

There is a very strong sense of pecking order.” But like all self-referential groups that rely on each other for mutual advice and reinforcement, the central bankers, cocooned in luxury and discretion at the BIS, can easily forget that they are public servants, said Andrew Hilton, the director of the Centre for the Study of Financial Innovation, a think-tank based in London. “It’s a tricky one because you don’t want them to be affected by day-to-day populist pressures. On the other hand, you do want them to know how much a pint of milk costs. The fine line you have to draw is between not being pressured by what’s happening on the street, but also being aware of it.

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Others argue that the answer to the banking crisis is not more insider committees and regulatory bodies hosted at the BIS, or anywhere else, but much less, or none at all. “Banking should become a normal industry, like manufacturing bicycles,” said Andrew Hilton, of the Centre for the Study of Financial Innovation. “Banking should be regulated to protect against fraud, to protect consumers, and to protect the banks’ integrity, but nothing else. That sounds crazy because everyone says that banking is special. Banking is only special because the sums of money flowing through these institutions are so large they can bring society down.

A Pelican Introduction Economics: A User's Guide
by Ha-Joon Chang
Published 26 May 2014

Exactly how they do so is rather complicated, as I shall explain below. Securitized debt products are created by pooling individual loans into a composite bond In the old days, when someone borrowed money from a bank and bought something, the lending bank owned the resulting debt and that was that. But ‘financial innovations’ in the last few decades have led to the creation of a new financial instrument called asset-backed securities (ABSs) out of these debts. An ABS pools thousands of loans – for homes, cars, credit cards, university fees, business loans and what not – and turns them into a bigger, ‘composite’, bond.

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It broke through the 900 per cent mark by the early 2000s.12 The New Financial System and Its Consequences The new financial system was to be more efficient and safer All this meant that a new financial system has emerged in the last three decades. We have seen the proliferation of new and complex financial instruments through financial innovation, or financial engineering, as some people prefer to call it. This process was enormously facilitated by financial deregulation – the abolition or the dilution of existing regulations on financial activities, as I shall discuss later. This new financial system was supposed to be more efficient and safer than the old one, which was dominated by slow-witted commercial banks dealing in a limited range of financial instruments, unable to meet increasingly diverse demands for financial risk.

Men Without Work
by Nicholas Eberstadt
Published 4 Sep 2016

Any account of America’s growing male work problem that does not recognize that macroeconomic changes have played a part in this troubling dynamic cannot help but be incomplete. Therefore, it’s important to summarize some of the thinking and evidence suggesting that long-term structural forces (including such things as international trade, technological and financial innovation, outsourcing, the rise of the on-demand economy, temporary work, and other trends shaping aggregate demand) may be responsible for much, if not most, of the decline in work for men in postwar America. A 2016 report by the president’s Council of Economic Advisers (CEA) did a good job of laying out this case.1 After documenting the long-term decline in prime-age male workforce participation rates and sorting out some of its components, the report rightly suggested that these long-term labor force trends can be explained in terms of three different kinds of effect: (1) supply side, (2) demand side, and (3) institutional.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing
by Burton G. Malkiel
Published 10 Jan 2011

Innovations such as e-mail, the Internet, iPhones, iPads, Kindles, videoconferencing, social networks, and new medical advances ranging from organ transplants and laser surgery to nonsurgical methods of treating kidney stones and unclogging arteries have materially affected the way we live. Financial innovation over the same period has been equally rapid. In 1973, when the first edition of this book appeared, we did not have money-market funds, NOW accounts, ATMs, index mutual funds, ETFs, tax-exempt funds, emerging-market funds, target-date funds, floating-rate notes, volatility derivatives, inflation protection securities, equity REITs, asset-backed securities, Roth IRAs, 529 college savings plans, zero-coupon bonds, financial and commodity futures and options, and new trading techniques such as “portfolio insurance” and “flash trading,” to mention just a few of the changes that have occurred in the financial environment.

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In 1973, when the first edition of this book appeared, we did not have money-market funds, NOW accounts, ATMs, index mutual funds, ETFs, tax-exempt funds, emerging-market funds, target-date funds, floating-rate notes, volatility derivatives, inflation protection securities, equity REITs, asset-backed securities, Roth IRAs, 529 college savings plans, zero-coupon bonds, financial and commodity futures and options, and new trading techniques such as “portfolio insurance” and “flash trading,” to mention just a few of the changes that have occurred in the financial environment. Much of the new material in this book has been included to explain these financial innovations and to show how you as a consumer can benefit from them. This tenth edition also provides a clear and easily accessible description of the academic advances in investment theory and practice. Chapter 10 describes the exciting new field of behavioral finance and underscores the important lessons investors should learn from the insights of the behavioralists.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

ffirs.qxd 3/1/07 3:33 PM Page i A DEMON OF OUR OWN DESIGN ffirs.qxd 3/1/07 3:33 PM Page ii ffirs.qxd 3/1/07 3:33 PM Page iii A DEMON OF OUR OWN DESIGN ~ ~ Markets, Hedge Funds, and the Perils of Financial Innovation RICHARD BOOKSTABER John Wiley & Sons, Inc. ffirs.qxd 3/1/07 3:33 PM Page iv Copyright © 2007 by Richard Bookstaber. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. Wiley Bicentennial Logo: Richard J. Pacifico No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com.

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Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Bookstaber, Richard M., 1950– A demon of our own design : markets, hedge funds, and the perils of financial innovation / Richard Bookstaber. p. cm. Includes bibliographical references and index. ISBN: 978-0-471-22727-4 (cloth) 1. Hedge funds. 2. Risk management. I. Title. HG4530.B66 2007 332.64'524—dc22 2006034368 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 ffirs.qxd 3/1/07 3:33 PM Page v In memory of my son, Joseph Israel Bookstaber ffirs.qxd 3/1/07 3:33 PM Page vi ftoc.qxd 3/1/07 3:34 PM Page vii CONTENTS Acknowledgments ix About the Author xi CHAPTER 1 ~ Introduction: The Paradox of Market Risk 1 CHAPTER 2 ~ The Demons of ’87 7 CHAPTER 3 ~ A New Sheriff in Town 33 CHAPTER 4 ~ How Salomon Rolled the Dice and Lost 51 CHAPTER 5 ~ They Bought Salomon, Then They Killed It 77 CHAPTER 6 ~ Long-Term Capital Management Rides the Leverage Cycle to Hell 97 CHAPTER 7 ~ Colossus 125 CHAPTER 8 ~ Complexity, Tight Coupling, and Normal Accidents 143 CHAPTER 9 ~ The Brave New World of Hedge Funds 165 CHAPTER 10 ~ Cockroaches and Hedge Funds 207 CHAPTER 11 ~ Hedge Fund Existential Conclusion: Built to Crash?

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

What happened if the bond issuer went bankrupt‌—‌the order in which creditors were paid out, how collateral was allocated‌—‌all these things and more were worked out in such a way that ordinary borrowing and lending became a smoothly operating machine. In the last ten or fifteen years, things have become vastly more complicated. Most of the financial innovation in that period has been driven, in the first instance, by mathematical possibility‌—‌the kind of thing that looks smart on a spreadsheet. But those spreadsheets are meaningless unless they turn into enforceable contracts and the contracts which emerge are often insanely complicated. Take, for example, the CDO-squared, a CDO backed by CDOs.

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I don’t want to get too technical, but exchange traded funds‌—‌effectively, mutual funds that boast a stock market quotation‌—‌are, in many ways, following the trajectory of the mortgage market. A fundamentally good, useful, and value-creating idea is being gradually transformed‌—‌via ceaseless ‘financial innovation’‌—‌into a darkly menacing shadow extending over an ever larger section of the financial system.27 That shadow is spreading extremely fast: today the total asset value of ETFs runs to $1.5 trillion, up almost 50% in eighteen months. What’s more, the quality and fundamental liquidity of ETFs are declining all the time.

The Age of Entitlement: America Since the Sixties
by Christopher Caldwell
Published 21 Jan 2020

This meant that financiers had to become more like politicians. They had to tell a story to convince the public they were advancing progress, not stripping assets. The economist and businessman Louis Kelso, who, like Lewis B. Cullman and many others, claimed to be the inventor of the leveraged buyout, always described his financial innovation as a kind of shareholder democracy. Boardrooms were now the place for “activists”—fighters and crusaders who wanted to earn billions, fix world hunger, or preferably both at the same time. Corporations, too, began to campaign for themselves as politicians always had. Apple rolled out its IIc model in 1984 with a series of two-page magazine ads that were longer than the articles they interrupted.

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Simon Johnson, an English-born former IMF economist, likened it to a late-twentieth-century emerging markets crisis of the sort he had seen in Ukraine, Russia, Thailand, Indonesia, and South Korea, with their crony capitalism and their corrupt, politically allocated credit. Raghuram Rajan, born in Bhopal and trained at MIT at the same time as Simon Johnson, had warned central bankers before the crisis that many American financial innovations meant to minimize risk, such as derivatives and swaps, were in fact amplifying it. (After the crisis Rajan would become governor of the Bank of India.) With extraordinary social sensitivity, Rajan linked the financial crisis to the gradual rise of American inequality. Since 1992, the U.S. economy had recovered slowly from recessions.

For Profit: A History of Corporations
by William Magnuson
Published 8 Nov 2022

Corporations must avoid taking these kinds of risky bets when they threaten systemic risk, even if profit can be made from them. The first rule provides a principle of action for corporate executives and government regulators alike. Will their new social media app debase public discourse? Will their lobbying campaign distort democratic decision-making? Will their financial innovation create excessive risk for the economy? If the answer is yes, then executives should say no. Even if it feels like the invisible hand is guiding them toward it, executives must understand that profit is not always synonymous with virtue. And if executives fail to police themselves, governments are justified in stepping in.

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Livy, History of Rome, bk. 23, ch. 49. 3. Dante Alighieri, De monarchia 39 (Donald Nicholl and Colin Hardie, trans., 1954); Plutarch’s Lives and Writings (A. H. Clough, ed., 1909), 2:351. 4. For a sample of these debates, compare Ulrike Malmendier, “Roman Shares,” in The Origins of Value: The Financial Innovations That Created Modern Capital Markets (William Goetzmann and K. Geert Rouwenhorst, eds., 2005), with Andreas Martin Fleckner, “Roman Business Associations,” in Roman Law and Economics: Institutions and Organizations, Vol. 1 (Giuseppe Dari-Mattiacci and Dennis P. Kehoe, eds., 2020). 5. Luke 5:27–30. 6.

The Social Life of Money
by Nigel Dodd
Published 14 May 2014

This is the backdrop for her distinction between the global financial system (i.e., the system of creating, buying, and selling credit money that in recent decades has “developed somewhat independently of governments”) and the international monetary system (i.e., the relationship between national currencies) (Strange 1994a: 49).44 Strange’s core thesis was that the emergence of money substitutes such as derivatives—Minsky’s private money—were taking finance increasingly beyond the control of national governments (Strange 1994a: 49). These money substitutes—“strange money”—undermine monetary policy. Central banks have long been grappling with the implications of financial innovation for measuring and controlling the aggregate money supply, seeking rather to influence the demand for money through “channels” such as interest rates and capital reserve requirements. Monetarism lapsed for this reason. In the United States, the 1982 Banking Act, allowing banks to pay interest on basic deposit accounts was a key moment in the Federal Reserve’s move away from seeking to control M3 directly because it broadened the funds available for transaction purposes.

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The Delirium of Praise: Bataille, Blanchot, Deleuze, Foucault, Klossowski, Baltimore, Johns Hopkins University Press. Kaufmann, W. A. (1975). Nietzsche: Philosopher, Psychologist, Antichrist, Princeton, NJ, Princeton University Press. Kay, J. (2009). Narrow Banking: The Reform of Banking Regulation, London, Centre for the Study of Financial Innovation. Kay, J. (2010). “Should We Have ‘Narrow Banking’?” London, London School of Economics and Political Science, www.johnkay.com/2011/06/02/should-we-have-‘narrow-banking’, accessed 28 March 2014. Kellermann, P. (2008). “Soziologie des Geldes.” Handbuch der Wirtschaftssoziologie, A. Maurer, Ed.

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See state fiat money fiction, and economic expectations, 16; and language, 36; and the free market, 338; and money, 6, 235, 317; and monetary policy, 110; in Simmel, 317; and truth, 36 fictitious capital, 55, 56, 58, 62, 65, 68–69, 70, 83, 194, 243; Marx’s definition of, 57n16; in Ricardo, 59n finance, etymology, 201; versus money, 61–62, 66, 125; social study of, 295 finance capital, 60, 64, 68, 74, 232, 249 financial engineering, 124 financial expropriation, 79 financial innovation, 121 financial instability hypothesis, 117, 124 financial repression, 69 financial system, 3; and crisis formation, 69; expansion of, 114; relationship to GDP, 114. See also capitalism; Wall Street system financialization, 10, 36, 61n22, 66–67, 391; and banking, 114; and the Eurozone crisis, 79; of money, 245, 298; as privatized Keynesianism, 76 First World War, 50, 59, 103, 225, 245, 256, 356, 362 fiscal cliff, 90, 386 fiscus, 261–62 Fisher, Irving, 120n41, 314; on the paradox of thrift, 347; on stamp scrip, 314, 349 Fisher, Mark, 193 floating money, 191, 244 flow, 227, 232, 233–34, 244; and financial markets, 233n Fond-des-Nègres marketplace, 302 Foster, William, 347 Foucault, Michel, 25, 238, 239, 391; death of “man,” 389–90; desire, 229; on homo economicus, 390; on Nietzsche, 389–90, 391; The Order of Things, 228 Fourcade, Marion, 91 Fourier, Charles, 324 fractional reserve lending, 95, 111, 113, 116, 199n26 Frank, Thomas, 315 Frankfurt School, 322, 326–27 Franklin, Benjamin, 176 fraud, 113, 117n, 120, 132, 137, 199, 313, 368 Freddie Mac, 123 free credit, 352 free labor, 98 free market money, 360, 362 free money, 348 free trade 281 Freicoin, 348n, 349n, 370–71 French Revolution, 84, 355 Freud, Sigmund, 150, 228, 332, 334; Civilization and Its Discontents, 152; on money and saving, 151, 336 Friedman, Milton, 131, 330–31 Frisby, David, on Nietzsche, 136–37, 141–42; on Simmel, 137 Fromm, Erich, 14, 85n45, 345, 356, 372, 382; on economic democracy, 338–39; Escape from Freedom, 331; on having versus being, 315, 331–38; on hoarding, 336, 340–41, 350–51; on the humanistic utopia, 315, 333–34, 338–39, 374; on language, 332; Man for Himself, 331, 341; on Marx, 339; “Medicine and the Ethical Problem of Modern Man,” 340; on Messianic time, 335, 338; on money, 334, 339–40, 341, 346; on the Shabbat, 334–35, 338; on spiritual poverty, 334; To Have or To Be?

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else
by Chrystia Freeland
Published 11 Oct 2012

At the time, though, to many it seemed, well, limp. One measure of how strongly the tide of world opinion was running against the Canucks is that the International Monetary Fund, meant to be the stern guardian of the global economy, chided Canada for not doing enough to promote securitization in its mortgage market—one of the American financial innovations that contributed to the crisis. Even communist China accused the Canadians of being too cautious about capitalism. Jim Flaherty, Canada’s finance minister, told me that on a visit to Beijing in 2007, “they were suggesting that maybe Canadian banks were too timid.” Canada’s bright young things were sympathetic to this critique.

…

The second important piece of the puzzle is figuring out why the behavior of bankers followed this U-shape. Why was banking far less popular and prestigious than law and medicine for the Harvard men of 1970, while the class of 1990 flocked to Wall Street? The economists measure the impact of various changes, including globalization, the technological revolution, and financial innovations like the creation of mathematically complex credit derivatives. All of them have some impact, but they find that the change with the single greatest explanatory power is deregulation, which they calculate has driven nearly a quarter of the increase in incomes in finance and 40 percent of the increase in the education of workers in that sector.

Panderer to Power
by Frederick Sheehan
Published 21 Oct 2009

In 1980, banks handled 58 percent of savings and investment assets in the U.S. economy. This had faded to 33 percent by 1994.14 Since the Fed is directly involved in the money supplied to the banking system but has limited sway over the bond market, monetary policy would have less influence over the economy. Financial innovation played a larger role in nonfinancial corporations. Since the 1970s, corporate treasury departments had embraced derivatives to survive interest-rate and exchange-rate volatility (after the gold standard was abandoned). These were the real McCoy—derivatives used by a manufacturer to hedge against currency losses when, for instance, a company sold soap in a country other than where its production plant was located.

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Then they expressed worry about the surge in no-money-down mortgages, interest only [mortgages] and ‘liar’s loans’ that require no proof of a borrower’s income. The impact so far? Almost nil.” 42 Why? Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation (FDIC) explained: “We don’t want to stifle financial innovation. We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation.”43 That the Federal Reserve and alphabet soup bureaucracies encouraged, rather than warned, was unpardonable. That current proposed legislation would give such organizations more power is a disgrace. 38 Jim Christie, “California Home Buyers Stretch to Afford Homes,” Reuters, August 18, 2005. 39 Ross Wehrner, “Colorado Authorities Indict Real Estate Agent Loan Officer for Forgery,” Denver Post, July 14, 2005. 40 Noland, “Credit Bubble Bulletin,” July 15, 2005, p. 8. 41Jennifer Steinhauer, “Housing Boom Echoes in All Corners of the City,” New York Times, August 4, 2005. 42Edmund L.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated)
by Charles Wheelan
Published 18 Apr 2010

Financial instruments, like every other good or service in a market economy, must create some value. Both the buyer and seller must perceive themselves as better off by entering into the deal. All the while, entrepreneurs seek to introduce financial products that are cheaper, faster, easier, or otherwise better than what already exists. Mutual funds were a financial innovation; so were the index funds that Burt Malkiel helped to make popular. At the height of the financial crisis in 2008, it became clear that even Wall Street executives did not fully understand some of the products that their firms were buying and selling. Still, all financial instruments—no matter how complex the bells and whistles—are based on four simple needs: Raising capital.

…

Many American households were “excessively leveraged,” meaning that they had borrowed far more than they could manage. The housing boom had encouraged ever bigger houses with ever bigger mortgages. Meanwhile, the down payments—the amount of their own money buyers had to spend to get a loan—were getting smaller relative to what was being borrowed. Subprime mortgages (a financial innovation, one must admit) made it easier for people to borrow who were otherwise not creditworthy and for other people to borrow in particularly aggressive ways (e.g., with no down payment at all). This all works fine when housing prices are going up; someone who falls behind on their mortgage payments can always sell the house to repay the loan.

The Black Box Society: The Secret Algorithms That Control Money and Information
by Frank Pasquale
Published 17 Nov 2014

Imagine if this approach were to supersede the bonus culture of Wall Street (where, for most key players, annual pay is peanuts compared to the bounty available in a banner year of spectacularly successful risks). Sure, in health care, there are worries that salary-based pay will lead to shirking. But given how destructive financial innovation has been over the past decade, maybe bankers ought to work less, at least until they can better prove how their sector contributes to real productivity.82 Restoring Trust For too long, we have assumed that the core aim of fi nancial regulation is disclosure.83 When every consumer understands the consequences of his actions, we like to believe, and when every investor has the same key data about a security as its seller, the fi nancial playing field will fi nally be leveled.

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Department of Justice, Office of Public Affairs, “Dallas Doctor Arrested for Alleged Role in Nearly $375 Million Health Care Fraud Scheme,” February 28, 2012 (news release), http://www.justice.gov /opa /pr/2012/February/12-crm-260.html. 294 NOTES TO PAGES 181–182 153. See Eric Posner and E. Glen Weyl, “An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets,” Northwestern University Law Review 107 (2013): 1307–1358. (The agency would approve fi nancial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for insurance than for gambling.

Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein
Published 23 Aug 1996

Even though corporations could execute hedges in the liquid and active markets for options and futures-which now included interest rate and foreign exchange contracts as well as commodities and stock indexes-these contracts were expressly designed to appeal to as many investors as possible. The risk-management needs of most corporations are too specific in terms of both coverage and time spans to find ready customers in the public markets. Wall Street has always been a hothouse of financial innovation, and brokerage houses are quick to jump into the breach when a new demand for their talents arises. Major banks, insurance companies, and investment banking firms with worldwide business connections lost no time in establishing new units of specialized traders and financial engineers to design tailor-made risk-management products for corporate customers, some related to interest rates, some to currencies, and some to the prices of raw materials.

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So-called "systemic risk" has become a parlor word in those circles and is the focus of attention at central banks and ministries of finance around the world. The measurement of the overall risk exposure in the system has been progressing in both comprehensiveness and sophistication.* But there is only a fine line between guaranteeing absolute safety and stifling the development of financial innovations that, properly handled, could reduce the volatility of corporate cash flows. Corporations that shelter their cash flows from volatility can afford to take greater internal risks in the form of higher levels of investment or expenditures on research and development. Financial institutions themselves are vulnerable to volatility in interest rates and exchange rates; to the extent that they can hedge that volatility, they can extend more credit to a wider universe of deserving borrowers.

A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
by Burton G. Malkiel
Published 5 Jan 2015

Innovations such as e-mail, the Internet, smartphones, iPads, Kindles, videoconferencing, social networks, and new medical advances ranging from organ transplants and laser surgery to nonsurgical methods of treating kidney stones and unclogging arteries have materially affected the way we live. Financial innovation over the same period has been equally rapid. In 1973, when the first edition of this book appeared, we did not have money-market funds, ATMs, index mutual funds, ETFs, tax-exempt funds, emerging-market funds, target-date funds, floating-rate notes, volatility derivatives, inflation protection securities, equity REITs, asset-backed securities, “smart beta” strategies, Roth IRAs, 529 college savings plans, zero-coupon bonds, financial and commodity futures and options, and new trading techniques such as “portfolio insurance” and “high-frequency trading,” to mention just a few of the changes that have occurred in the financial environment.

…

In 1973, when the first edition of this book appeared, we did not have money-market funds, ATMs, index mutual funds, ETFs, tax-exempt funds, emerging-market funds, target-date funds, floating-rate notes, volatility derivatives, inflation protection securities, equity REITs, asset-backed securities, “smart beta” strategies, Roth IRAs, 529 college savings plans, zero-coupon bonds, financial and commodity futures and options, and new trading techniques such as “portfolio insurance” and “high-frequency trading,” to mention just a few of the changes that have occurred in the financial environment. Much of the new material in this book has been included to explain these financial innovations and to show how you as a consumer can benefit from them. This eleventh edition also provides a clear and easily accessible description of the academic advances in investment theory and practice. Chapter 10 describes the exciting new field of behavioral finance and underscores the important lessons investors should learn from the insights of the behavioralists.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

Ranked first and second on the list of personal finance books on website Goodreads.com December 2022. [https://www.goodreads.com/shelf/show/personal-finance]. See James Choi (2022), Popular personal financial advice versus the professors, National Bureau of Economic Research. About the Authors Victor Haghani has spent four decades actively involved in markets and financial innovation. He started his career in 1984 at Salomon Brothers in bond research. He moved to the trading floor in 1986 and shortly after became a managing director in the bond arbitrage group run by John Meriwether. In 1993, Victor was a cofounding partner of Long‐Term Capital Management (LTCM). He established and co‐ran its London office.

…

Insurance companies do offer equity‐linked annuities, known as variable annuities, but they tend to be complex, with convoluted embedded options and generally higher costs than plain vanilla fixed payment structures. A simple, cost‐efficient equity‐linked annuity might be a valuable addition to the annuity product menu for many investors. We hope that financial innovation, together with the necessary evolution of insurance regulation, will lead to high quality equity‐linked annuities delivered through mutualized structures. Mutualized annuity pools could be run very cost‐efficiently, with a Vanguard‐like administrator competently managing the investment, payouts, and pool membership for a low fee.

Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier
by Edward L. Glaeser
Published 1 Jan 2011

Honda may have brought heartache to Detroit’s Big Three, but managing the international flow of finance has earned vast sums for New York’s bankers. A more connected world has brought huge returns to the idea-producing entrepreneurs who can now scour the earth in search of profits. New York reinvented itself during the bleak years of the 1970s when a cluster of financial innovators learned from each other and produced a chain of interconnected ideas. Academic knowledge about trading off risk and return made it easier to evaluate and sell riskier assets, like Michael Milken’s high-yield (junk) bonds, which made it possible for Henry Kravis to use those bonds to get value out of underperforming companies through leveraged buyouts.

…

The growth of finance in late-twentieth-century New York was encouraged by just such an innovation, the ability to quantify the trade-off between risk and return, which made it easier to sell investors riskier assets, from junk bonds to mortgage-backed securities, which in turn enabled riskier, high-return activities, like leveraged buyouts of underperforming companies such as RJR/ Nabisco. Today’s hedge-fund billionaires are only the latest links in a long chain of connected innovators. For the millions worldwide who look askance at all of New York’s financial innovation, Michael Bloomberg’s story, in which a smart trader became an entrepreneur in another sector, might be easier to embrace. In the 1970s, Bloomberg had been riding high at Salomon Brothers, running the firm’s trading floor, until he was exiled into the geeky world of systems development before being fired in 1981.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

I haven’t included the collateral damage from Wall Street abuses such as the Orange County bankruptcy, nor the non–Wall Street financial firms like Enron, nor the damage overseas as with the Asian financial crisis, nor the ones that entered more people’s homes like the Internet stock collapse and the mutual fund timing scandal. First, let me reiterate that the good from financial innovations far exceeds the damage. There were scandals and bankruptcies and disasters before quants came to Wall Street. Taking the good and bad together, the past 30 years have been the most extraordinarily good economic time for the globe in history. The horrendous times are decades of stagnation or totalitarian repression, not the exuberant and painful times of boom and bust.

…

Nassim Taleb is best known for his Black Swan, but his earlier book, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, tackles many of the same issues as my book, with somewhat different results. We more or less agree on the problem, but go in opposite directions to find solutions. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber comes at things from a third direction. Dylan Evans’s forthcoming Risk Intelligence: How to Live with Uncertainty focuses on similar ideas in settings beyond finance. Iceberg Risk: An Adventure in Portfolio Theory is Kent Osband’s brilliant and provocative communication of related ideas, and a pretty good novel to boot.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

While Spanish colonists were soldiers in search of gold, British and Dutch colonization was managed by businesses such as the East India Company and the VOC (Vereenigde Oostindische Compagnie) and its purpose was commercial exploitation. The beginning of the eighteenth century was a period of rapid financial innovation, which culminated in the boom and bust of the South Sea bubble. The Market Economy Crosses the Atlantic ••••••••••••••••••••••••••••••••••••• The Pilgrim fathers came to Plymouth from Britain via the Netherlands. Thus the connection with the two countries at the forefront of the development of economic institutions in the seventeenth and eighteenth centuries was established at the inception of modern America.

…

The financial center of the United States is located in the northeast corner of the country, and traditional industries are still predominantly based in Northern states. Market institutions were first imported into the United States from Western Europe, but the revolution was brought home, in an economic sense, before the end of the nineteenth century, as the United States became a center for new technology and financial innovation. And in the twentieth century, the United States was to become dominant in management theory and product innovation. By its end, Americans would sincerely believe that the market economy was an American invention, and a comparatively recent one. Thomas Friedman, a chronicler of globalization for the New York Times) would explain that "if one hundred years ago you had come to a visionary geo-architect and told him that in the year 2000 the world would be defined by a system called 'globalization,' what sort of country would he have designed to compete and win in that world?

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

Sorensen and Sevcan Yesiltas (2012), ‘Leverage Across Firms, Banks and Countries’, Federal Reserve Bank of Dallas Conference on Financial Frictions and Monetary Policy in an Open Economy, mimeo. Kareken, John (1986), ‘Federal Bank Regulatory Policy: A Description and Some Observations’, Journal of Business, 59, pp. 3–48. Kay, John (2009), ‘Narrow Banking: The Reform of Banking Regulation’, Center for the Study of Financial Innovation Report, 15 September 2009. —— (2015), Other People’s Money: The Real Business of Finance, PublicAffairs, New York. Keating, Paul (2014), ‘Avoiding the Thucydides Trap in Asia’, mimeo, Sydney. Kerr, Gordon (2011), The Law of Opposites: Illusory Profits in the Financial Sector, Adam Smith Research Trust, London.

…

Thaler, Richard (1991), Quasi Rational Economics, Russell Sage Foundation, New York. Thaler, Richard and Cass Sunstein (2008), Nudge: Improving Decisions about Health, Wealth and Happiness, Yale University Press, New Haven. Thornton, Henry (1802), An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, J. Hatchard, London. Tobin, James (1985), ‘Financial Innovation and Deregulation in Perspective’, Bank of Japan Monetary and Economic Studies, Vol. 3, No. 2, pp. 19–29. Tuckett, David (2011), Minding the Markets: An Emotional Finance View of Financial Instability, Palgrave Macmillan, London. —— (2012), ‘The Role of Emotions in Financial Decisions’, The Barbon Lecture, 24 May 2012.

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

For the investors, the only option was structured products like reverse dual currency bonds. There was the risk, but the insurance companies were trapped between a rock (do nothing and die) and a hard place (do something and probably die but with a small chance of survival). They did what anyone sensible would do. The state of the Japanese economy was leading to dazzling financial innovation. There was, for example, the 100-year mortgage that could be passed on to your children. It lent new meaning to the term ‘inheritance’. Japanese economic mandarins were unconvinced that there was a problem. One confessed that ‘things had improved’, he could now shop for a suit in the fashionable Ginza district without annoying crowds.

…

Chapter 3 True lies – the ‘buy’ side 1 Truman Capote (1993) Breakfast at Tiffany’s, Vintage Books, New York. 2 Frank Partnoy (1999) FIASCO; New York, Penguin, p. 200. 3 Walt Disney case study is drawn from Scott Mason, Robert Merton, Andre Perhold and Peter Tufano (1995) Cases In Financial Engineering: Applied Studies of Financial Innovation; Prentic Hall, Upper Saddle River, New Jersey, pp. 567–579. See (5 September 1991) ‘The Walt Disney Company’s Yen Financing’; Harvard Business School, Boston, MA, p. 5. 12_NOTES.QXD 17/2/06 322 4:43 pm Page 322 Tr a d e r s , G u n s & M o n e y 4 Quoted in Antonio S. Mello and John E.

The Book: A Cover-To-Cover Exploration of the Most Powerful Object of Our Time
by Keith Houston
Published 21 Aug 2016

The China that Marco Polo visited during the thirteenth century—Cathay, he called it, from the name of a Uighur dynasty that had ruled some centuries earlier—was a technological superpower.8 Gunpowder, invented in China sometime during the fifth or sixth century, had still not made it to Europe; the magnetic compass, in its infancy when Polo arrived, promised to revolutionize travel at sea; and the use of paper money whose value was determined by the state rather than being inherent in some precious substance—“fiat money,” as it is known—was perhaps the greatest financial innovation the world had ever seen.9 More vital than these technical and financial advances was the information revolution that had begun more than a thousand years earlier with the invention of paper. Barely 1 in 20 Western manuscripts of Polo’s time were written upon paper (to a European scribe, paper would have been scarcely less exotic than parchment is today), but in China the “paper of Marquis Cai” had long since replaced bamboo and silk as the writing material of choice.10 Polo told Rustichello of a stopover in the city of Chengdu, though he did not mention its shrine dedicated to the patron saint of Chinese paper, Cai Lun.11 But paper, though necessary to make the banknotes that Polo lauded so highly, was not all that was required.

…

Carter, Printing in China, 12; Tsien, Paper and Printing, 143–46; “The Making of a Chinese Rubbing,” The Field Museum, September 25, 2008, https://www.youtube.com/watch?v=ADfhgDRIhUk. 26. Tsien, Paper and Printing, 143–46; “Carved in Stone,” Art & Architecture Library, accessed October 31, 2014, http://lib.stanford.edu/art/exhibitions/carved-in-stone. 27. Richard von Glahn, “The Origins of Paper Money in China,” in The Origins of Value: The Financial Innovations That Created Modern Capital Markets, ed. William N. Goetzmann and K. Geert Rouwenhorst (Oxford: Oxford University Press, 2005), 79. 28. “Six Dynasties,” Encyclopaedia Britannica, accessed October 31, 2014, http://www.britannica.com/EBchecked/topic/547040/Six-Dynasties. 29. Xinjiang Rong, “Land Route or Sea Route?

The Bank That Lived a Little: Barclays in the Age of the Very Free Market
by Philip Augar
Published 4 Jul 2018

Turner was known as an eloquent and trusted public figure, radical without being revolutionary, independent but never indiscreet. Then in August 2009 he surprised everyone when he was interviewed by Prospect, an intellectual magazine of modest circulation. In an unplanned answer to one question, Turner said: ‘It is hard to distinguish between valuable financial innovation and nonvaluable. Clearly, not all innovation should be treated in the same category as the innovation of either a new pharmaceutical drug or a new retail format. I think that some of it is socially useless activity.’3 It was by far the most headline-catching thing he had ever uttered and the approval it received said much about public opinion.

…

After I left the City, my interest in Barclays was piqued in 2000 by Martin Vander Weyer’s memoir Falling Eagle. As a writer and commentator I followed with – let me simply say – great interest, the bank’s frequent changes in strategy and chief executive. Then in 2013 at a dinner organized by the Centre for the Study of Financial Innovation, I fell into an argument with Bob Diamond, who had been deposed as Barclays’ chief executive the year before. We continued the discussion afterwards, which prompted me to explore how Barclays had got into such a mess. This book is the result. A word on sources and methodology. I have dramatized events and reconstructed dialogue based on more than 400 hours of interviews with over one hundred people closely involved in the story described.

Open: The Story of Human Progress
by Johan Norberg
Published 14 Sep 2020

In the eighth century bc, Isaiah criticized those who ‘clasp hands with foreigners’ and Zephaniah warned that Yahweh would punish the traders and ‘all who dress themselves in foreign attire’.42 The Phoenicians’ strength came from their productivity and trade, not from their military strength, and in the end their citystates were destroyed by the likes of Nebuchadnezzar and the Romans, but they left a legacy that still persists today. The Phoenicians did not just teach the Greeks everything from architecture and glass-blowing to sport festivals and financial innovations, they also inspired them to follow in their footsteps, as traders and colonists. As the Phoenicians established cities in North Africa and the western Mediterranean, the Greeks started doing the same in southern Europe and the eastern Mediterranean. And the Romans famously proclaimed themselves the cultural heir of the Greeks.

…

They had just invented paper money, which greatly facilitated trade, especially in rural areas. Internal controls of movement were relaxed to create the largest integrated market in the world. Since the Chinese had recently lost access to the Silk Road, naval commerce grew in importance, and the merchant fleet was second to none. Financial innovation kept them afloat with the arrival of joint stock companies that separated owners and managers. Leaders proclaimed: ‘Profits from maritime commerce are very great. If properly managed, they can amount to millions. Is this not better than taxing people?’6 An impressive system of roads was built that got crops, fruits, vegetables, timber and paper to harbours, where they were loaded onto large ships based on Persian, Arab and South East Asian designs.

The Tyranny of Nostalgia: Half a Century of British Economic Decline
by Russell Jones
Published 15 Jan 2023

The current account shortfall and difficulties in the tradable-goods sector did not trigger a currency crisis, but they were nevertheless indicative of burgeoning underlying disequilibria and unsustainable processes within the economy. Following an extended phase of falling long-term government bond yields, this period saw a deepening ‘stretch for yield’ and an accumulation of risk on the part of investors. It also saw considerable financial innovation and asset price appreciation, not least in the real estate market. From the low in December 1995 until the onset of the GFC in 2007, the average price of a house increased by some 260%, rising from the equivalent of just over four times average earnings to more than eight times. This was the longest and most ebullient bull market in housing on record, and it had a significant impact on the distribution of wealth.

…

Securitization, based on the development of new liquid markets, has enhanced the allocation of resources and the stability of the financial sector. The riskiness of financial assets can be determined by mathematical means, so as to elicit dependable quantitative metrics of trading risk. Market discipline is an effective mechanism to moderate excessive risk taking. Financial innovation is generally constructive because market competition should ensure that innovations that do not provide value-added do not survive. And the following assumptions follow from the above description. Markets will generally prove self-correcting, with market discipline a more effective instrument than government regulation and oversight.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

Jargon In FRA-land, the jargon is buy and sell. If you sell a FRA, you are lending the rate, and you hope interest rates will fall. If you buy a FRA, you are borrowing the rate, and you hope that interest rates won’t fall. INTEREST-RATE SWAPS In Chapter 2, we introduce interest-rate swaps—probably the greatest financial innovation of the 1980s. Here we focus on swaps principally as a tool in bank asset-liability management. (For more on swaps, see Chapter 19.) Arbitrage One interesting aspect of the off–balance sheet items we are discussing is that, while they appear to be quite different animals, it’s often possible to construct the equivalent of the one out of the other.

…

Dealers, undeterred, went on to other pastures: they used mortgages to back yet new sorts of hybrid paper; created hedged transactions in foreign currency-denominated paper; created, priced, and sold interest-rate caps, collars, and floors; and so on and on. One way to make money on customer business is via financial innovation. Seeing this, dealers have combed the universities and other institutions to find people with strong backgrounds in math and finance—quants or rocket scientists as they have been dubbed—paying them astronomical salaries, and asking them to engineer new derivative products, including options and other hybrids, that can be sold to retail at a spread.

…

Liquidity is deepest in the electronic market, where over 80% of all trades take place, so that is where institutional investors go when they want to fill large orders. Literally thousands of contracts are typically on the bid and offer sides of the most actively traded Eurodollar contracts. Even when prices change rapidly, the market remains deep on both sides. The deep liquidity of the Eurodollar market is very much connected to the substantial financial innovation that has taken place over the years. The mortgage-backed securities market is one example: It has grown to become the largest segment of the bond market, accounting for $6.2 trillion of its $26.4 trillion size at the end of June 2006, according to data from the Bond Market Association. Many mortgage originators, investors, and the like that have exposure to the mortgage market often use Eurodollar contracts to hedge their positions, as do others wanting to hedge against an existing or future interest-rate risk.

Obliquity: Why Our Goals Are Best Achieved Indirectly
by John Kay
Published 30 Apr 2010

Of course, neither ABB’s organization nor Barnevik’s personality had changed: What had changed was the company’s results and hence the lens through which the organization and the personality were viewed.10 Similarly, Enron was considered a model of a new style of corporate organization when its stock price was rising and a hotbed of corporate corruption when it had gone bust. The financial innovation that until 2007 had been seen as a sophisticated way to spread and minimize risk was seen in 2008 as an unmanageable source of instability in the world financial system. The mistake is to make inferences about the relationships between outcomes and processes when we cannot observe and do not understand the processes themselves.

The Scandal of Money
by George Gilder
Published 23 Feb 2016

Its share of the U.S. and UK economies tripled between 1950 and the 2000s. Stock-market turnover increased dramatically as a percentage of GDP. On average across advanced economies private-sector debt increased from 50 percent of national income in 1950 to 170 percent in 2006. . . . From 1980 on, the growth was turbocharged by the financial innovations of securitization and derivatives; by 2008 there were $400 trillion of derivative contracts outstanding.”6 Like Piketty, Turner invokes the insights of Henry George, who more than a century ago described in Progress and Poverty the tendency of wealth to congeal around scarce urban acreage.7 Drilling in on the fundamental problem, Turner asserts, “At the core of financial instability lies the interaction between the potentially limitless supply of bank credit and the highly inelastic supply of real estate and locationally specific land. . . .

Blockchain: Blueprint for a New Economy
by Melanie Swan
Published 22 Jan 2014

PayPal was initially an innovative payments market solution outside of the traditional financial-services market, like Bitcoin, but has since become a more formal business within the regulated industry, collecting and validating detailed personal information about its customers. PayPal had been known for being on the edge of financial innovation, but it then became more corporate focused and lost the possibility of providing early market leadership with regard to Bitcoin. Now, PayPal has been incorporating Bitcoin slowly, as of September 2014 announcing partnerships with three major Bitcoin payment processors: BitPay, Coinbase, and GoCoin.37 Also in September 2014, Paypal’s Braintree unit (acquired in 2013), a mobile payments provider, is apparently working on a feature with which customers can pay for Airbnb rentals and Uber car rides with Bitcoin.38 In the same area of regulation-compliant Bitcoin complements to traditional financial services is the notion of a “Bitbank.”

The End of Loser Liberalism: Making Markets Progressive
by Dean Baker
Published 1 Jan 2011

The second phase of the housing bubble: 2002-2006 The housing bubble was already visible and large enough in 2002 that its collapse likely would have led to a recession in that year. However, rather than take any steps to rein in the bubble, the Federal Reserve Board and others in policy-making positions almost cheered it on.[33] Greenspan applauded subprime mortgages as a financial innovation that allowed moderate-income families who could not otherwise afford a home to buy one.[34] In early 2004, he even suggested that people could save money by taking out adjustable rate mortgages, in spite of the fact that the interest rate on 30-year fixed-rate mortgages was near a 50-year low.[35] As tends to be the case in the later phases of bubbles, all the excesses of the early stages became ever more exaggerated.

Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts
by David Gerard
Published 23 Jul 2017

A week after Bitcoin 0.1 was released, Jonathan Thornburg wrote on the Cryptography and Cryptography Policy mailing list: “To me, this means that no major government is likely to allow Bitcoin in its present form to operate on a large scale.”21 In practice, governments totally did, and treated it like any other financial innovation: give it room to run, make it very clear that regulation still applies, give it a bit more room to run, repeat. The advocates’ ideas of how governments work were already at odds with completely predictable reality. (I’m still baffled at the notion that the governments of first-world countries are somehow fundamentally against the idea of people doing well with innovations in finance.)

Big Mistakes: The Best Investors and Their Worst Investments
by Michael Batnick
Published 21 May 2018

Associating myself – and the firm whose leadership I had been entrusted – with a group of go‐go managers.”17 The blame for the disastrous performance fell on Bogle. He was fired as CEO of Wellington Management in 1974 but convinced the board to let him stay on as chairman and president of the Wellington Fund. Abject failure would give birth to the most important financial innovation the world has ever seen, the index fund. In 2005, at a Boston Security Analysis Society event, the great Paul Samuelson said: I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese: a mutual fund that never made Bogle rich but elevated the long‐term returns of the mutual‐fund owners.

Inflated: How Money and Debt Built the American Dream
by R. Christopher Whalen
Published 7 Dec 2010

In the former group (United States, United Kingdom, Ireland, Spain, Iceland, Australia, and New Zealand) the response was one of democratization of credit that allowed households to borrow and spend beyond their means: the boom in mortgage and consumer credit (credit cards, auto loans, student loans, payday loans, subprime loans, and so on) led to a massive increase in private household debts that found it matching in the rising leverage of the financial sector (banks and shadow banks). This financial system leverage was abetted by reckless financial deregulation—repeal of Glass Steagall, non-regulation of derivatives, explosion of toxic financial innovation, rise of a subprime financial system, explosion of the shadow banking system. Since households, and the country, were spending more than their incomes, all of these Anglo-Saxon countries run large current account deficits financed by over-saving countries (China and emerging markets, as well as Germany and Japan).

…

“A nation that spends on itself is not spending on physical plant and equipment,” observes Vincent Reinhart, former director of the Federal Reserve Board’s Division of Monetary Affairs. “I don’t think it’s an accident that high savings rates and low deficits were associated with fast growth. We forgot that lesson in the 1960s. Financial innovation also made it easier for the government and households to spend more.”11 Changing Places Former Fed Governor Alan Blinder famously said in 1994: “The last duty of a central banker is to tell the public the truth.” But this, of course, assumes that our political leaders and central bankers know the truth in the first place.

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt
by Kwasi Kwarteng
Published 12 May 2014

In England, the year 1688 brought about a new settlement, in which King James II was deposed, largely for trying to introduce Roman Catholicism, and a new king, William III, Stadtholder of the Dutch Republic, was invited to take the throne. The first priority of William’s government was to engage Britain in a continental war against the power of France, under the reign of its vainglorious king, Louis XIV. The financial innovations introduced, particularly in the City of London, as a consequence of this development have been called collectively ‘the Financial Revolution’. More generally, ‘England was at war for twenty-nine of the sixty-six years between 1688 . . . and 1756.’ This prolonged state of war was waged on an unprecedented scale, involving enormous sums of money, unimaginable to earlier generations.

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‘The decade immediately following the Civil War, because of its extraordinary happenings in speculative finance and in legislative and judicial corruption, has been called the fantastic era,’ wrote one observer in 1929.27 For all those who argue for a dynamic role to be adopted by government in stimulating economic growth, the history of money can afford some corroboration. We have seen how government borrowing stimulated such financial innovations as central banking in England in the last decade of the seventeenth century, and the conversion of debt into equity in both Paris and London in the early eighteenth century. In New York, the influence of government could be seen in the Wall Street of the 1860s. The issuance of government debt in the 1860s provided a platform which launched the careers of a ‘distinctively American class of financiers’.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge
by Faisal Islam
Published 28 Aug 2013

Morgan billions. And then there was the systematic rigging of Libor, London’s inter-bank interest rate, the scandal that came to symbolise everything that was wrong with global finance. Why did all roads lead to London? London was, and still is, the global clearing house for socially useless financial innovation. In France and in Germany this has long been the accusation. But even in the USA, accusatory fingers began to be pointed at London. The ever-lengthening shadows in the world financial system were being cast by the ever-rising skyline of the City. Mis-selling mortgages to poor African Americans Cut to Baltimore, the setting for the greatest TV drama series of all time: The Wire.

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It combined ‘right-wing’ policies on wage restraint with ‘left-wing’ policies on borrowed stimulus. The result was an economy that powered back to health, regaining all of the lost ground in one of the sharpest V-shaped recoveries in modern history. Germany engineers finances towards productive industry and innovation. Britain has financialised our engineers towards useless financial innovation. In the 1990s and noughties, the latter approach appeared to conquer all. However, financialising the housing market does not an economic strategy make. The German government sees a house and considers it a home. Successive British governments see a house and consider it a piggybank. Now Britain needs a broader economic plan, one that stretches beyond deficit reduction and financialisation.

Corporate Finance: Theory and Practice
by Pierre Vernimmen , Pascal Quiry , Maurizio Dallocchio , Yann le Fur and Antonio Salvi
Published 16 Oct 2017

A given financial investor can buy either existing shares or new shares issued during a capital increase, for example. If there is often more emphasis placed on the primary market, it is because the function of the financial markets is, first and foremost, to ensure equilibrium between financing needs and the sources of finance. Secondary markets, where securities can change hands, constitute a kind of financial “innovation”. 2. The function of the secondary market Financial investors do not intend to remain invested in a particular asset indefinitely. Even before they buy a security, they begin thinking about how they will exit. As a result, they are constantly evaluating whether they should buy or sell such and such an asset.

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This type of financing was first used in the early 1930s by American banks to extend financing to oil prospectors who could not offer the guarantees required for standard loans. The banks drew up loan contracts in which a fraction of the oil still in the ground was given as collateral and part of the future sales were set aside to repay the loan. With this financial innovation, bankers moved beyond their traditional sphere of financing to become more involved, albeit with a number of precautions, in the actual risk arising from the project. But it is all too easy to become intoxicated by the sophistication and magnitude of such financial structures and their potential returns.

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For listed companies the issue of such products does not seem to have become established practice. In Europe it has almost disappeared, firms privileging one single trading line (hence Italcementi imposed the merger of its two categories of shares in 2014). Section 24.4 Other hybrid securities Financial innovation has reduced the difference between the investment characteristics of debt and equity. Firms are able to issue securities that function very much like equity but which are frequently treated as debt for tax purposes. Much of this innovation represents “equity in drag” (Bulow et al., 1990). Innovation has, in fact, eroded each of the traditional tests used for distinguishing debt and equity. 1.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa
by Dambisa Moyo
Published 17 Mar 2009

We can put a man on the moon, so we can most certainly crack Africa’s financing puzzle, jump-start economic growth and drastically reduce poverty. But herein lies the key – innovation. Innovation means breaking out of the mould, and finding more-applicable ways for Africa to finance its development. There is a history of financial innovation to draw from: the Soft Banks of America’s Wild West and the Scottish Banks of the eighteenth century. Both catered to the unsecured and traditionally unbankable. At the time of the gold rush in 1800s California, for example, one would have expected the well-established East Coast American banks to have simply migrated westwards, opening branches and setting up their lending shops on the West Coast to cater to the demand from those in search of yellow (and black) gold.

Global Financial Crisis
by Noah Berlatsky
Published 19 Feb 2010

Jennifer Amyx Japan’s Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton, NJ: Princeton University Press, 2004. Patrick Bond Against Global Apartheid: South Africa Meets the World Bank, IMF and International Finance. London: Zed Books, 2004. Richard Bookstaber A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. Hoboken, NJ: John Wiley & Sons, 2007. Roger Boyes Meltdown Iceland: How the Global Financial Crisis Bankrupted an Entire Country. New York: Bloomsbury USA, 2009. George Cooper The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy. New York: Random House, 2008. 245 The Global Financial Crisis Niall Ferguson The Ascent of Money: A Financial History of the World.

Impact: Reshaping Capitalism to Drive Real Change
by Ronald Cohen
Published 1 Jul 2020

I shared the stage with former US Treasury Secretary Larry Summers and Professor Michael Porter, and we discussed the role of private investment in tackling social issues. Tracy, a Harvard Business School graduate herself, was in the audience, and we discussed insights from the panel. Three years later, after the launch of the Peterborough SIB, I was keen for Social Finance to expand into the USA, where financial innovation takes root faster than anywhere else in the world. I called Tracy and invited her to join David Blood and myself in co-founding Social Finance US, which we did at the beginning of 2011. Under her leadership, the USA has become the market where SIBs have scaled the most, attracting more investment than anywhere else in the world.

Damsel in Distressed: My Life in the Golden Age of Hedge Funds
by Dominique Mielle
Published 6 Sep 2021

I’ll just reiterate its seismic importance in the 2008 crisis, not only because of the size of the debacle—over $600 billion in debt, twenty-five thousand employees, offices around the world—but also because of its dire consequences on financial markets around the world. Christine Lagarde’s jest aside, the point remains. Virtually no one doubted Greenspan’s gospel, although financial innovation had so vastly outgrown regulation and supervision that it had created the very eye of the storm. With 2008 a high point in Wall Street groupthink, a reckoning was inevitable. And a “key ingredient of [any future] reform would be more female leadership in finance,” Lagarde has written. “First, greater diversity always sharpens thinking, reducing the potential for groupthink.

The Price of Inequality: How Today's Divided Society Endangers Our Future
by Joseph E. Stiglitz
Published 10 Jun 2012

Some always went into business, but in the years before the crisis an increasingly large fraction of the country’s best minds chose finance. And with so many talented young people in finance, it’s not surprising that there would be innovation in that sector. But many of these “financial innovations” were designed to circumvent regulations, and actually lowered long-run economic performance. These financial innovations do not compare with real innovations like the transistor or the laser that increased our standard of living. The financial sector is not the only source of rent seeking in our economy. What is striking is the prevalence of limited competition and rent seeking in so many key sectors of the economy.

The Alchemists: Three Central Bankers and a World on Fire
by Neil Irwin
Published 4 Apr 2013

One of those shareholders was later named by the king as “chief inspector of the banking system”—which, it is safe to say, isn’t currently considered a best practice in the field of bank regulation. Palmstruch, not unlike the investment bankers who were inventing new mortgage securities in the 2000s, was a master of what is now called financial innovation. There were numerous problems attached to using copper as the nation’s official currency standard, as Sweden had done since 1624. For one thing, when copper is stored in bank vaults, it can’t be used for all the other practical uses that it’s good for. And as later governments that tied the value of their money to a precious metal have learned, having a copper-based currency created wild swings in the value of money due to factors beyond any one country’s control.

…

In the bank’s charter, he mentioned the “good convenience” Swedish subjects would receive in the form of relief from “hauling and dragging and other trouble that the copper coin entails in its handling.” The success of this innovation led to a great inflow of deposits into the bank—400,000 copper daler by 1660, just three years after its opening, the equivalent of $76 million in today’s dollars. And even sooner, the leaders of the bank came up with another financial innovation. As Palmstruch would later testify, Gustaf Bonde—the shareholder in the bank who was also its chief government inspector—“came to the exchange bank towards spring 1659 in the morning, stood there looking around, and exclaimed with these words: ‘I see here in the exchange bank good stores of money and it seems to me to be best now to make a beginning with the loan bank.’”

The Unwinding: An Inner History of the New America
by George Packer
Published 4 Mar 2014

It was mathematically challenging, and he lasted longer on Wall Street than at the law firm, but not much. There was the same problem as at Sullivan & Cromwell: he was competing feverishly with his coworkers, and with little conviction in the socially designated stakes. The economic value of the work wasn’t at all evident—financial innovation seemed to have reached diminishing returns—and he harbored doubts that he could ever master the game enough to win at it. He lacked the political skills, which included schmoozing and backstabbing. And the older generation in both institutions, law and finance—men who had come on in the midsixties and gotten their big reward in the seventies—was totally oblivious to the fact that it had become much harder for young people to move up.

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He lived at the heart of the overlapping worlds of political and financial elites, yet he had become such a scalding critic of Wall Street—the too-clever engineering, the over-the-top pay—that he was now an internal dissident, officially respected, unofficially distrusted. He once told a group of executives, “The most important financial innovation that I have seen the past twenty years is the automatic teller machine … I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations.

The Third Pillar: How Markets and the State Leave the Community Behind
by Raghuram Rajan
Published 26 Feb 2019

The French historian Henri Pirenne asserts that “the Church was the indispensable moneylender of the period.”31 With both monarchs and the Church administration inclined to allow some borrowing and lending, ways had to be found. Many in the Church were not comfortable with violating what they believed was a Scriptural ban. Financial innovation helped satisfy those in the Church looking for a fig leaf that the letter of the interest prohibition was not breached. For example, bills of exchange allowed a borrower to pay interest to a lender provided the borrowing was done in one currency and repayment in the other. The interest payment was hidden in the rate at which one currency was exchanged for the other, but could also be justified as a compensation for the exchange rate risk the lender bore.32 Similarly, the Church, following Roman law, allowed a penalty imposed for late payment, poena detentori.

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It was then a simple matter to lend with a fixed date for repayment and an implicit agreement that the borrower would not repay by that day. When he paid a few days later, a penalty was tacked on, which surprisingly approximated the market interest that ordinarily would have been charged by less conscientious lenders! When there is a will, the market finds a way around impediments; financial innovation helped finesse the Scriptures, much as it helps aggressive financiers avoid regulations today. THE STATE MOVES AGAINST THE CHURCH Not only was the Catholic Church inclined to turn a blind eye to some types of lending, it was becoming weaker politically once again. Its pronouncements, including on usury, began to carry less weight.

End This Depression Now!
by Paul Krugman
Published 30 Apr 2012

And his comments about how the wonders of modern finance had ushered in a new age of stability were taken to reflect that oracular wisdom. The wizards of Wall Street, said Greenspan, had ensured that nothing like the great financial disruptions of the past could happen again. Reading those words now, one is struck by how perfectly Greenspan got it wrong. The financial innovations he identified as sources of improved financial stability were precisely—precisely—what brought the financial system to the brink of collapse less than three years later. We now know that the sale of “asset-backed securities”—basically, the ability of banks to sell bunches of mortgages and other loans to poorly informed investors, instead of keeping them on their own books—encouraged reckless lending.

The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
by Mihir Desai
Published 22 May 2017

In this way, the state had a powerful new fundraising tool, fathers were insured against rapid dowry inflation by generous interest rates as well as a precommitment to save, and grooms were guaranteed the payment of the dowry by the state rather than by a father who might renege. Talk about financial innovation. As Francesca shows me yet more letters concerned with marriages and dowries, I am comforted by the fact that we only have to think about 529 plans for our daughters instead of dowry funds. Initially, though, the Monte delle doti was a bust—only two fathers participated. Rates weren’t sufficiently attractive at 11 percent, and, more importantly, the contract stipulated that the death of the daughter prior to maturity resulted in the fathers forfeiting their principal.

Electronic and Algorithmic Trading Technology: The Complete Guide
by Kendall Kim
Published 31 May 2007

The chapter covers different aspects of electronic trading, such as duration averaging, dynamic hedging, and index arbitrage, and touches on the connectivity protocol known as FIX (Financial Information Exchange), which is the technological basis for increased connectivity. Chapter 2: Automating Trade and Order Flow covers the trade life cycle from beginning to end. It highlights the major steps in the trade life cycle, such as trade confirmation, settlement, and reconciliation. It argues that changing back-office processes are, in fact, key enablers of financial innovation. It gives perspective on the automation of trading from both a technology and a management point of view, describing important concepts such as direct market access (DMA), smart order routing, and straight-through processing (STP). Chapter 3: The Growth of Program and Algorithmic Trading reviews statistics like average daily volume (ADV) whose exploding number is attributable to the rising prevalence of program and algorithmic trading.

The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read
Published 16 Jul 2012

He twice received the first prize from the Institute of Quantitative Research in Finance’s Roger Murray Award and a 1993 International INA-Academia Nazionale dei Lincei Prize from Italy’s National Academy of Lincei. He also earned the Financial Engineer of the Year Award from the International Association of Financial Engineers and the FORCE Award for Financial Innovation from Duke University. He was inducted into the Derivatives Hall of Fame by Derivatives Strategy in 1998. Merton also earned the Michael I. Pupin Medal for Service to the Nation from Columba University in 1998, the Distinguished Alumni Award from the California Institute of Technology, and the Mathematical Finance Day Lifetime Achievement Award from Boston University in 1999.

Money: The True Story of a Made-Up Thing
by Jacob Goldstein
Published 14 Aug 2020

The corporation and the limited liability that went with it made it much easier for people like Edison to find willing investors. In the weeks after the Edison Electric Light Company was created, investors rushed to put up $50,000 (about $1 million in today’s money), giving Edison the money he needed to pay his team. Those investors hoped to become rich from another financial innovation that was essential to the explosion of invention around this time: patents. The point of patents—which the founders of America thought was so important they put it in the Constitution—is to give people a financial incentive to come up with new ideas, and to share those ideas with the world.

The WikiLeaks Files: The World According to US Empire
by Wikileaks
Published 24 Aug 2015

Wall Street and its less regulated sidekick, the City of London, dominated the new international financial system, and a series of international agreements—most notably the financial services agreement arising from the Uruguay Round of the GATT negotiations, lasting from 1986 to 1994—consolidated a new global regulatory structure that favored financial “innovation” (the freedom of financiers to develop ever more intricate instruments for maximizing royalties, however risky). The IMF, meanwhile, came to play a key role in using debt to open the markets of the global South and force the “structural adjustment” of their economies so that they would become more tightly integrated into the Dollar–Wall Street regime.

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And since that money does not materialize from nothing, by magic, it must come out of the revenues driven by productive investment. The profits of investment in, for example, capital markets, are essentially a drain on productive investment. There is certainly little empirical evidence of a link between financial “innovation” and enhanced growth.60 But the promises of growth were highly seductive. Nevertheless, there was more going on here than just seduction. Significant groups of businesses in the global South stood to benefit from liberalization. They had felt constrained by protected domestic markets and capital controls, and limited by decreasing returns on industrial investment.

Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity
by Daron Acemoglu and Simon Johnson
Published 15 May 2023

For example, from 1700 to 1841, when the first comprehensive census was held, population increased roughly threefold. This growth was in part a consequence of rising incomes and better nutrition. It was also enabled by the revolution in transport, which carried enough food to the cities. Early financial innovation is not where we should look for the origin story of the Industrial Revolution either. Many more-consequential financial innovations had taken place earlier in Italy during the Renaissance and in the Netherlands, and had fueled the growth of Mediterranean and then Atlantic trade and voyages; the British Isles were at the time a financial backwater. By the early 1700s, London-based financiers were willing to fund long-distance trade, but they were hesitant to dip their toes into industrial waters, at least during the early years.

The End of Money: Counterfeiters, Preachers, Techies, Dreamers--And the Coming Cashless Society
by David Wolman
Published 14 Feb 2012

For cash, it could prove to be the angel of death. UPHILL FROM SEATTLE’S Space Needle, Ignacio Mas has just finished a call in his glassy office at the headquarters of the Bill and Melinda Gates Foundation. In recent years, the Gates Foundation has committed tens of millions of dollars to support a kind of financial innovation that has nothing to do with Wall Street’s latest Byzantine products, and everything to do with the humble cellphone program Kumar used to deposit his 1,000 rupees. In November of 2010, Melinda Gates announced a $500 million commitment to further promote these kinds of advances in basic financial services, recognizing that merely having the means to sock money away empowers people, as she put it, “to use their own energy, their own talents to lift themselves out of poverty.”1 Mas is deputy director of the foundation’s Financial Services for the Poor program, and it’s his job “to teach the world that cash is the enemy of the poor.”

Rigged Money: Beating Wall Street at Its Own Game
by Lee Munson
Published 6 Dec 2011

Profits would jump for shareholders, pay packages for executives that were tied to the increase in revenue would boom, and Federal Reserve Chairman Alan Greenspan would tell the public that the risk of system failure would be different this time. In May 2000, Greenspan said, “So long as we recognize the risks and insist on good risk-management systems . . . economic growth is, I suggest, enhanced by the kinds of financial innovation that technology and deregulation are now producing.”1 Plus, with the government backing banks, it didn’t matter if things blew up like they did in the 1920s or late 1980s with the savings and loan crisis. Banks were important and would have to be bailed out. “History teaches us that a sound banking system, willing and able to take deposits and extend credit, is a prerequisite for the long-term health of the national economy.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian
Published 26 Jan 2016

And an increasing number of countries competed to establish “the world’s financial center” or smaller offshore centers. And some of those who couldn’t do so directly felt comfortable renting out segments of their domestic financial sector. Enabled and empowered by this new approach, and helped by financial innovations such as securitization, banks embarked on a whole new range of activities (many of which involved trading ever more complexly structured pieces of paper among themselves, as well as placing them with others that had an even weaker understanding). With hindsight, it is now clear, including to banks themselves, that too many of these activities involved risk taking that they only partially understood but that seemingly appeared too lucrative to pass up.

The Great Reset: How the Post-Crash Economy Will Change the Way We Live and Work
by Richard Florida
Published 22 Apr 2010

For twenty-five years or more, the U.S. economy grew and grew, feasting on the unchecked consumption of a never-ending cascade of real estate, goods, and gadgetry. The United States used to be revered for its innovative capacity, its so-called American ingenuity, but all that somehow got refocused on overly risky financial innovation. The economy became a giant bazaar, fueled by easy credit. At the same time, the financial markets, once a haven for investors, mutated into rolling casinos, where many of our most brilliant minds gambled recklessly, making bets of dizzying complexity. It’s been nearly ten years since Alan Greenspan revised his description of “irrational exuberance,” replacing it with the more condemning phrase “infectious greed” as he watched the house of cards rise higher and grow ever more precarious.

Whiplash: How to Survive Our Faster Future
by Joi Ito and Jeff Howe
Published 6 Dec 2016

And so Rubin spent much of his sophomore and junior years wondering whether he would be prosecuted for a project that was neither fraudulent nor functional. Scientists and inventors are often all too ready to claim credit for an important discovery. So it is one of our age’s more baffling mysteries that the man—or woman, or group of men and women—behind the biggest financial innovation since the ATM remains stubbornly, sincerely anonymous. It started on November 1, 2008, when someone calling himself Satoshi Nakamoto posted “Bitcoin: A Peer-to-Peer Electronic Cash System” to a cryptography mailing list.20 In his introduction, he wrote, “I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.… The main properties: Double-spending is prevented with a peer-to-peer network.

Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn
Published 18 Jun 2012

Banks also looked to borrowers to keep a cushion of capital—stock and cash preferably—as a buffer, and where possible demanded marketable collateral. It was only in the 1980s that bankers became clever enough to discard these time-honored rules, especially when applied to themselves. After the 2008 crisis, the Center for the Study 147 148 Chapter 7 | Reconstructing Finance of Financial Innovation in London published a very entertaining online book called Grumpy Old Bankers, in which bankers of an earlier era representing many countries opined on how the current generation “lost the plot” and disgraced the profession. Short-term share-price manipulation through leverage and asset securitization is high among their complaints.

The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg)
by Liam Vaughan and Gavin Finch
Published 22 Nov 2016

Many set up base in the swanky streets of Mayfair. At the same time, emerging markets like Russia and India were experiencing The Call 93 unprecedented growth.With its ready infrastructure and convenient time zone, London was a natural conduit between East and West. Powering the financial boom years was an ethos of unbridled financial innovation. Derivatives markets globally jumped from $80 trillion to $592 trillion between 1998 and 2008,4 accompanied by what turned out to be a misguided belief that the complex financial instruments served to disperse rather than concentrate risk. Between 2003 and 2008, bonuses in the City rose from £3.3 billion to £11.6 billion.5 With a 1,000-watt smile, a townhouse in Belgravia and a box at Chelsea football club’s Stamford Bridge stadium, Diamond rode the crest of the wave.Barclays started sponsoring the Premiership,England’s soccer franchise, in 2001.

The Unbanking of America: How the New Middle Class Survives
by Lisa Servon
Published 10 Jan 2017

Unlike previous generations, millennials think of their relationship to banks as transactional rather than relationship-driven, probably because they came of age during a time when banks invested less and less in relationships. That’s one reason they are more likely than older generations to consider a branchless bank. Financial innovators know millennials aren’t happy with banks, and they’re tripping over one another in a rush to come up with solutions that work for the largest generation ever. The Millennial Disruption Index, which identifies which industries are most likely to be transformed by millennials, found banking to be at the highest risk for disruption.

The Sport and Prey of Capitalists
by Linda McQuaig
Published 30 Aug 2019

And he suggests that the Oshawa plant be expropriated today without compensation, since Canadian taxpayers have already provided generous subsidies to GM. While he acknowledges that his plan is a long shot, he adds, “It seems criminal not to at least try.” What is needed is some bold, out-of-the-box thinking — a willingness to consider innovation that is not just Wall-Street-designed, self-enriching financial innovation, but untapped made-in-Canada innovation aimed at building something the world needs. Given the fact that Canada’s historic auto-making centre is about to be shut down, we should at least give serious consideration to the possibility of creating a publicly owned company that could potentially start a transformative industry here.

China's Superbank
by Henry Sanderson and Michael Forsythe
Published 26 Sep 2012

In January 2007, the China Daily, a state-owned newspaper, said that reform of China’s three policy banks—Exim Bank, CDB, and the Agricultural Bank—was “on top” of the agenda for China’s National Financial Work Conference.1 Four years later, Premier Wen Jiabao, in his last year in power, promised in a radio address to end the monopoly of state-owned banks. There is no doubt that the West can learn from what a strong development bank can achieve. It is a fallacy that financial innovation can be achieved only by private banks and a free market: CDB has been innovative in its deals with local governments and companies like Huawei. But China has decent infrastructure and can afford to move toward a more market-based system where consumption is better promoted and capital is freed up to follow the best, most innovative returns.

Tomorrow's Capitalist: My Search for the Soul of Business
by Alan Murray
Published 15 Dec 2022

And it’s an investment he believes will pay off for the company in the long run—even if investors reject it in the short run. ON THE FRONT LINES It was one of the last New York City galas before the coronavirus took hold. The glittering February 2020 event by the Museum of Finance attracted luminaries from both the private and public sectors. The year’s honoree for the Schwab Award for Financial Innovation, which would be presented that evening, was Dan Schulman, the charismatic and sometimes offbeat CEO of PayPal. A standout amid the tony, well-dressed crowd, Schulman was wearing jeans. But it was his words not his wardrobe that got the most attention. Schulman, who had been early to recognize that capitalism needed a reboot and the CEOs had to do more than just make money for their shareholders, had been speaking out for years.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

Unfortunately, a mortgage-market tsunami struck in August and September 1998, and LTCM suffered tremendously on this trade. By August 31, 1998, the spread had moved to 84 basis points. On September 22, the spread was at 111 basis points. How did this happen? Did LTCM rely on too short a horizon to measure trade risk? Or were these highly unusual mortgage spread jumps? Often financial innovations don’t offer a long history with which to measure risk. This was the case with OAS spreads. To get a better sense of how mortgage spreads behaved over time, compare 30-year conventional mortgage rates to 30-year constant maturity Treasury bills from 1977 forward. The juxtaposition shows that, from the middle of July 1998 to the end of December 1999, the monthly mortgage spread rose by two standard deviations.

…

When the BIS lowered the residential mortgage risk-weighting from 50% to 35% before the financial crisis, that may have increased banks’ willingness to increase their own real estate exposure, because it counted less against their capital requirements.18 Another example of ignored interconnections is encapsulated in this question: “If financial innovation or derivatives have made us better off, then why aren’t we safer today?” The question is not posed correctly. Suppose you’re driving in Cambridge, Massachusetts, during the winter with your new four-wheel drive. Your police friend tells you that the data show that after 15 years with four-wheel drives, Cambridge still has the same rate of accidents per passenger mile.

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover
by Katrina Vanden Heuvel and William Greider
Published 9 Jan 2009

Turnover of new and existing houses in the third quarter of last year was more than 16 percent of GDP, way above its long-term average of 9 to 10 percent, and easily beating the levels reached in the housing frenzies of the 1970s and 1980s. But that’s not all, as they say on TV. People haven’t merely been buying houses, they’ve been conducting scary experiments in financial innovation. Time was, you had to come up with a hefty down payment to buy a house. No longer: In 2005 the median first-time buyer put down only 2 percent of the sales price, and 43 percent made no down payment at all. And almost a third of new mortgages in 2004 and 2005 were at adjustable rates (because the initial payments are lower than on fixed-rate loans).

The Inequality Puzzle: European and US Leaders Discuss Rising Income Inequality
by Roland Berger , David Grusky , Tobias Raffel , Geoffrey Samuels and Chris Wimer
Published 29 Oct 2010

Although the consensus view continues to be that much of the increase in inequality stems from a rising demand for skilled labor and a corresponding increase in the payout to such labor, it’s likely that other sources are also implicated, such as globalization, market liberalization, changing tax policies, financial innovation, changing social mores, deunionization, changing corporate governance, market failure, and shifting demographics. It is well beyond the scope of this book to offer new evidence on these competing accounts. Rather, we would like to present the accounts of rising inequality that business, political, and labor elites tend to mention.

How Much Is Enough?: Money and the Good Life
by Robert Skidelsky and Edward Skidelsky
Published 18 Jun 2012

It would not, on its own, reduce the love of money for its own sake. This is most clearly exhibited in the ever expanding financial services industry, the real driver of contemporary capitalism, and the most egregious source of personal and corporate enrichment. Adair Turner, former chairman of the UK Financial Services Authority, has called much financial innovation “socially useless.”40 From our point of view it is worse than that. It is a cause of the insatiability we seek to control. One way to rein in the financial sector would be to tax trades in financial instruments like derivatives. Such “Tobin taxes” would both serve to reduce the power of finance to dictate economic activity and provide revenue for socially desirable objects of public spending.

The New Economics: A Bigger Picture
by David Boyle and Andrew Simms
Published 14 Jun 2009

What they published in July 2008 was known as the ‘Green New Deal’, launched 75 years after President Roosevelt launched a New Deal to rescue the USA from financial crisis.5 The Green New Deal urged governments to embrace a comprehensive, selfreinforcing programme including to: • • • • • • • invest in a major programme of renewable energy and wider environmental transformation that would create thousands of new green collar jobs; build a new alliance between environmentalists, industry, agriculture and unions to put the interests of the real economy ahead of those of footloose finance; set up an Oil Legacy Fund, paid for by a windfall tax on the profits of oil and gas companies, as part of a wide-ranging package of financial innovations and incentives to assemble the tens of billions of pounds that need to be spent, including local authority green bonds, green gilts and green family savings bonds; make sure fossil fuel prices include the cost to the environment, and are high enough to tackle climate change by creating economic incentives to drive efficiency and bring alternative fuels to market; cut corporate tax evasion by clamping down on tax havens and corporate financial reporting; re-regulate the domestic financial system, inspired by reforms implemented in the 1930s, including cutting interest and much tighter regulation of the wider financial environment; break up the discredited financial institutions that have needed so much public money to prop them up in the latest credit crunch.

Losing Control: The Emerging Threats to Western Prosperity
by Stephen D. King
Published 14 Jun 2010

The idea of dampening down capital markets through capital controls has a long and rich history and was, of course, part of the post-war international financial consensus: if countries wanted to control simultaneously their exchange rates and their domestic inflation rates, they had no choice but to regulate capital inflows and outflows. As that consensus began to unravel in the 1970s with the failure of the Bretton Woods system of fixed but adjustable exchange rates, countries slowly moved away from capital controls to the world we’re now living in. In a world of constant financial innovation, it became increasingly difficult to impose capital controls successfully. Moreover, capital controls allowed countries to pursue bad domestic policies for too long, ultimately to their own detriment. Nevertheless, the abolition of capital controls has hardly been plain sailing. Some economists foresaw the problems associated with newly liberalized capital markets.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

This baffles and bamboozles outsiders, because it’s very hard to understand what these Bond villains—which is what hedge funders are in the public imagination—have to do with hedges. The story of how the term made its journey is a good one, and it has a lot to tell us about the language of money and the pressures brought to bear on it by the forces of financial innovation. In fact, I’m not sure that there is a purer example of reversification at work than in “hedge fund.” Here’s what happened. The word “hedge” began its life in economics as a term for setting limits to a bet, in the same way that a hedge sets a limit to a field. That’s what a hedge is for: demarcating an area of land.

An Edible History of Humanity
by Tom Standage
Published 30 Jun 2009

Eventually, in 1667, Run was relinquished to the Dutch under the terms of a Treaty of Breda, one of many peace treaties signed during the on-off Anglo-Dutch wars of the seventeenth and eighteenth centuries. As part of the 1667 deal, Britain received a small island in North America called Manhattan. Profits from the spice trade helped to bankroll the Dutch “golden age” of the seventeenth century, a period in which the Dutch led the world in commerce, science, and financial innovation, and the wealthy merchant class provided sponsorship for artists such as Rembrandt van Rijn and Johannes Vermeer. But in the long run the Dutch spice monopoly proved to be less valuable than expected. The garrisons and warships needed to protect the monopoly were hugely expensive and did not justify the returns as the price of spices began to fall in Europe in the late seventeenth century.

The Vanishing Middle Class: Prejudice and Power in a Dual Economy
by Peter Temin
Published 17 Mar 2017

After stagnating in the 1970s, the Dow Jones Industrial Index tripled in the 1980s, attracting people to the brokerage industry.22 The rising demand for financial services increased the size of the financial sector and the returns to those employed in it. As deregulation created more need for finance as well as more scope for financial innovation, more educated people were attracted to the field. During the Bretton Woods period, banking was highly regulated and did not attract highly educated people. This changed in the tumultuous 1970s, and more educated people entered the financial sector. The increasing human capital in finance explains most of the rise in financial incomes in the 1980s.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity
by Bernard Lietaer and Jacqui Dunne
Published 4 Feb 2013

In some cases, companies were so embarrassed about calling such rewards ‘performance bonuses’ that they felt compelled to change the name to ‘retention bonuses’ (even if the only thing being retained was bad performance). Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.”15 Creutz, reflecting on the current euro crisis, remarks, “Thanks to the blindness of our economical experts there is also the danger that after a collapse, which could be worse than that of 1929, the same systemic errors will be put in place again.”16 Although no equivalently extensive study isolating the effects of interest payments on the concentration of wealth is available for the United States, data indicate an even more dramatic economic disparity, especially in recent decades. 

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit
by William Keegan
Published 24 Jan 2019

But I read in the Financial Times this morning that high bonuses are being justified in London on the grounds that otherwise bankers will move to New York.’ Volcker also spoke very much to the point when he stated in the wake of the banking crisis – in my opinion only half-jokingly – that, for all the development of ‘new financial products’, the only worthwhile financial innovation in recent decades had been the cash machine, otherwise known as the ATM. Volcker was also very critical of modern investment banking practices and their contribution to the crisis. I was lucky enough to be in the audience on several occasions at seminars of bankers in Washington when Volcker, a firm believer in old-fashioned values, made sardonically perceptive criticisms of modern financial practices in which his successor, Alan Greenspan, styled ‘Maestro’ by his biographer, had placed so much faith.

Cities: The First 6,000 Years
by Monica L. Smith
Published 31 Mar 2019

Rowe, “Changing Rural Class Structure and the Jajmani System,” Human Organization 22, no. 1 (1963): 41–44. The first coinage: David M. Schaps, “War and Peace, Imitation and Innovation, Backwardness and Development: The Beginnings of Coinage in Ancient Greece and Lydia,” in Explaining Monetary and Financial Innovation: A Historical Analysis, eds. Peter Bernholz and Roland Vaubel (Cham, Switzerland: Springer, 2014), 32. Within a hundred years: Peter Bernholz, “The Development of Small Early Money in Western Antiquity and Early China,” in Money in Asia (1200–1900): Small Currencies in Social and Political Contexts, eds.

Smarter Investing
by Tim Hale
Published 2 Sep 2014

Metrick, A. and Yasuda, A. (2011) ‘The economics of private equity funds’, Swedish Institute for Financial Research Conference on The Economics of the Private Equity Market; Review of Financial Studies, Vol. 23, pp. 2303–41 (http://ssrn.com/abstract=996334). Morris, P. (2010) ‘Private equity, public loss?’, Centre for the Study of Financial Innovation, July. Phalippou, L. (2011) ‘Why is the evidence on private equity performance so confusing?’ (www.ssrn.com). Swensen, D. F. (2005) Unconventional Success. New York: The Free Press. Wargo, B. (2008) ‘The fever for structured products’, March (WealthManagement.com), March 2008. Conclusion This book has, I hope, been useful to you, both in getting you into a smarter investing mindset and in allowing you to decide what type of portfolio makes sense, and how you can put this into practice.

Jared Bibler
by Iceland's Secret The Untold Story of the World's Biggest Con-Harriman House (2021)

It is a simple indicator of the market view on the chance of a particular borrower not paying its debts, and is therefore extremely useful.44 So the higher the CDS insurance premium (or spread), the more risky the borrower, and the less valuable are outstanding or future loans made to that borrower. Unlike the loans or bonds themselves, which once made are often kept in a drawer until their due date, CDS is quoted every day. So the CDS spread becomes a proxy for the credit risk of a borrower. Seen from this perspective, CDS is a useful financial innovation. Every big borrower now has a publicly and globally viewable credit score, and it’s also now possible to buy insurance on their debt. Starting in 2007, the CDS on Kaupthing showed clearly that the bank was in trouble, much more clearly than had its share price, which as we now know was being illegally bid up on two markets each day.

Vassal State
by Angus Hanton
Published 25 Mar 2024

[website] (16 September 2022), https://www.which.co.uk/news/article/amazon-credit-card-closure-when-will-your-card-stop-working-a0ADB3r8kJy5. 18 Kaye Wiggins and Silvia Sciorilli Borrelli, ‘How the private equity industry stole a march in European payments’, Financial Times [website] (20 November 2020), https://www.ft.com/content/e5756da3-e040-4f41-9849-9bfdd17a8a69. Peter Morris was the author of Private Equity, Public Loss?, published by the think tank the Centre for the Study of Financial Innovation (CSFI) in 2010. 19 Antoine Gara and Ortenca Aliaj, ‘FIS sells majority stake in Worldpay to buyout group at $18.5bn valuation’, Financial Times (6 July 2023), https://www.ft.com/content/b133fa58-5ef2-4cc4-972b-8271f749779e. 20 Quoted in Wiggins and Borrelli, ‘How the private equity industry stole a march in European payments’. 21 ‘Alfred Kelly Jr net worth & insider trades’, Benzinga [website] (4 December 2023), https://www.benzinga.com/sec/insider-trades/v/ALFRED-KELLY%20JR; ‘Ajay Banga – net worth and insider trading’, GuruFocus [website], https://www.gurufocus.com/insider/3836/ajay-banga. 22 Charlotte Tobitt and Aisha Majid, ‘National press ABCs: FT stays steady while Evening Standard falls below 300,000 for first time since going free’, Press Gazette (15 November 2023), https://pressgazette.co.uk/media-audience-and-business-data/media_metrics/most-popular-newspapers-uk-abc-monthly-circulation-figures-2/. 23 ‘UK ad spend grew 8.8% in 2022 to reach £34.8bn’, Advertising Association [website] (27 April 2023), https://adassoc.org.uk/our-work/uk-ad-spend-grew-8-8-in-2022-to-reach-34-8bn-inflationary-pressures-persist-with-minimal-growth-forecast-for-2023/. 24 ‘Nobody reads terms and conditions: it’s official’, Pinsent Masons [website] (19 April 2010), https://www.pinsentmasons.com/out-law/news/nobody-reads-terms-and-conditions-its-official. 25 ‘It pays to read license agreements (7 years later)’, PC Matic [website] (12 June 2012), https://www.pcmatic.com/blog/it-pays-to-read-license-agreements-7-years-later/. 26 Gina Hall, ‘San Jose area has world’s third-highest GDP per capita, Brookings says’, The Business Journals [website] (23 January 2015), https://www.bizjournals.com/sanjose/news/2015/01/23/san-jose-has-worlds-third-highest-gdp-per-capita.html. 27 ‘Investing in American dynamism (with Katherine Boyle)’ [transcript of podcast interview with embedded video], Acquired [website] (5 June 2022), https://www.acquired.fm/episodes/american-dynamism-with-katherine-boyle. 28 David Curry, ‘Etsy revenue and usage statistics (2023)’, Business of Apps [website] (8 November 2023), https://www.businessofapps.com/data/etsy-statistics/. 29 Krystal Hu, ‘ChatGPT sets record for fastest-growing user base – analyst note’, Reuters [website] (2 February 2023), https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01/. 30 For ‘privacy zuckering’, ‘roach motel’ and ‘confirmshaming’, see ‘Dark pattern’, Wikipedia [website], https://en.wikipedia.org/wiki/Dark_pattern.

The Half Has Never Been Told: Slavery and the Making of American Capitalism
by Edward E. Baptist
Published 24 Oct 2016

Meanwhile, the national Whig Party, once the champion of the B.U.S., now tried to eliminate regulation altogether by passing the Deposit Act of 1836. This act shifted public land revenues from western banks to eastern ones, allowing the latter to increase their lending. The Whigs also doubled the number of pet banks.19 Lending by US banks had also increased dramatically since 1833 because of the second cause of bubbles: financial innovations that make it easier to expand the leverage of borrowers. C.A.P.L.-style bonds provided distant investors with opportunity to purchase shares in the income flows of thousands of slaves—to speculate, in effect, on future revenues generated by cotton and slaves. These securities drew cash into the southwestern region, inflating the value of all kinds of assets, especially enslaved “hands.”

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But even as they wrote, on the other side of the Atlantic Pierce was learning that the survival of the Democratic Party itself depended so heavily on alliance behind the cause of expanding slavery that he wasn’t going to be allowed to wait for Spain to sell Cuba.24 IN 1852, A YEAR after Rice Ballard’s business partner Samuel Boyd helped to buy arms for Narciso Lopez’s invasion of Spanish territory, other things that Boyd had been doing caught up to him. Boyd, a Natchez lawyer and judge, and former slave trader Ballard had been buying distressed properties through the trough of the 1840s. As the new decade opened, they began to buy dozens of new “hands” through a New Orleans slave-consignment agent named C. M. Rutherford. Pre-1850s financial innovations had worked in tandem with new slave trades, from coffle-chain and Georgia-men to the supertraders and the securitization of hands. Now the factors’ capillary credit created demand, to which the domestic slave trade responded with a new business model. Unlike 1830s’ supertraders who owned enslaved hands from one end of the pipeline to the other, new players, such as Richmond’s Richard Dickinson, behaved more like consignment agents or commodities traders.

The Bogleheads' Guide to Investing
by Taylor Larimore , Michael Leboeuf and Mel Lindauer
Published 1 Jan 2006

The Vanguard researchers also found that the benchmark indexes had a higher return than the corresponding funds. Finally, the Vanguard researchers found that the returns of the highest-cost funds lagged those of the lowest-cost funds. Current-day researchers use the findings of Bachelier, Markowitz, Cowles, Fama, and Bogle, together with all the other financial innovations of the past 100 years, to formulate what is called Modern Portfolio Theory. Our brief review of the history of investment research serves two purposes. First, it will help you design an efficient (low risk/high return) portfolio, and then it will give you the knowledge and conviction needed to stay-the-course.

The Making of a World City: London 1991 to 2021
by Greg Clark
Published 31 Dec 2014

Founded by the Romans as a trading post on the banks of the River Thames, offering excellent sea access from the northerly reaches of the Roman Empire, trade is part of London’s DNA. From the Middle Ages and throughout the centuries which followed, this trading spirit resurfaced in London’s age of maritime adventure, which brought with it boat building, navigation technologies and financial innovation in shipping, insurance and banking. The trading spirit fostered the British Empire, with its growth of docks and exchanges, and led to a deep pragmatism and openness. Openness to trade also meant openness to other people: merchants, labourers, and investors. Of course its status as an imperial metropolis also enabled London to become a centre of arts, artifacts, culture, publishing and a seat of learning.

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction
by Richard Bookstaber
Published 1 May 2017

Del Genio, Jesus Gómez-Gardeñes, Miguel Romance, Irene Sendiña-Nadal, Zhen Wang, and Massimiliano Zanin. 2014. “The Structure and Dynamics of Multilayer Networks.” Physics Reports 544, no. 1: 1–122. Bookstaber, Richard. 2007. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. Hoboken, NJ: J. Wiley. Bookstaber, Richard, Jill Cetina, Greg Feldberg, Mark Flood, and Paul Glasserman. 2014. “Stress Tests to Promote Financial Stability: Assessing Progress and Looking to the Future.” Journal of Risk Management in Financial Institutions 7, no. 1: 16–25. Bookstaber, Richard, Paul Glasserman, Garud Iyengar, Yu Luo, Venkat Venkatasubramanian, and Zhizun Zhang. 2015.

The Democracy Project: A History, a Crisis, a Movement
by David Graeber
Published 13 Aug 2012

The conventional story is that we have moved from a manufacturing-based economy to one whose center of gravity is the provision of financial services. As I’ve already observed, most of these are hardly “services.” Former Fed chairman (under Carter and Reagan) Paul Volcker put the reality of the matter succinctly when he noted that the only “financial innovation” that actually benefited the public in the last twenty-five years was the ATM machine. We are talking little more than an elaborate system of extraction, ultimately backed up by the power of courts, prisons, and police and the government’s willingness to grant to corporations the power to create money.

The Impulse Society: America in the Age of Instant Gratification
by Paul Roberts
Published 1 Sep 2014

Yet through massive share buybacks, the firm has kept share prices high and investors mollified—and, thus, has avoided the discipline of the efficient marketplace. Microsoft, Lazonick says, is a company that is “run to keep share prices high rather than to keep people engaged.”25 This myopic, financialized innovation strategy is endemic across American corporate culture. Many big American technology firms have found that when it comes to R&D spending and returns, it’s much more capitally efficient to live off of past innovation, cut investment in the organizational capacities for future innovation (including worker skills), and spend the “savings” on their own shares.

No Ordinary Disruption: The Four Global Forces Breaking All the Trends
by Richard Dobbs and James Manyika
Published 12 May 2015

These cottage industries have become big businesses, creating large, integrated players and a network of suppliers and encouraging a host of service providers and smaller companies to enter the field. Industrial trends are procyclical. The more renewable energy is installed, the more compelling a business it becomes. Prices are coming down, and a host of financial innovations—from solar leases to green bonds—are helping to increase the pace of rollout. If the current drive for large-scale renewable solutions continues, the sun could become the world’s largest source of electricity by 2050, ahead of fossil fuels and hydro and nuclear power, according to the International Energy Agency.59 In many parts of the developing world, the first supplies of electricity that consumers use will be carbon-free, generated by solar panels.

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
by Sal Arnuk and Joseph Saluzzi
Published 21 May 2012

Most important, terrorists or hackers didn’t cause the crash. It also didn’t look like a “fat finger” error of the kind where a trader mistakenly entered a massive sell order. After going through the events of the day and showing a variety of data about what happened, Gregg Berman, a deputy director in the SEC’s new Division of Risk Strategy and Financial Innovation, offered up the money shot. He put up a slide in the presentation, slide 48, that illustrated how selling could ripple in the markets and cause more selling. He then used two deadly words that would come to define the frenzy on May 6, feedback and cascade.17 Berman didn’t say this, but others soon would—the Flash Crash happened because it was designed to happen.

The Big Short: Inside the Doomsday Machine
by Michael Lewis
Published 1 Nov 2009

The party on the other side of his bet against subprime mortgage bonds was the triple-A-rated insurance company AIG--American International Group, Inc. Or, rather, a unit of AIG called AIG FP. AIG Financial Products was created in 1987 by refugees from Michael Milken's bond department at Drexel Burnham, led by a trader named Howard Sosin, who claimed to have a better model to trade and value interest rate swaps. Nineteen eighties financial innovation had all sorts of consequences, but one of them was a boom in the number of deals between big financial firms that required them to take each other's credit risks. Interest rate swaps--in which one party swaps a floating rate of interest for another party's fixed rate of interest--was one such innovation.

Frugal Innovation: How to Do Better With Less
by Jaideep Prabhu Navi Radjou
Published 15 Feb 2015

Similarly, to teach young people good financial habits, AmEx is piloting a project with non-profit organisations Moneythink and EveryoneOn to provide financial mentoring, free Wi-Fi and mobile-phone-based learning to students in Mississippi. Additionally, American Express Ventures, established in 2011 in Silicon Valley, will invest in early-stage start-ups to help people manage their finances better. In June 2014, AmEx launched a Financial Innovation Lab, where researchers and counsellors work together to support credit building and savings; the lab’s results will be made publicly available. Through these multiple initiatives, AmEx is attempting to understand and solve a complex, multi-dimensional socio-economic problem. The unbanked and underbanked spend 10% of their $1 trillion disposable income on fees, the same amount as they spend on food.

The Ecotechnic Future: Envisioning a Post-Peak World
by John Michael Greer
Published 30 Sep 2009

Further, the industrial system that supports us has been in place long enough that most of us seem to be unable to conceive of circumstances in which it might no longer be there. The first stage of the ensuing crisis has already arrived. What large trees were to the Easter Islanders and irrigation canals were to the medieval Middle East, the money economy is to industrial Preparations society, and the speculative delusions that passed for financial innovation over the last few decades have played much the same role as the invading nomads of ibn Khaldûn’s history. The result, just as in the 1930s, is that a nation still relatively rich in resources and a large and skilled labor force is sliding into crushing poverty because the intricate social system we use to allocate labor and resources has broken down.

No Such Thing as a Free Gift: The Gates Foundation and the Price of Philanthropy
by Linsey McGoey
Published 14 Apr 2015

The index was a derivative that tracked the performance of different traded materials, including coffee, cocoa, corn, and wheat, and then reduced the weighed investment value of each material into a simple mathematical formula. Other firms followed suit by creating their own commodities indices.8 These indices might have been useful financial innovations, improving liquidity and enabling producers to insure themselves against massive price depreciations – had three things not happened. First, after diligent lobbying, the CFTC agreed to exempt Goldman Sachs from the need to adhere to position limits. Second, this was followed by a wave of further deregulations throughout the 1990s, allowing other market players to also buy as many futures as they liked.

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
by Ben Mezrich
Published 20 May 2019

Speaking sarcastically to CNET, Moritz had said, “You know when the Winklevosses get into the business, it’s serious.” Felix Salmon, a financial journalist, writing for Reuters: To be clear: this thing is a really, really silly idea, from a pair of brothers whose main ambition, these days, is to be the biggest helminths in the bitcoinverse. The Winklevii, muscling in to the financial-innovation game, are being much more selfish about the whole thing. They’re going to fail; I just hope they don’t cause too much harm to others in doing so. Bill Borden, a senior vice president at UBS: When I read the headlines my initial reaction was to chuckle … while I find developments in the Bitcoin story to be intriguing, I doubt that the Winklevoss ETF would be how I would play it should I ever decide to buy Bitcoin.

Going Infinite: The Rise and Fall of a New Tycoon
by Michael Lewis
Published 2 Oct 2023

Bitcoin could be owned and moved without the need for a bank. Its value could not be eroded by governments. It didn’t require anyone to trust anyone or anything, except, of course, the integrity and design of the computer code. It was at once a plea for sound money and an appeal to mistrust. It was both financial innovation and social protest. Crypto was like the friend you’d made only because you shared an enemy. The sort of person drawn to it, at least in the beginning, was the sort of person suspicious of big banks and governments and other forms of institutional authority. Zane Tackett was a good example of the type, though to call Zane a type was to miss both the joy and the point of Zane.

The Revolution That Wasn't: GameStop, Reddit, and the Fleecing of Small Investors
by Spencer Jakab
Published 1 Feb 2022

When I saw what was about to happen that morning, I thought this was something I wanted to write about. When I saw how politicians, the news media, and ordinary people reacted to the following days’ roller-coaster ride, I knew I had to. It’s a wild and fascinating series of events—a perfect storm of financial innovation, big egos, economic uncertainty, mob psychology, generational strife, and a deadly pandemic. Within a couple of weeks, there were at least four films under development about the “Reddit Revolution.” I knew that they would be more like Trading Places or Zulu Dawn, with maybe a touch of Animal House for good measure.

Sunbelt Blues: The Failure of American Housing
by Andrew Ross
Published 25 Oct 2021

Before they underwent consolidation, these companies included Blackstone, Colony Capital, Starwood, Waypoint, Silver Bay, Main Street Renewal, Tricon, Freo, Progress Residential Trust, Beazer, Wynkoop, and American Residential Properties. See Tony Roshan Samara, Rise of the Renter Nation: Solutions to the Housing Affordability Crisis (Right to the City Alliance, 2014).   5.  Just as in the lead-up to the crash, these schemes included financial “innovations,” such as leveraged purchasing, private-label lending, nonperforming loan acquisition, and, inevitably, rental bonds, through the market trading of rent-backed securities. Desiree Fields et al., The Rise of the Corporate Landlord: The Institutionalization of the Single-Family Rental Market and Potential Impacts on Renters (Homes for All and Right to the City Alliance, July 2014), https://homesforall.org/wp-content/uploads/2014/07/corp-landlord-report-web.pdf; Sarah Edelman with Julia Gordon and David Sanchez, “When Wall Street Buys Main Street: The Implications of Single-Family Rental Bonds for Tenants and Housing Markets,” Center for American Progress, February 27, 2014, https://www.americanprogress.org/issues/economy/reports/2014/02/27/84750/when-wall-street-buys-main-street-2/; and Rob Call with Denechia Powell and Sarah Heck, “Blackstone: Atlanta’s Newest Landlord; The New Face of the Rental Market” (Occupy Our Homes, April 2014), https://homesforall.org/wp-content/uploads/2014/04/BlackstoneReportFinal0407141.pdf.   6.  

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

” • Hyman Minsky for his insight that financial stability can be destabilizing (because prolonged stable periods make investors extrapolate the stability too far and induce them to overprice risky assets) as well as for his analysis of bubble stages. Each boom starts with displacement (an exogenous shock, akin to Shiller’s precipitating factor) that triggers profit opportunities in some sector. Asset prices begin to rise, aided by easy credit (monetary expansion and credit creation—often via financial innovation), and both developments also stimulate the real economy; this is the moment at which stability becomes destabilizing. At the euphoria stage, speculation dominates and any value concerns are dismissed. Eventually euphoria gives way to the critical stage where some insiders take profits and financial distress ensues.

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Figure 27.4. U.S. financial sector’s share of corporate profits and market cap. Source: Haver Analytics. Financialization is related to several other trends: rising leverage and asset richening; securitization and its flip side (i.e., disintermediation from banks); deregulation and active financial innovations; expansion of the delegated asset management industry (institutionalization of asset holding and trading); the finance sector’s increasing political influence; widening income inequality within countries; and globalization and integration of capital markets. Some of these trends are now reversing.

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State
by Paul Tucker
Published 21 Apr 2018

This was in the spirit of Hayek: rules, not men (sic), were needed for government under the rule of law (chapter 8). The first irony, therefore, was that the viability of Friedman’s favored rule—a target for the growth rate of (some measure of) the stock of money—was undermined by the very market liberalizations that formed part of the same ideological project as “monetarism.” Financial innovations and freedoms made the demand for money (however measured) highly unpredictable, leaving the authorities struggling to know where to set their targets, how to interpret the data outturns, and how to explain to the public the changes to targets made from year to year or, sometimes, in the course of a year.

…

“Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking.” Journal of Finance 57, no. 1 (2002): 33–73. Kavanagh, Aileen. “Judicial Restraint in the Pursuit of Justice.” University of Toronto Law Journal 60, no. 1 (2010): 23–40. Kay, John. Narrow Banking: The Reform of Banking. Centre for the Study of Financial Innovation, September 2009. Kazmin, Amy. “India’s Raghuram Rajan Warns against Intolerance.” Financial Times, November 1, 2015. Keefer, Philip, and David Stasavage. “When Does Delegation Improve Credibility? Central Bank Independence and the Separation of Powers.” Oxford Working Paper Series, no. 98-18, 1998.

Escape From Rome: The Failure of Empire and the Road to Prosperity
by Walter Scheidel
Published 14 Oct 2019

In this context, the contrast between common law traditions, in which judges refereed among competing lawyers and layman juries, and continental courts, dominated by expert judges and prone to enhance top-down control by the central state, is worth noting.85 As a safe haven, England benefited from receiving persecuted and often particularly skilled groups that exited rival polities on the continent. Financial innovation was boosted by successive waves of émigrés: starting with the expulsion of Sephardic Jews from Granada in 1492, this inflow peaked in the 1680s with the Huguenot exodus from France that was closely followed by the emigration of Dutch Jews and Protestant dissidents. Members of these communities had long been key players in international finance.86 Sovereignty also helped England protect other features that arguably contributed to economic development, such as the superior physical and cognitive condition of workers that owed much to improvements in nutrition sustained by rising agricultural productivity, to job training, and to Poor Laws that helped feed the labor force.

…

See, e.g., O’Brien 2011: 428–30; Vries 2015: 69–179, esp. 121, 164, 175–78, with a comparison to low-tax China (more on this later in this chapter). 101. Vries 2015: 181–217, esp. 184, 187, 207, 210–11. 102. He 2013: 63–77; Vries 2015: 219–22, 228–29. Brewer 1988 is a classic account of the relationship between warfare, taxation, public debt, and financial innovation. Much the same was true of the Netherlands, which had pioneered large-scale public debt by building on (much more modest) medieval Italian precedent: in the seventeenth and eighteenth centuries, debt rose while interest rates fell, and more than a tenth of Dutch households invested in the war against Spain: Vries 2015: 224 (65,000 individuals out of a population of 2 million). 103.

Currency Wars: The Making of the Next Gobal Crisis
by James Rickards
Published 10 Nov 2011

A Splendid Exchange: How Trade Shaped the World. New York: Atlantic Monthly Press, 2008. Bhagwati, Jagdish. A Stream of Windows: Unsettling Reflections on Trade, Immigration, and Democracy. Cambridge: MIT Press, 1998. Bookstaber, Richard. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. Hoboken: Wiley, 2007. Braudel, Fernand. The Structures of Everyday Life: Civilization and Capitalism, 15th–18th Century, Volume 1. New York: Harper and Row, 1979. ———. The Wheels of Commerce: Civilization and Capitalism, 15th–18th Century, Volume 2. New York: Harper and Row, 1979. Brown, Cynthia Stokes.

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history
by Gregory Zuckerman
Published 3 Nov 2009

Until the second half of the twentieth century, borrowing for anything other than big-ticket items, such as a home or a car, was unusual. Even then, home buyers generally needed at least a 20 percent down payment, and thus required a degree of financial well-being before owning a home. But the forces of financial innovation, Madison Avenue marketing, and growing prosperity changed prevailing attitudes about being in hock. Two decades of robust growth justified, and encouraged, the embrace of debt. Catchy television commercials convinced most people that debt was an ally, not an enemy. “"One of the tricks in the credit-card business is that people have an inherent guilt with spending,”" said Jonathan Cranin, an executive at the big advertising agency McCann-Erickson Worldwide Advertising, in 1997, explaining the rationale behind MasterCard’'s “"Priceless”" campaign.

Future Files: A Brief History of the Next 50 Years
by Richard Watson
Published 1 Jan 2008

The answer will be shaped by various product, service and process innovations, Money and Financial Services 139 although critically it will also largely hinge on external events, most notably the health of the global economy. In short, if globalization and prosperity remain generally intact (with a few exceptions and possibly due to financial support from China, India and the Middle East), this will drive interest in and supply of all manner of financial innovations, especially those delivered online. However, if the global economy slips into a serious or prolonged recession or if interest rates really climb or inflation takes hold, there is a likelihood that countries, companies and individuals will act defensively to protect what they have against loss.

Confessions of a Microfinance Heretic
by Hugh Sinclair
Published 4 Oct 2012

Steve Beck and Tim Ogden, “Beware of Bad Microcredit,” Harvard Business Review, September 2007; summary available at http://hbr.org/2007/09/beware-of-bad-microcredit/ar/1. 17. David Lascelles and Sam Mendelson, Microfinance Banana Skins 2011: The CSFI Survey of Microfinance Risk (London: Centre for the Study of Financial Innovation, 2011); available at www.cgap.org/p/site/c/template.rc/1.26.15503/. 18. Ibid., p. 5. 19. Ibid., pp. 10–11. 20. Ibid., p. 27. Chapter 6 Something Not Quite Right in Nigeria 1. For example, in 2001 the Cambodian government banned flat interest entirely. See www.mftransparency.org/pages/wp-content/uploads/2011/10/Case-Study_Cambodia_Regulation-Outlawing-Flat-Interest.pdf. 2.

Servant Economy: Where America's Elite Is Sending the Middle Class
by Jeff Faux
Published 16 May 2012

Hedge funds—highly speculative and highly leveraged concentrations of short-term investment capital—brought what seemed to be an inexhaustible supply of fresh money into the mix. Through the extreme borrowing leverage provided by options, the investors were able to accumulate portfolios in which the ratio of the actual investment to the underlying asset was a staggering one hundred to one. Business TV talking heads and financial columnists applauded the financial “innovations.” This was American ingenuity at its best for all the world to see and admire. The commentators assured their audiences that by spreading risks among more people, the miracle of “diversity” was actually turning bad loans into good ones. And there was nothing to worry about, they said, for the banks were buying insurance policies against default.

The Myth of Capitalism: Monopolies and the Death of Competition
by Jonathan Tepper
Published 20 Nov 2018

The figure below shows that the “Big 3” index funds – Blackrock, Vanguard, and State Street – own nearly 19% of the S&P 500 between them (Figure 9.3). Figure 9.3 S&P 500 Ownership by “Big 3” SOURCE: Lazard, FactSet. Despite their popularity and outperformance, passive investments are starting to become more hotly contested. What began as a financial innovation to democratize access to investment products has morphed into a situation where a few huge players dominate access to these products. Exchange traded funds (ETFs) are super cheap for investors, but the Big 3 have more than 80% of the market between them. Not since the gilded age has so much power been highly concentrated.17 Asset management has, itself, become “Morganized.”

How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely
by Andrew Craig
Published 6 Sep 2015

If you want to make sure that you own the hundred biggest companies in the UK, thirty of the most important companies in the US or the forty largest companies in France, you need look no further than those indices to find out which companies you need to own. There will also be a tracker (or passive) fund for that index that will leave you the proud owner of shares in all of those companies for one transaction fee. I hope you can see that such funds are potentially exciting investment vehicles, and a great financial innovation. You might also be interested in owning a number of smaller companies from the countries above. As you might imagine, smaller companies tend to grow faster than large ones. It is generally easier for a company with £100 million of sales or profits to grow that number by 10 per cent than it is for a company with £10 billion of sales or profits – and certainly easier for them to grow by 50 per cent Faster-growing companies will often have faster-growing share prices, which means you may have the opportunity to make higher returns with successful smaller companies than very large companies.

Capital Without Borders
by Brooke Harrington
Published 11 Sep 2016

It is not just the extent of wealth concentration but the way it has been achieved that so strikingly blends the medieval and modern. Trusts, of course, not only survived the Middle Ages but have come to play a vital role in contemporary global finance, both for private individuals and for public corporations.9 More surprisingly, legal-financial innovations within the traditional trust structure, led by wealth managers themselves, have mainly served to create new pathways to stratification structures that, if not feudal, hark back at least to the Gilded Age.10 For example, the Special Trusts Alternative Regime law of 1997 in the Cayman Islands offers a modern route to reestablishing entail and primogeniture, the centuries-old practices ensuring that land and other assets would be passed down within families, indivisibly, to an heir designated by the settlor—usually the firstborn son.11 While these practices are now illegal in most onshore states, STAR trusts offer wealthy families a contemporary workaround: assets held in the trusts are “locked in,” meaning that beneficiaries have no right to sell them, and often cannot challenge the terms of the trust in court.12 The major difference between STAR trusts and the medieval trust is that while the latter could contain only family lands, the former can contain any kind of asset, including stocks, bonds, and—most commonly now—family businesses.13 But like the heir to a landed estate in centuries past, the beneficiary of a STAR trust is bound to a perpetual family dynasty under highly specific terms, making him “inherited in a way by his inheritance” rather than the other way around.14 Families The case of STAR trusts points up a paradox of wealth management vis-à-vis the family as a social institution: as professionals, wealth managers represent the sort of expert authority described by Max Weber, but their work serves to reproduce within the families they serve the kind of tribal solidarity analyzed by Émile Durkheim.

The Truth Machine: The Blockchain and the Future of Everything
by Paul Vigna and Michael J. Casey
Published 27 Feb 2018

This systemic risk problem is what drew Blythe Masters, one of the key figures behind blockchain innovation on Wall Street, into digital ledger technology; she joined Digital Asset Holdings, a blockchain service provider for the financial system’s back-office processing tasks, as CEO in 2014. Masters is best known for one of the most contentious financial innovations of our time, the credit default swap (CDS), a financial derivative contract in which one institution agrees to pay another if a particular bond or loan goes into default. At the age of just twenty-five, and as part of a crack team at J.P. Morgan, she conceived of CDSs as a way for investors to buy insurance against the risk they bear on their balance sheets—and thus to unlock capital hitherto tied up against that risk—as well as for other investors, the banks, and other institutions that issue the CDS to place a bet on the underlying asset without actually owning it.

Why the Dutch Are Different: A Journey Into the Hidden Heart of the Netherlands: From Amsterdam to Zwarte Piet, the Acclaimed Guide to Travel in Holland
by Ben Coates
Published 23 Sep 2015

New windmill pumping technology enabled vast tracts of valuable farmland to be drained outside the city, while wind-powered sawmills facilitated the construction of yet more of the ships needed to increase trade. Peat provided a cheap energy source, while the establishment in Amsterdam of a commodity exchange, public exchange bank and lending bank drew capital from across the continent. The city produced financial innovations such as the direct bank transfer, and the Dutch guilder was, for a time, the dollar of its day, a currency accepted by traders around the world. Dutch traders were even credited with inventing the art of short-selling, the type of high-risk stock market speculation that would later be blamed for helping crash stock markets worldwide.

The Tyranny of Merit: What’s Become of the Common Good?
by Michael J. Sandel
Published 9 Sep 2020

The cable increased the speed of trades on pork belly futures and other speculative bets by a few milliseconds. This minuscule edge was worth hundreds of millions of dollars to high-speed traders. 60 But it is hard to claim that speeding up such transactions from the blink of an eye to something even faster contributes anything of value to the economy. High-speed trading is not the only financial innovation of dubious economic value; credit default swaps that enable speculators to bet on future prices without investing in any productive activity are hard to distinguish from casino gambling. One party wins and the other loses, money changes hands, but no investment occurs along the way. When companies use profits to buy back shares instead of investing in research and development, or in new equipment, shareholders gain but the productive capacity of the company does not.

The City
by Tony Norfield

By increasing the latter, the total volume of profit they received was higher, even if the profit they got on each billion dollars of assets was lower. The result was much higher bank leverage. At the same time, the banks also boosted the volume of their trading in foreign exchange, financial securities and derivatives, helped both by the boom in financial markets and by what has been euphemistically called ‘financial innovation’. This refers to the invention by banks of complex deals to gain more revenues from their customers, while minimising their tax liabilities and allocation of capital. In general, such deals increased both bank interest income and their trading income from dealing spreads and commissions. In the early 2000s, a relatively stable rate of economic growth in the major capitalist countries made the higher leverage among banks seem less risky.

The Unusual Billionaires
by Saurabh Mukherjea
Published 16 Aug 2016

As a result, when Marico decided to set up its coconut oil factory at Kanjikode, Kerala, they divided the workers into four houses similar to the practice followed in schools. After work, cultural and sports competitions were organized to keep the workers occupied. This HR innovation ensured that Marico never faced disruptions at its factory. Financial innovations: Commodity companies are perceived by investors as cyclical, given their vulnerability to global commodity cycles. Compared to them, FMCG companies’ stocks enjoy higher valuations because an FMCG company’s profits are more predictable, enabling these companies to reward shareholders with regular dividends.

Practical Doomsday: A User's Guide to the End of the World
by Michal Zalewski
Published 11 Jan 2022

Ultimately, principled portfolio management is more about asking, “What if I’m wrong?” than daydreaming about the glorious future that awaits if your investments pan out well. From that perspective, the cost of passing on Bitcoin is modest, while the cost of taking a substantial stake can be unacceptably high. The other very recent financial innovation that captured the attention of the media are non-fungible tokens (NFTs): short blockchain-recorded entities with cryptographically established chains of ownership. In most ways, their inner workings resemble cryptocurrencies, but they’re specifically designed not to serve that role. Instead, every token is meant to be distinguishable from others by virtue of possessing a unique ID.

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis
by Kevin Rodgers
Published 13 Jul 2016

All through my career, LIBOR was a familiar concept to me because, although trading it or setting it was never a responsibility of mine, it touched virtually every market I had been involved in. Despite that, I could not have told you the details of how it was arrived at or even why it had come to exist at all. I had never really given either topic a moment’s thought. As the scandal broke, I became educated very quickly. Like so many financial innovations, LIBOR came into being as a way of solving a particular, one-off problem. Back in 1969, a group of banks wanted to make a syndicated (that is, ‘shared’) US$80 million loan to the Shah of Iran. The loan, which was a large one for the time, was part of a growing business in ‘offshore’ dollars that arose because of the capital flows resulting from the costs of funding the Vietnam War.

Dead in the Water: A True Story of Hijacking, Murder, and a Global Maritime Conspiracy
by Matthew Campbell and Kit Chellel
Published 2 May 2022

Without tankers to distribute it cheaply and efficiently, there would be no economic way to extract much of the natural gas that heats our homes, nor the fuel that allows us to fly off on vacations and business trips. The evolution of the shipping business to enable this commerce is one of the most remarkable achievements of capitalism, a symphony of technical and financial innovations that have drastically reduced the cost, and increased the reliability, of long-distance trade. Yet the industry’s success has also, curiously, led it to become largely invisible. The world’s greatest cities—London, New York, Tokyo—were once dominated by their ports, their streets crowded with the sailors and dockworkers who made them run.

Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism
by Jeff Gramm
Published 23 Feb 2016

The S&L crisis went from 1986 to 1995. 66. “The Milken Sentence; Excerpts from Judge Wood’s Explanation of the Milken Sentencing,” New York Times, November 22, 1990. 67. Kurt Eichenwald, “Wages Even Wall Street Can’t Stomach” New York Times, April 3, 1989. 68. Robert Sobel, Dangerous Dreamers: The Financial Innovators from Charles Merrill to Michael Milken (New York: Wiley, 1993), 94. 69. Stewart, Den of Thieves, 259. 70. Harvey Silverglate, Three Felonies a Day: How the Feds Target the Innocent (New York: Encounter Books, 2011), 101. 71. Carol J. Loomis, “How Drexel Rigged a Stock,” Fortune, November 19, 1990. 72.

The End of Growth: Adapting to Our New Economic Reality
by Richard Heinberg
Published 1 Jun 2011

Nearly everyone agrees that it unfolded in essentially the following steps: • In an attempt to limit the consequences of the “dot-com” crash of 2000, the Federal Reserve drastically lowered interest rates, enabling lenders across the country to provide easy credit to households and businesses who hadn’t been able to access it before. • This led to a housing bubble, which was made much worse by sub-prime lending. • Partly because of the prior deregulation of the financial industry, the housing bubble was also magnified by over-leveraging within the financial services industry, which was in turn exacerbated by financial innovation and complexity (including the use of derivatives, collateralized debt obligations, and a dizzying variety of related investment instruments) — all feeding the boom of a shadow banking system, whose potential problems were hidden by incorrect pricing of risk by ratings agencies. • A commodities boom (which drove up gasoline and food prices) and temporarily rising interest rates (especially on adjustable-rate mortgages) ultimately undermined consumer spending and confidence, helping to burst the housing bubble — which, once it started to deflate, set in motion a chain reaction of defaults and bankruptcies.

The Irrational Economist: Making Decisions in a Dangerous World
by Erwann Michel-Kerjan and Paul Slovic
Published 5 Jan 2010

Shiller, Yale University Robert Shiller is the Arthur M. Okun Professor of Economics at Yale University and Professor of Finance and Fellow at the International Center for Finance, Yale School of Management. He received his PhD in economics from MIT in 1972. Professor Shiller has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, and statistical methods as well as on public attitudes, opinions, and moral judgments regarding markets. He is the author of many books including Subprime Solution: How the Global Financial Crisis Happened and What to Do About It (Princeton University Press, 2008), which offers an analysis of the housing and economic crisis and a plan of action against it.

Paper Promises
by Philip Coggan
Published 1 Dec 2011

These investments have a high failure rate; the hope is that the occasional big success makes up for the many losers. By encouraging innovation, venture capital is generally seen as a much better thing for the economy than private equity; alas, it has delivered much lower returns. 10 See Peter Morris, ‘Private Equity, Public Loss?’, Centre for the Study of Financial Innovation, July 2010. 10. NOT SO RISK-FREE 1 Carmen Reinhart and Kenneth Rogoff, This Time Is Different, Princeton, 2009. 2 Alexander Sack, quoted in ‘Unfinished Business: Ten Years of Dropping the Debt’, Jubilee Debt Campaign, May 2008. 3 The Multilateral Debt Relief Initiative factsheet, August 2010. 4 2010 Development Cooperation Report, OECD. 5 Elgie McFadyen, ‘The Multilateral Debt Relief Initiative: Impact on Structural and Economic Development Among African Nations’, Kentucky State University, April 2008. 6 Alan Beattie, ‘Rich Nations Face Increased Debt Burden’, FT.com, 31 October 2010. 7 Reinhart and Rogoff, This Time Is Different. 8 Martin Wolf, Fixing Global Finance: How to Curb Financial Crises in the Late 21st Century, rev. edn, New Haven, Conn., 2010. 9 Figures from the IMF at http://www.imf.org/external/np/exr/faq/greece-faqs.htm. 10 ‘Threadbare: A Briefing on Ireland’s Economy’, The Economist, 20 November 2010. 11 Bennett Stancil, ‘Ireland: From Bubble to Broke’, Carnegie Endowment for International Peace, May 2010. 12 As I tried to explain to friends and relatives at the time, this move was a mistake.

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed
by Andrew Jackson (economist) and Ben Dyson (economist)
Published 15 Nov 2012

The demand for money is also discussed, as is the effect on the economy of any attempt to pay down debts in aggregate. Second, we will look at the incentives facing banks: given the high demand for credit, why do banks not simply lend to every individual or business that applies for a loan? We will see that due to the profit motive, financial innovations and some other institutional quirks, banks will attempt to lend as much as they can as long as it is profitable for them to do so. Third, we will look at the reaction of the regulators. Faced with a banking sector that has a huge number of willing borrowers and an incentive to lend to them, in the current institutional structure, is it possible to temper banks’ natural desire to create credit?

Pound Foolish: Exposing the Dark Side of the Personal Finance Industry
by Helaine Olen
Published 27 Dec 2012

Even Condé Nast would consider getting into the fray, only to be foiled by a problem only the publisher of Vogue could have: there appeared to be no way to make the subject of personal finance lushly photogenic. The coalescing of several trends in American life ensured the personal finance industrial complex would keep growing. First, the pace of financial innovation was increasing, and, as a result, our fiscal lives were becoming more complicated. When Quinn joined McGraw Hill in the late 1960s, credit cards had existed for a little more than a decade. There were no adjustable rate mortgages, home equity loans, money market funds, discount brokerages, day traders, IRAs, or other direct contribution retirement accounts like the 401(k).

The Year 1000: When Explorers Connected the World―and Globalization Began
by Valerie Hansen
Published 13 Apr 2020

Horses, whose sale the Liao forbade: Shiba Yoshinobu, “Sung Foreign Trade: Its Scope and Organization,” in China Among Equals: The Middle Kingdom and Its Neighbors, 10th–14th Centuries, ed. Morris Rossabi (1983): 89–115, 98; Brian Thomas Vivier, “Chinese Foreign Trade, 960–1276,” PhD thesis, Yale University (2008). paper money: Richard von Glahn, “The Origins of Paper Money in China,” in The Origins of Value: The Financial Innovations That Created Modern Capital Markets, ed. William N. Goetzmann and K. Geert Rouwenhorst (2005): 65–89. Horses were the most important overland import: Paul J. Smith, Taxing Heaven’s Storehouse: Horses, Bureaucrats, and the Destruction of the Sichuan Tea Industry, 1074–1224 (1991). South Indians financed a Buddhist temple: Friedrich Hirth and W.

Broke: How to Survive the Middle Class Crisis
by David Boyle
Published 15 Jan 2014

These days, he finds himself in rather different company, and has recently begun a defence of the embattled American middle classes.[23] What he described as ‘happy talk about the wonders of the knowledge economy’, hailing a new economy based exclusively on service and finance, was actually a ‘gauzy veil placed over the hard facts of deindustrialization’. The rewards of technological and financial innovation go overwhelmingly to a very narrow group of people, he warned, explaining that: Americans may today benefit from cheap cell phones, inexpensive clothing, and Facebook, but they increasingly cannot afford their own homes, or health insurance, or comfortable pensions when they retire. The same is worryingly true of the middle classes in the UK, even though they are defined differently, and Fukuyama’s key question applies equally to the UK as well: ‘What if the further development of technology and globalization undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?’

Origins: How Earth's History Shaped Human History
by Lewis Dartnell
Published 13 May 2019

The first national central bank as well as the first formal stock market were founded in Amsterdam in the opening years of the seventeenth century,7 by which time Holland had become the most financially developed country in Europe.8 These instruments of formalised capitalism quickly spread to other nations and created the financial institutions needed for the Industrial Revolution. Like the windmills in the medieval Netherlands, Britain’s mills, factories and steam engines would have been prohibitively expensive to build without the pooling of capital from a number of different, and confident, investors.9 Dutch financial innovations helped build the modern world, and they had grown out of her low-lying landscape and the need to reclaim land from the sea. There are many other ways in which the salt waters of the planet have been instrumental in the human story. The sea can isolate a people from the rest of the word, which is what happened on Tasmania, for example.

The Great Reversal: How America Gave Up on Free Markets
by Thomas Philippon
Published 29 Oct 2019

Yet the cost per dollar of intermediation has remained constant, and the share of GDP spent on financial services has increased. So why is the nonfinancial sector transferring so much income to the financial sector? When an industry is deregulated, wages and prices usually fall. In finance, they seem to rise. In most industries, innovation is good for growth, but financial innovations do not seem to improve capital allocation very much. What, then, is the matter with finance? Why does it appear to behave differently from other industries? I am going to highlight three main issues: a high prevalence of zero-sum games, entrenched market power, and heavy and sometimes misguided regulations.

A World Without Work: Technology, Automation, and How We Should Respond
by Daniel Susskind
Published 14 Jan 2020

Some economists do believe that new technologies are directly responsible for the rising pay of the top 1 percent and 0.1 percent of wage earners. For instance, CEOs are thought to use new systems to run larger, more valuable companies, pushing up their pay as a result. Bankers, who stand alongside CEOs at the top of the pay ladder, may also have seen technological progress boost their wages, as financial innovations like complex pricing software and algorithmic trading platforms have helped to raise the demand for their work.24 The most compelling explanations for the rise in inequality at the very top, though, are not so much about productivity but power: these “supermanagers,” as Thomas Piketty calls them, are receiving higher wages largely because they now have so much institutional clout that they are able to put together increasingly generous pay packages for themselves.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet
by Klaus Schwab
Published 7 Jan 2021

Nor is inequality in education, health care, and housing limited to race-based discrimination. Many of the best American colleges until today have so-called legacy preferences, giving preferred admission to children of parents who also studied at the institution or, in some cases, gave money to it. And while US governments for decades promoted homeownership, opaque financial innovation with mortgage-backed securities and collateralized debt obligations led to a housing crisis in 2008, pushing millions of Americans out of their houses and out of their jobs. To this day, some people have not recovered financially from that crisis. Finally, some 28 million Americans, almost 10 percent of the total, did not have health insurance in 201819 (the last year for which data were available at the time of writing).

The Data Detective: Ten Easy Rules to Make Sense of Statistics
by Tim Harford
Published 2 Feb 2021

Samantha Vanderslott, Bernadeta Dadonaite, and Max Roser, “Vaccination,” published online at OurWorldInData.org (2020), retrieved from https://ourworldindata.org/vaccination. 24. Anna Rosling Rönnlund, Hans Rosling, and Ola Rosling, Factfulness (New York: Flatiron, 2018). 25. Gillian Tett, “Silos and Silences,” Derivatives: Financial Innovation and Stability, Banque de France Financial Stability Review 14 (July 2010), https://publications.banque-france.fr/sites/default/files/medias/documents/financial-stability-review-14_2010-07.pdf. 26. Rolf Dobelli, “News Is Bad for You—and Giving Up Reading It Will Make You Happier,” Guardian, April 12, 2013, https://www.theguardian.com/media/2013/apr/12/news-is-bad-rolf-dobelli. 27.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet
by Klaus Schwab and Peter Vanham
Published 27 Jan 2021

Nor is inequality in education, health care, and housing limited to race-based discrimination. Many of the best American colleges until today have so-called legacy preferences, giving preferred admission to children of parents who also studied at the institution or, in some cases, gave money to it. And while US governments for decades promoted homeownership, opaque financial innovation with mortgage-backed securities and collateralized debt obligations led to a housing crisis in 2008, pushing millions of Americans out of their houses and out of their jobs. To this day, some people have not recovered financially from that crisis. Finally, some 28 million Americans, almost 10 percent of the total, did not have health insurance in 201819 (the last year for which data were available at the time of writing).

Number Go Up: Inside Crypto's Wild Rise and Staggering Fall
by Zeke Faux
Published 11 Sep 2023

Most went to Democrats, but FTX executives also gave at least $20 million to Republicans. One in three members of Congress received donations. If Bankman-Fried was trying to buy his way to a new version of U.S. regulations that favored him and boxed out his competitors, it seemed to be working. In Washington, he was treated like a financial innovator, not a crypto pirate. A week before our meeting in Nassau, he’d testified at a congressional hearing, offering advice about how the industry should be regulated. Senator Cory Booker, who’d received a $5,700 donation, fawned over him, even joking: “I’m offended you have a much more glorious Afro than I once had

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

In June 2007, as the seeds of the mortgage bust were sprouting, Warsh gave a speech hailing the Wall Street trading desks that had churned out increasingly esoteric derivatives and securities. Warsh liked giving speeches with affected, smart-sounding turns of phrase, and this one touted how “financial innovation” had “made markets substantially more ‘complete.’”6 As the crisis accelerated, though, Warsh found his groove. He used his extensive Rolodex to serve as Fed chair Ben Bernanke’s bridge to Wall Street executives. And he proved a loyal guardian of Bernanke in GOP circles. In November 2010, however, Warsh publicly broke with Bernanke’s policy, echoing critiques made in GOP policy circles; for example, that the bond purchases were enabling the White House to hide the cost of a bulge in federal borrowing.

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All
by Mary Childs
Published 15 Mar 2022

He wrote in November 2008 that “we” were “all bull market children,” trained to buy when the market dipped; from the year of his own birth (coincidentally!) onward, “credit continued to be the mighty lubricant of capitalism’s engine, allowing its pistons to accelerate at an increasing pace as financial innovation mixed with our own animal spirits produced more and more profits, more and more jobs, more and more everything.” He didn’t much examine the costs of more everything. And back then, in the thick of the crisis, it had been more urgent to find a self-effacing way to say that he’d called it, that he and Pimco had seen the risk in the system before it bucked up.

The Four Pillars of Investing: Lessons for Building a Winning Portfolio
by William J. Bernstein
Published 26 Apr 2002

A skilled broker or money manager should be worth his weight in gold. In this chapter, we’ll examine the utter demolition of that belief system and the emergence of a powerful new theory for understanding stock and bond market behavior—the efficient market hypothesis. Alfred Cowles III Gets Burned Most great financial innovators come from humble circumstances—nothing arouses fascination with financial assets quite like their absence. Or, as someone born to great wealth once explained to me, if you are raised in the desert, all you think about is water. But the average Western citizen, who can get it from the tap at will, hardly considers it at all.

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff
by Christine S. Richard
Published 26 Apr 2010

HG4538.52.R53 2010 368.8’7—dc 22 2010001831 For Dean Preface FOR NEARLY 10 YEARS, I covered the bond market as a Wall Street reporter, first at Dow Jones and later for Bloomberg News. It was a period of enormous growth and innovation in the credit markets. As the expansion peaked, Wall Street manufactured billions of dollars of debt every day, astonishing amounts of it considered triple-A or virtually risk-free. For a while, this was accomplished with true financial innovation. Later, the process was corrupted by delusion and dishonesty. Of all the stories I covered, there was one that never seemed to go away: the battle between a company called MBIA and a hedge fund manager named Bill Ackman, who was obsessed with that company’s practices. What is MBIA? It stands for Municipal Bond Insurance Association.

Platform Revolution: How Networked Markets Are Transforming the Economy--And How to Make Them Work for You
by Sangeet Paul Choudary , Marshall W. van Alstyne and Geoffrey G. Parker
Published 27 Mar 2016

Citizens have long had reason to wonder about what firms might be doing with the personal data they collect about their customers. The ability of businesses to gather finely detailed data about individual households expanded dramatically with the introduction of the consumer credit card. This financial innovation helped increase consumer spending by making it much easier to access credit. But this, of course, meant banks had a significant incentive to use data to measure the creditworthiness of customers. To provide this analysis, three major consumer credit information agencies arose: Equinox, Experian, and Transunion.

How Will Capitalism End?
by Wolfgang Streeck
Published 8 Nov 2016

In subsequent years ‘financial services’ became the most important growth industry by far in both the United States and the United Kingdom.16 After the end of the Bretton Woods monetary regime, with the dollar continuing to be the leading global reserve currency, the United States enjoyed the ‘exorbitant privilege’ (Giscard d’Estaign) of being able to indebt itself internationally in its own currency and repay its debt, if need be, by printing basically unlimited amounts of it. The rich supply of fiat dollars that ensued nourished an expanding financial industry about to turn into the financial sector of capitalism worldwide. Aggressive deregulation of financial institutions allowed for unprecedented ‘financial innovations’ that attracted capital from all over the world and became a major instrument for governments not only looking for new economic growth but also desperately seeking access to credit. Indeed, as the overall credit supply expanded, it was not just states that became increasingly ‘leveraged’ but also corporations and, later, private households.

Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance
by Ian Goldin and Chris Kutarna
Published 23 May 2016

In addition to opening their economies to trade, they brought international creditors and investment bankers into their economic policy shops, adopted more familiar fiscal and monetary policies, made it easier to move money in and out of the country and put valuable state assets up for sale to private investors. Meanwhile, in the advanced economies, declining interest rates and tepid economic growth pushed investors out of their comfortable confines. Diffusion was, once again, accompanied by financial innovation that caused a sudden leap in the scale of market activity. The main innovations—“securitization” and “credit derivatives”—were likewise about making debts and risk more easily transferable. By securitization, a lender mixed together the various IOUs he held (in modern parlance, bonds and mortgages).

The Great Escape: Health, Wealth, and the Origins of Inequality
by Angus Deaton
Published 15 Mar 2013

They too are very highly trained, and they have also used their training and creativity to produce new products. There is no unanimity among economists on the extent to which these new financial instruments have a social value that matches the profits that they generate for their inventors. It is hard not to sympathize with Paul Volcker’s statement that the last truly useful financial innovation was the ATM machine. If bankers and financiers have private incentives that exaggerate their social incentives, we will get too much banking and financing, and there is no defense for the inequality that they cause. Financial services have played an important role in financing innovation throughout the economy, and the efficient allocation of capital is one of the most valuable tasks in a market economy.

The Evolution of Everything: How New Ideas Emerge
by Matt Ridley

Selgin concludes: ‘Such were the alternatives to commercial money for which Parliament, in its blind impetuosity, had cleared the way.’ The Scottish experiment There is an even more persuasive example of monetary evolution from north of the Scottish border. Between 1716 and 1844 Scotland experienced unparalleled monetary stability, pioneering financial innovation and rapid economic growth as it caught up with England. It had a self-regulating monetary system, which worked as well as any other monetary system at any other time or place. Indeed, it was so popular that Scots rushed to praise and defend their banks – a phenomenon largely unheard of in history.

Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction
by David Enrich
Published 18 Feb 2020

Bill got an MBA at Northwestern University and then a job at Continental Illinois, one of the country’s largest and fastest-growing banks. He set out to master derivatives, tinkering with the structures of the fledgling products and conjuring new uses by mushing together different types of derivatives. Colleagues hailed him as a financial innovator—and that reputation soon spread. Derivatives would later become a dirty word—wreaking havoc across the financial industry and the broader economy—but when Broeksmit joined Continental Illinois, he and his peers saw them as a powerful way for businesses to operate better. Companies could insulate themselves from risks in ways never before thought of.

System Error: Where Big Tech Went Wrong and How We Can Reboot
by Rob Reich , Mehran Sahami and Jeremy M. Weinstein
Published 6 Sep 2021

The enthusiasm for deregulation in the financial sector, which began in the 1970s, brought us the Great Recession of 2009. Even one of the world’s greatest enthusiasts for deregulation, former Federal Reserve chairman Alan Greenspan, has admitted the error of his ways. A naive belief in the self-healing power of markets stopped regulators from intervening even as complex financial innovations and greater market concentration created ever-increasing systemic risk—until it was too late. If we want to effectively govern new technologies, we must demand more than corporate CEOs seeing the light and pledging better behavior. Structural changes are necessary to ensure that existing incentives do not nudge CEOs toward profit seeking above all else.

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems
by Linda Yueh
Published 4 Jun 2018

Fisher would have agreed that a well-regulated financial system would guard against debt-deflation by avoiding large and unsustainable build-ups of debt in the first place. Well-designed regulatory and supervisory powers play a role in preventing deflation by maintaining financial stability. They can act to rein in exuberant financing from dangerous financial innovations, practices and attitudes. Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk.

The Code of Capital: How the Law Creates Wealth and Inequality
by Katharina Pistor
Published 27 May 2019

The securitization of mortgages transforms a claim for repayment of a loan that is backed by the value of the house into a claim against future cash flows made by the debtor in fulfillment of her obligations under the loan, and this claim can be traded and thus converted into cash as long as there are willing buyers. The claim to fame as the inventor of securitizing land does not belong to Ginnie Mae, which kicked off the securitization of mortgages in the United States in the early 1970s; rather, it belongs, of all places, to Prussia under Frederick the Great—not exactly a hotbed for financial innovation and entrepreneurship. In the late eighteenth century, the country emerged victoriously from the Seven Years’ War it had fought against all the major European powers, including France, Austria, Saxony, Sweden, and Russia in 1763. But victory came at a huge cost. The warring troops had turned arable land into battlegrounds and, as a result, the members of the East Prussian aristocracy, the bedrock of the Prussian monarchy, found themselves not only deep in debt, but unable to serve their creditors.

Toward Rational Exuberance: The Evolution of the Modern Stock Market
by B. Mark Smith
Published 1 Jan 2001

Henry Watson, eds., Black Monday and the Future of Financial Markets (Homewood, Ill.: Dow Jones–Irwin, 1989), p. 5. 10 Wall Street Journal, 22 October 1987. 11 Ibid. 12 Ibid. 13 Kamphuis et al., p. 72. 14 Wall Street Journal, 23 October 1987. 15 Ibid. 16 Ibid. 17 Ibid. 18 Ibid. 19 Merton Miller, Financial Innovations and Market Volatility (Cambridge, Mass.: Basil Blackwell, 1991), p. 100. 20 Kamphuis et al., p. 18. 21 Ibid., p. 75. 22 Wall Street Journal, 23 October 1987. 23 Bradford Cornell, The Equity Risk Premium (New York: John Wiley & Sons, 1999), p. 190. 24 Miller, p. 89. 16. GREENSPAN’S DILEMMA 1 Wall Street Journal, 8 May 2000. 2 Hersh Shefrin, Beyond Greed and Fear (Boston: Harvard Business School Press, 2000), p. 40. 3 Wall Street Journal, 8 May 2000. 4 Fischer Black, Journal of Finance 41, 1986. 5 Discussed at length in Shefrin. 6 Werner De Bondt and Richard Thaler, Journal of Finance 40, 1985. 7 Victor Bernard and Jacob Thomas, Journal of Accounting Research 27, 1989. 8 Lawrence Summers, Journal of Finance 41, 1986. 9 Narasimhan Jagadeesh and Sheridan Titman, Journal of Finance 48, 1993. 10 Eugene Fama and Kenneth French, Journal of Finance 47, 1992. 11 Eugene Fama, Journal of Financial Economics 49 (3), 1998. 12 Wall Street Journal, 7 January 1988. 13 Nicholas Dunbar, Inventing Money (New York: John Wiley & Sons, 2000), p. 130. 14 Ibid., p. 180. 15 Ibid., p. 188. 16 Ibid., p. 205. 17 Fama and French, Journal of Finance 47, 1992. 18 Robert Hagen, The New Finance (Englewood Cliffs, N.J.: Prentice Hall, 1995), p. 71. 19 Eugene Fama, Journal of Finance 46 (5), 1991. 20 Hagen, p. 71. 21 Wall Street Journal, 8 May 2000. 22 Ibid. 17.

Philanthrocapitalism
by Matthew Bishop , Michael Green and Bill Clinton
Published 29 Sep 2008

Since 1995, developing countries, led by China and India, have grown faster than at any time since the 1960s, lifting hundreds of millions of people out of poverty. This is truly a golden age of global economic growth—and one that, despite the capital market crash of 2007 and its economic aftermath, could continue for many years. As Carnegie might not be surprised to learn, this strong economic growth has come at a price. Whilst, overall, financial innovation has driven faster growth, some of the inevitable failures that accompany it have hit the people least able to cope. For instance, in 2007, new financial products related to subprime mortgages in America suffered huge losses, paralyzing the global financial system and causing problems for millions of home owners.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

After that, the ratio spiked: by 2009 it had almost doubled to 1.7 (Figure 16).11 The financial sector's profits were fabulous, especially in the UK and US with their global financial hubs in London and New York City, and were contributing an increasing share of GDP. It was hardly surprising that the public went along with ‘financial innovation'. People spent. From London to Hong Kong the retail and leisure sectors of the world's financial centres were doing a roaring trade. From the 1980s onwards the financial sector was on a mission to convince governments that it was productive. In the minds of policymakers, finance had become an increasingly productive industry, an idea they were keen to convey to the public.

The Great Economists: How Their Ideas Can Help Us Today
by Linda Yueh
Published 15 Mar 2018

Fisher would have agreed that a well-regulated financial system would guard against debt-deflation by avoiding large and unsustainable build-ups of debt in the first place. Well-designed regulatory and supervisory powers play a role in preventing deflation by maintaining financial stability. They can act to rein in exuberant financing from dangerous financial innovations, practices and attitudes. Regulations and reforms are also needed alongside lender of last resort facilities to curb potential moral hazard problems. In other words, if the central bank is always there to bail a bank out, then a bank has less of an incentive to act prudently. Regulation can reduce this risk.

Portfolio Design: A Modern Approach to Asset Allocation
by R. Marston
Published 29 Mar 2011

Bond Market in 2008 Source: Securities Industry and Financial Markets Association, 2009. Loan Mortgage Corporation and the Student Loan Marketing Association. Money market securities and asset-backed bonds round out the rest. The relative importance of Treasury bonds has declined over time because other bond markets have grown more rapidly. Part of this growth is due to financial innovation that has led to the securitization of assets that were previously held in bank balance sheets such as mortgages and commercial loans. Figure 7.6 shows how the bond market since 1985 has shifted away from Treasury securities toward other types of bonds that were relatively unimportant then.

The Long Boom: A Vision for the Coming Age of Prosperity
by Peter Schwartz , Peter Leyden and Joel Hyatt
Published 18 Oct 2000

THEEurope, with a slight stutter step, is going through many of the same changes that Americans went through in the early to middle 1990s. European businesses and households have been quickly adopting new computer technologies and getting wired up to the Internet. They have been incorporating many of the same financial innovations: starting a mass migration of individuals to stocks and mutual funds, taking to initial public offerings, and nurturing new venture capital practices. The fundamental restructuring of the economy is proceeding more slowly but still steadily in the right direction. By the late 1990s, Europeans were finally pushing through with privatizations (e.g., of their public telecommunications companies), 92 Iks LONQ BOOM going through with corporate restructuring, and deregulating the economy so that smaller entrepreneurial firms could begin creating growth and jobs.

Machine, Platform, Crowd: Harnessing Our Digital Future
by Andrew McAfee and Erik Brynjolfsson
Published 26 Jun 2017

locations=US#x0026;name_desc=true. 130 In the mid-1990s, almost every American community: Newspaper Association of America, “Annual Newspaper Ad Revenue,” accessed May 2, 2016, http://www.naa.org/~/media/NAACorp/Public Files/TrendsAndNumbers/Newspaper-Revenue/Annual-Newspaper-Ad-Revenue.xls. 130 well over 10,000 AM and FM stations: Steven Waldman, “The Information Needs of Communities: The Changing Media Landscape in a Broadband Age,” Federal Communications Commission, July 2011, 63, https://transition.fcc.gov/osp/inc-report/The_Information_Needs_of_Communities.pdf. 130 In 2000, recorded music was a $14.3 billion industry: RIAA (Recording Industry Association of America), “RIAA’s Yearend Statistics,” accessed March 9, 2017, http://www.icce.rug.nl/~soundscapes/VOLUME02/Trends_and_shifts_Appendix.shtml. 131 In 1997, David Bowie: Ed Christman, “The Whole Story behind David Bowie’s $55 Million Wall Street Trailblaze,” Billboard, January 13, 2016, http://www.billboard.com/articles/business/6843009/david-bowies-bowie-bonds-55-million-wall-street-prudential. 131 which spanned twenty-one years and twenty-five albums: Tom Espiner, “ ‘Bowie Bonds’—the Singer’s Financial Innovation,” BBC News, January 11, 2016, http://www.bbc.com/news/business-35280945. 131 raising $55 million: Ibid. 131 Iron Maiden: “Iron Maiden Rocks the Bond Market,” BBC News, February 9, 1999, http://news.bbc.co.uk/2/hi/business/275760.stm. 131 Rod Stewart and James Brown: Roy Davies, “Who’s Who in Bowie Bonds: The History of a Music Business Revolution,” last modified June 5, 2007, http://projects.exeter.ac.uk/RDavies/arian/bowiebonds. 131 America’s love affair with shopping malls: Richard A.

Innovation and Its Enemies
by Calestous Juma
Published 20 Mar 2017

Christian Schubert, “Is Novelty Always a Good Thing? Towards an Evolutionary Welfare Economics,” Journal of Evolutionary Economics 22, no. 3 (2012): 586–619; Christian Schunbert, “How to Evaluate Creative Destruction: Reconstructing Schumpeter’s Appproach,” Cambridge Journal of Economics 37, no. 2 (2013); 227–250. 38. Mariana Mazzucato, “Financial Innovation: Destruction vs. Destructive Creation,” Industrial and Corporate Change 22, no. 4 (2013): 851–867. 39. Christopher Henke, Cultivating Science, Harvesting Power: Science and Industrial Agriculture in California (Cambridge, MA: MIT Press, 2008), 4. 40. Maarten Crivits, Michiel P. M. M. de Krom, and Joost Dessein, “Why Innovation Is Not Always Good: Innovation Discourses and Political Accountability,” Outlook on Agriculture 43, no. 3 (2014): 147–155. 41.

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
by Steven G. Mandis
Published 9 Sep 2013

Robert Freeman, Goldman’s head of arbitrage, receives a prison sentence for insider trading. As a result of the crash, Value at Risk models receive more emphasis (R, T, O). Wall Street begins to increasingly focus on hiring academically trained and quantitatively oriented traders and risk managers and increase spending on financial innovation (T, O). 1988: Leon Cooperman, head of equity research, assumes responsibilities for building the investment management business, and a new division is launched: Goldman Sachs asset management (GSAM) (O, C). Hundreds of savings and loans (S & Ls) are shut down, at a total cost of more than the reserves in the federal insurance fund.

The Levelling: What’s Next After Globalization
by Michael O’sullivan
Published 28 May 2019

The rise in house prices was leveraged in different ways: in the enormous amounts of derivative contracts that multiplied the risks of a fall in house prices, in the very large amounts of debt taken out by households in relation to stretched housing valuations, and in the business model of banks. Banks and bankers acted like J. W. Goethe’s Sorcerer’s Apprentice: their financial innovations produced an explosive cocktail of risk. In this respect, the blame for the financial crisis lies at the feet of the banking and financial services industry. Equally, much of the recent work of central bankers has been directed at undoing and calming the damage done by the financial crisis.

From the Ruins of Empire: The Intellectuals Who Remade Asia
by Pankaj Mishra
Published 3 Sep 2012

‘The spirit of the military organization,’ Tokutomi Soh marvelled about Europe in 1887, ‘does not stop with just the military.’ Its influence was ‘extended to all corners of society’.55 As more than one Asian observer noted, European forms of political and military mobilization (conscript armies, efficient taxation, codified laws), financial innovations (capital-raising joint-stock companies) and information-rich public cultures of enquiry and debate fed upon each other to create a formidable and decisive advantage as Europe penetrated Asia. Individually, Europeans might be no more brave, innovative, sensitive or loyal than Asians, but as members of corporate groups, churches or governments, and as efficient users of scientific knowledge, they mustered more power than the wealthiest empires of Asia.

Extreme Economies: Survival, Failure, Future – Lessons From the World’s Limits
by Richard Davies
Published 4 Sep 2019

Often a building had a go-to person who pawned items regularly, was in good standing with lenders and was unafraid of stigma. One neighbour provided the collateral, a second arranged the pawn-shop loan, and the third – in distress and short of cash – received the funds. GOVAN FINTECH Just as Robert Putnam found in rural Italy, the trust prevalent in Glasgow’s tenements supported unique financial innovations. Another tradition was a lending system known as a ‘ménage’. A typical ménage involved 20 people and ran for 20 weeks. A value for the pot was set, often at £2, and each week members would pay in one-twentieth of this amount. At the end of each week a number would be drawn from a hat to determine which member had won.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

Zweig’s Belly Up: The Collapse of the Penn Square Bank). But the result was simple: Between 1974 and 1981, Penn Square’s assets jumped from $35 million to $525 million. Many of these new assets were energy loans written on the optimistic premise that oil prices would only keep rising. On the way up, Beep Jennings was hailed as a financial innovator and a charmingly brash risk taker. When Paul Volcker and the Fed raised the cost of borrowing, it killed demand for the loans Penn Square was selling and turned Beep Jennings into a literal beggar. Jennings and his team desperately petitioned the Kansas City Fed for discount-window loans that would keep the bank afloat.

The Economics Anti-Textbook: A Critical Thinker's Guide to Microeconomics
by Rod Hill and Anthony Myatt
Published 15 Mar 2010

They argue (2009: 173): ‘We had forgotten the hard-earned lesson of the 1930s: that capitalism can give us the best of all possible worlds, but it does so only on a playing field where the government sets the rules and acts as a referee.’ The US administration was trapped into the mantra of deregulation. Some commentators, such as Rodrik (2009), specifically blame economists. He says: [E]conomists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful. They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession.

The Party: The Secret World of China's Communist Rulers
by Richard McGregor
Published 8 Jun 2010

The down payment was delivered in a frenzy of deals in late 2005 and early 2006, when foreign financial institutions invested tens of billions of dollars in Chinese state lenders. The money came with a promise from the foreigners to the laggard locals to teach them the secrets of risk management and financial innovation. The western banks approached the exercise almost as adult education, which is why what happened subsequently was so shocking. Barely two years after the big Chinese banking deals, the humbled Visigoths of global finance were back. This time, battered by the unfolding credit crisis, they returned, humiliated, cap-in-hand, seeking Chinese cash to shore up their balance sheets or selling their newly acquired shares to take money home.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

We also consider whether markets should have circuit breakers to control excess volatility. Chapter 29 considers the benefits and consequences of prohibiting insider trading. Interestingly, the most important issues involve labor economics rather than market microstructure. 23 Index and Portfolio Markets Index trading is one of the most important financial innovations of the twentieth century. The nominal dollar value of trading in equity index products now is greater than the total dollar value of trading in the underlying securities. The growth of index trading has had a profound effect on equity markets. It is also increasingly affecting debt markets.

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Review of Financial Studies 8(3), 579–603. Mendelson, Haim. 1987. Consolidation, fragmentation, and market performance. Journal of Financial and Quantitative Analysis 22(2), 189–208. Miller, Merton H., and Charles W. Upton. 1991. Strategies for capital market structure and regulation. In Alexander Miller, ed., Financial Innovations and Market Volatility (Blackwell, Maiden, MA). Chapter 27: Floor Versus Automated Trading Systems Benveniste, Lawrence M., Alan J. Marcus, and William J. Wilhelm. 1992. What's special about the specialist? Journal of Financial Economics 32(1), 61–86. Glosten, Lawrence R. 1994. Is the electronic open limit order book inevitable?

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
by Duff McDonald
Published 5 Oct 2009

With a number of defections from Salomon, most prominently John Meriwether and his team at the powerful hedge fund Long-Term Capital Management, other firms were using similar if not identical strategies, with the inevitable result that the arbitrage opportunity was shrinking. This, in turn, meant that the risk-return trade-off on the unit’s big bets was heading in the wrong direction. The arbitrage group’s members had also done a surprisingly poor job of ingratiating themselves with their new bosses. In his insightful indictment of financial innovation, A Demon of Our Own Design, Richard Bookstaber recalls a series of meetings in which the heads of Salomon’s proprietary trading—Rob Stavis, Costas Kaplanis, and Sugar Myojin—were tasked with making Weill, Dimon, and Travelers’ CFO Heidi Miller comfortable with their strategies and positions.

A History of Future Cities
by Daniel Brook
Published 18 Feb 2013

Like its historic sister cities, the Gulf’s instant global metropolis had implemented the West’s latest architectural and intellectual fashions in the most extreme manner on its blank slate. While cities the world over gorged on debt-financed real estate speculation, ostensibly made safe through the financial innovations of collateralized debt obligations and credit-default swaps, Dubai topped them all. At the most insane heights of the bubble, Dubai was, to a large extent, a casino posing as a city: owner-occupied units accounted for just 30 percent of its housing market. When the music stopped, Dubai had the farthest to fall.

Life Inc.: How the World Became a Corporation and How to Take It Back
by Douglas Rushkoff
Published 1 Jun 2009

The enthusiasm with which we embraced our skyrocketing home values was more than matched by the greed of lending institutions flush with cash to capitalize our suspect mortgages. Although lawmakers and the Fed had sufficient warning about widespread unscrupulous lending practices and the impending disaster in the housing market, they did nothing to avert it. Why? Mr. Greenspan and the federal government put a higher priority on promoting “financial innovation” and the “ownership society.” Besides, Greenspan says he believed that any problems would remain “local” and not systemic, which is why he felt no qualms about encouraging what he called “innovative” lending products even after home owners had begun to default, and the ratings on mortgage-backed securities had begun to fall.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

Bernstein, Peter L. Capital Ideas: The Improbable Origins of Modern Wall Street. Hoboken, N.J.: John Wiley & Sons, 2005. ———. A Primer on Money, Banking and Gold. New York: John Wiley & Sons, 2008. Bookstaber, Richard. A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. Hoboken, N.J.: John Wiley & Sons, 2007. Bordo, Michael David. The Classical Gold Standard: Some Lessons for Today. Federal Reserve Bank of St. Louis, May 1981. Brown, Cynthia Stokes. Big History: From the Big Bang to the Present. New York: New Press, 2007. Buchanan, Mark. Ubiquity: The Science of History . . . or Why the World Is Simpler Than We Think.

The Euro: How a Common Currency Threatens the Future of Europe
by Joseph E. Stiglitz and Alex Hyde-White
Published 24 Oct 2016

The UK’s Barclays bank confessed to having manipulated the market for LIBOR, the London interbank lending rate upon which some $350 trillion of derivatives and other financial products are based.15 Still, the eurozone was designed with the potential to make all of this worse. The advocates of the euro said that it would enable financial products to move more freely, since the exchange rate risk had been eliminated. In their mind, financial innovation meant designing better products to meet the needs of consumers and firms. That’s the standard neoliberal theory. More modern theories emphasize imperfectly informed and often irrational consumers and firms operating in markets with imperfect and asymmetric information, where profits can typically be enhanced more by exploiting these market imperfections than in any other way.

A Man for All Markets
by Edward O. Thorp
Published 15 Nov 2016

Superficially, the PNP case appears simply to be a federal prosecution of securities violators. To understand why it really happened, you need to go back to the 1970s, when first-tier companies could routinely meet their financing needs from Wall Street and the banking community, whereas less established companies had to scramble. Seizing an opportunity to finance them, a young financial innovator named Michael Milken built a capital-raising machine for these companies from within a stodgy old Wall Street firm, Drexel Burnham Lambert. Milken’s group underwrote issues of low-rated, high-yielding bonds—the so-called junk bonds—some of which were convertible or came with warrants to purchase stock.

People, Power, and Profits: Progressive Capitalism for an Age of Discontent
by Joseph E. Stiglitz
Published 22 Apr 2019

The market didn’t clean these cities up on its own: it was government regulations that forced changes in behavior. At a small cost to each individual and firm, there were enormous benefits for all. The complex economy. Managing an economy in the Adam Smithian world of farms and pin factories is different from managing a postindustrial globalized and financialized innovation economy. Then, economic fluctuations were largely related to weather. For two hundred years, however, there have been large business fluctuations that have inflicted enormous societal costs. The 2008 crisis was not an act of God; it was man-made, something our system did to us. Our system failed us—and in many ways, we are still reeling from its economic and political consequences.

The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources
by Javier Blas and Jack Farchy
Published 25 Feb 2021

It was a company that had started life as a staid pipeline company, but went on to surf the liberalisation of gas and electricity markets to become one of the world’s largest commodity traders: Enron. Throughout the 1990s, Enron had been an all-consuming force in the trading industry, hoovering up bright young traders and buying up rival trading companies, redefining how a trading company could behave, and redrawing the commodity markets themselves. Just as financial innovations had begun to revolutionise the oil market, Enron, with its army of bright young traders and its hefty lobbying budget, helped to turn electricity and natural gas from a boring regulated industry into a casino where fortunes could be made or lost in the blink of an eye. 52 From its origins in gas and electricity, Enron looked to conquer the rest of the commodity trading industry.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

It’s analogous to the advice that my father provided me that if you don’t miss at least two or three planes a year, you’re spending too much time in airports,” Quarles said, even as he called for better integration of global regulation instead of a race to the bottom in financial oversight.[17] Yet the downfalls of letting financial innovation get ahead of the government’s ability to police it had soon become evident as American mortgage markets began to show cracks. In 2006, Quarles acknowledged that officials were looking into requiring greater transparency in nontraditional mortgages and that he and other officials at the Treasury were “doing everything in our power to make our financial system even more resilient in the future,”[18] but he also seemed to play down risks building in the housing market.

Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least
by Antti Ilmanen
Published 24 Feb 2022

History of Institutional Asset Allocation Pre-WWII History5 Individual saving and investing have taken place for thousands of years, and the idea of diversification was recognized already in the Bible (Ecclesiastes 11:2) and the Talmud, but delegated and pooled investing through institutions has a much shorter history. In the 1600s and 1700s, financial innovations like the joint stock company, the mutual fund, and the insurance company were developed in Holland and Great Britain to make risk pooling and diversification easier for wealthy individuals. Life insurance companies were the dominant institutional investors in Britain in the 1800s and held this status beyond WWII.

Vulture Capitalism: Corporate Crimes, Backdoor Bailouts, and the Death of Freedom
by Grace Blakeley
Published 11 Mar 2024

Steve Keen, an economist who specializes in the theories of Hyman Minsky, also predicted in 2005 that the buildup of private debt in the global financial system was paving the way for a “Minsky moment,” in which credit markets tighten and fire sales of assets lead to an insolvency crisis.31 That same year, an insider—Raghuram Rajan—told an audience of economists at the annual central bankers meeting in Jackson Hole, Wyoming, that financial “innovations” like collateralized debt obligations and credit default swaps were generating the possibility of a “catastrophic meltdown.”32 What did these economists know that their colleagues didn’t? Keen puts it down to the failure of mainstream economists to consider the dynamics of debt.33 In this section, we’ll look at precisely why debt is so central to modern capitalism, and how orthodox models of the economy underplay—or even overlook entirely—the dynamics of lending and borrowing.

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System
by Henry M. Paulson
Published 15 Sep 2010

The crisis has abated, but these imbalances persist and must be addressed. 2. Our regulatory system remains a hopelessly outmoded patchwork quilt built for another day and age. It is rife with duplication, gaping holes, and counterproductive competition among regulators. The system hasn’t kept pace with financial innovation and needs to be fixed so that we have the capacity and the authority to respond to constantly evolving global capital markets. 3. The financial system contained far too much leverage, as evidenced by inadequate cushions of both capital and liquidity. Much of the leverage was embedded in largely opaque and highly complex financial products.

Superclass: The Global Power Elite and the World They Are Making
by David Rothkopf
Published 18 Mar 2008

“First, our home country, the United States, comprises about 30 percent of global GDP and typically has the friendliest regulatory environment for transactional activities. Also, it offers the ability to transact business with like-minded people who are problem solvers. And so a lot of the financial innovation that gets done in the world has historically been done in the United States. “Being in this primary market discourages you initially from going anywhere else because it’s always harder to do business,” he went on. The development of video conferencing, which was sufficiently perfected around the year 2000, led to some considerable expansion.

The Rational Optimist: How Prosperity Evolves
by Matt Ridley
Published 17 May 2010

Ironically, the plague may have been one of the sparks that lit the Renaissance, because the shortage of labour shifted income from rents to wages as landlords struggled to find both tenants and employees. With rising wages, some of the surviving peasantry could once more just afford the oriental luxuries and fine cloth that Lombard and Hanseatic merchants supplied. There was a rash of financial innovation: bills of credit to solve the problem of how to pay for goods without transporting silver through bandit country, double-entry book-keeping, insurance. Italian bankers began to appear all across the continent, financing kings and their wars, sometimes at a profit, sometimes at a disastrous loss.

All the Money in the World
by Peter W. Bernstein
Published 17 Dec 2008

Since ancient times, financiers have been regarded by their critics with suspicion and dislike: They don’t produce anything useful, so the thinking goes, and there is the constant maneuvering and manipulating to extract as much as they can get from every deal. The counterargument is that financiers create value and that the U.S. economy—or any economy, for that matter—couldn’t grow as fast without the financial innovations that have rooted out the inefficient and incompetent and provided capital for business, albeit with the occasional scandal and crimes. “Only the final conflagration6 will put an end to Wall Street speculation and Wall Street swindles,” one commentator observed—160 years ago. In part, the dislike of financiers may stem from a lack of understanding of what they do—what’s a derivative, anyway?

Venice: A New History
by Thomas F. Madden
Published 24 Oct 2012

In practice, though, few voyages bothered with insurance. Diversification of investments was sufficient for most investors to ensure an overall profit margin. For their part, merchants were generally content to recoup the loss of a vessel or cargo by charging it as an expense against profits. These various complicated financial innovations required painstaking record keeping. The sole owner of an enterprise can figure out profit and loss on the back of an envelope. However, when there are numerous investors, it is imperative to be able to demonstrate that all are receiving their due. Furthermore, the Venetian government had strict laws regarding what could or could not be shipped, stored, or charged against profits.

Connectography: Mapping the Future of Global Civilization
by Parag Khanna
Published 18 Apr 2016

While it has always been a shipping center, the reinvestment of its annual double-digit growth rates has created high-end jobs in airline manufacturing and other sectors. Today Tianjin boasts China’s highest income per capita ($13,500, which is $1,000 higher than Shanghai). Its downtown business district is now home to the most industrial investment funds in China, making it the headquarters for financial innovation and even commercial courts for intellectual property dispute resolution with foreign companies. Like Shanghai, it plans a free trade zone. Tianjin also hosts China’s National Supercomputing Center, where the world-leading Tianhe-1A is located. Tianjin Eco-city, another project of Singapore’s Singbridge agency, has been built from scratch as a low-emissions headquarters for high-end research and commercialization in areas such as LED lighting, digital animation, and alternative energy.

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It
by Steven Brill
Published 28 May 2018

Credit 3 Students at New York’s Baruch College riding the escalator, literally and figuratively, to more income equality. Credit 4 As a wunderkind economics professor in the 1970s, Michael Jensen (now an emeritus professor at Harvard Business School) created the intellectual underpinning for corporate America to binge on the new meritocrats’ legal and financial “innovations”—which boosted short-term profits but exacerbated income inequality and undermined the country’s economic vitality. Credit 5 Shunned by blue chip law firms because he did not fit the mold, corporate takeover pioneer Joseph Flom got the ultimate revenge. He invented guerrilla legal strategies that terrified their boardroom clients, accelerated the quest for short-term profits, and put him atop one of the world’s most successful firms.

Good Economics for Hard Times: Better Answers to Our Biggest Problems
by Abhijit V. Banerjee and Esther Duflo
Published 12 Nov 2019

Even if every firm faces diminishing returns, doubling the number of high-skilled people in the Valley makes all of them more productive. Romer argues that the same goes for all successful industrial cities: Manchester in the middle of the eighteenth century, New York and London during various periods of financial innovation, Shenzhen or the Bay Area today. In all of these places, he would claim, the force of diminishing returns that comes from the scarcity of land and labor (labor becomes scarce in part because land is scarce and therefore living in these places is so expensive) was defeated by the exuberant energy that comes out of learning from each other and coming up with new ideas.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt
by Russell Napier
Published 19 Jul 2021

But before we leave page 9, some sobering thoughts on the condition of the global banking system: John Mingo, a senior adviser to the Fed’s Board of Governors, said: “We should begin yesterday to construct the accord [Basle Accord on bank capital ratios] because today the accord is very much a lose/lose proposition”. It was “useless for regulators and costly for banks, because more and more banks were engaging in regulatory capital arbitrage”, he said. This involved the use of securitisation and other financial innovations to allow banks to “assume greater risk, while showing no change or even an increase in capital ratios”, according to David Jones, an assistant director at the Fed. Banks achieved this through a variety of methods, including “cherry picking”. Since the Basle Accord did not differentiate in its treatments of loans based on risk, banks were tempted to securitise their highest quality credits while leaving lower quality loans on their balance sheet.

Your Computer Is on Fire
by Thomas S. Mullaney , Benjamin Peters , Mar Hicks and Kavita Philip
Published 9 Mar 2021

In 2017 alone, Amazon shipped more than five billion packages via its Prime subscription service.3 To accomplish this, Amazon has constructed more than 329 distribution centers in the United States, and another 380 worldwide.4 These include massive, million-square-foot warehouses like that in Tracy, California, as well as smaller, more specialized sorting and delivery stations.5 For delivery between its various facilities, Amazon relies on fleets of company-owned or leased vehicles.6 For the so-called last mile, it relies (for the moment, at least) on delivery services like UPS or FedEx and—on extraordinarily favorable terms—the United States Post Office.7 In order to further reduce its costs, Amazon has been developing an Uber-like system called Amazon Flex to further “disrupt” its dependence on third-party carriers.8 And famously (and prematurely, perhaps perpetually), Amazon has announced plans to implement entirely automated drone delivery.9 In its focus on the control and consolidation of transportation and distribution networks, Amazon resembles yet another of the early-twentieth-century corporate giants, namely Standard Oil (see fig. 1.1).10 Although Standard Oil’s dominance of the oil industry was due in part to its monopolistic consolidation of refineries, it was equally enabled by the firm’s secret manipulation of the railroad network. Like Jeff Bezos, John D. Rockefeller recognized the value of vertical integration and the necessity of access to and control over critical infrastructure. Such integration is only ever in part a technological accomplishment, and it requires social, political, and financial innovation. In this respect, the continuity between the industrial-era giants and the “Big Five” tech firms (Alphabet, Amazon, Apple, Facebook, and Microsoft) is all the more apparent. When we consider the digital economy in general, and electronic commerce in particular, it seems that success is also dependent on access to infrastructure—proximity to key transportation networks like roads, bridges, and highways; the employment of large numbers of appropriately skilled (but reasonably inexpensive) labor; the ability to construct and maintain (or at least lease) physical plants and other facilities; and, of course, access to the large amounts of capital, credit, and political influence required to secure the aforementioned resources.

Animal Spirits: The American Pursuit of Vitality From Camp Meeting to Wall Street
by Jackson Lears

The capitalist religion of modernity was taking hold, promoting strange new ways of assessing human worth. 2 The Madness and Mildness of Money WHAT PROTESTANTS CALLED the Glorious Revolution of 1688 was a revolution in finance as well as political power. When William of Orange became King William III of Great Britain and Ireland, he brought Dutch financial innovations to England. The government increasingly financed its operations (mainly wars with France) by borrowing from private creditors—in particular the Bank of England, which was founded in 1694. Paper began to displace gold and silver as the chief medium of exchange—not only banknotes but shares in the capital stock of corporations that were themselves traded on what became known as the stock exchange.

All the Devils Are Here
by Bethany McLean
Published 19 Oct 2010

By the second quarter of 2010, the homeownership rate had fallen to 66.9 percent, right where it had been before the housing bubble. Ever so swiftly, the wave of foreclosures in the aftermath of the crisis wiped out the increase in homeownership that had occurred over the past decade. In other words, subprime lending was a net drain on homeownership. A lot of needless pain was created in the process. Financial innovation? Collateralized debt obligations? Synthetic securities? What had been the point of that? “The financial industry is central to our nation’s ability to grow, to prosper, to compete, and to innovate,” President Obama said when he signed the new legislation. During the bubble it had been nothing of the sort.

Why Nations Fail: The Origins of Power, Prosperity, and Poverty
by Daron Acemoglu and James Robinson
Published 20 Mar 2012

These political reforms led to a further series of institutional innovations: in law, the creation of independent magistrates, courts, a court of appeals, and new private contract and bankruptcy laws. These new Venetian economic institutions allowed the creation of new legal business forms and new types of contracts. There was rapid financial innovation, and we see the beginnings of modern banking around this time in Venice. The dynamic moving Venice toward fully inclusive institutions looked unstoppable. But there was a tension in all this. Economic growth supported by the inclusive Venetian institutions was accompanied by creative destruction.

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America
by Greg Farrell
Published 2 Nov 2010

Thain was entering the world of finance at an inflection point, at the end of the stagnant markets of the 1970s. Every industry has its transformational moments, when innovation does more than improve performance at the margins, it fundamentally changes the nature of the business. The Wall Street that John Thain entered in 1979 was perched on the edge of one of those transformational moments. Financial innovators such as Michael Milken at Drexel Burnham Lambert were already creating a new market for high yield debt, more commonly known as “junk bonds.” Advances in computer technology allowed traders to accelerate and simplify the process of buying and selling stocks and bonds, especially when using the analytic tools that would soon be found on Bloomberg terminals, the boxlike machines that started popping up on trading floors across Wall Street in the 1980s.

A Splendid Exchange: How Trade Shaped the World
by William J. Bernstein
Published 5 May 2009

In 1610, court documents showed that the estate of one petit bourgeois merchant consisted of shares in twenty-two ships: thirteen 1/16 shares, seven 1/32 shares, one 1/17 share, and one 1/28 share.17 Fractional shares not only made it easier for merchants to bear prudent risks, but also allowed investors to increase their margin of safety by blunting the damage done by the loss of an individual ship or an unsuccessful commercial outcome. This in turn increased the willingness of investors to provide capital, which further lowered interest rates. Another Dutch financial innovation that served to decrease risk (at least when used properly) was the futures market-the "buying of herrings before they be catched."II Essentially, such markets assigned prices to given amounts of commodities at some point in the future-say for a thousand pounds of herring one year hence. These financial instruments could then be bought and sold just like the actual item.

Why Stock Markets Crash: Critical Events in Complex Financial Systems
by Didier Sornette
Published 18 Nov 2002

Essai sur le rythme évolutif et son interprétation quantique (Librairie des Sciences et des Arts, Paris). 296. Meyer, F. (1954). Problématique de l’évolution (Presses Universitaires de France, Paris). 297. Milgram, S. (1967). The small world problem, Psychology Today 2, 60–67. 298. Miller, M. (1991). Financial Innovations and Market Volatility (Basil Blackwell, Cambridge, MA). 299. Miller, M. H. and Modigliani, F. (1961). Divident policy, growth and the valuation of shares, Journal of Business 34, 411–433. r efe rences 411 300. Miltenberger, P., Sornette, D., and Vanneste, C. (1993). Fault self-organization as optimal random paths selected by critical spatio-temporal dynamics of earthquakes, Physics Review Letters 71, 3604–3607. 301.

We the Corporations: How American Businesses Won Their Civil Rights
by Adam Winkler
Published 27 Feb 2018

Charles Francis Adams (1856), 510. 14. On Roman societas and societas publicoranum, see Ulrike Malmendier, “Law and Finance ‘at the Origin,’ ” 47 Journal of Economic Literature 1076 (2009); Ulrike Malmendier, “Roman Shares,” in William N. Goetzmann and K. Geert Rouwenhorst, eds., The Origins of Value: The Financial Innovations that Created Modern Capital Markets (2005), 31. For a somewhat contrary view, see Andreas M. Fleckner, “Roman Business Associations” (unpublished manuscript, 2014), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2472598. For earlier studies of Roman corporations, see Andrew Stephenson, A History of Roman Law (1912), 371–74; William Livesey Burdick, The Principles of Roman Law and Their Relation to Modern Law (1938), 282 et seq. 15.

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society
by Binyamin Appelbaum
Published 4 Sep 2019

He repeatedly said there was no bubble in real estate prices, that real estate didn’t lend itself to speculation, and that a decline in housing prices, if it happened, “likely would not have substantial macroeconomic implications.”80 He did not understand that the great Wall Street banks had become housing-finance companies — conduits carrying money from foreign investors into mortgage loans as the vast reservoirs of savings accumulated by America’s trading partners were pumped back into the United States, inflating home prices and financial markets.81 He allowed those same banks to operate as casinos for investors to place elaborate bets on the future of the housing market, using derivatives to greatly increase the scale of speculation — and the size of the crisis that followed.82 He had plenty of company. At a conference in August 2005, shortly before Greenspan retired, he was celebrated as a great public servant. When one speaker, a Chicago economist named Raghuram Rajan, dared to suggest that financial innovation was making the world a riskier place, Larry Summers called Rajan “slightly Luddite.” Summers, echoing his attack on Born a few years earlier, added that even talking about such things was disruptive.83 Paper Fish Remote, austere, sparsely populated, Iceland rose to prosperity in the twentieth century by trading codfish for everything else: bread and wine, wood and windows, cars and gasoline.

Bill Marriott: Success Is Never Final--His Life and the Decisions That Built a Hotel Empire
by Dale van Atta
Published 14 Aug 2019

Someone who invested the minimum of $10,000 in the Potomac LP would receive $87,000 in tax shelter deductions over the next fifteen years.4 Once again, as with the stock repurchase program, when this new financing vehicle became public in January 1982, it generated substantial excitement throughout the industry.5 “Marriott Corp. has created an unprecedented plan to finance expansion of its hotel business by selling tax shelters to the public,” wrote chief financial writer Jerry Knight of the Washington Post.6 “Tax shelter sales are a common method of raising money for real estate ventures, but the Marriott deal [is] the first time a major corporation has [done it].” The New York Times agreed: “Marriott is a financial innovator, with such twists as the recent public syndication, an industry first [and] a clever use of financing.”7 Steven Rockwell, an analyst with Alex. Brown & Sons Inc., was quoted in the Times article as calling the idea “masterful.” John Lanahah of Laventhol & Horwath, an accounting and consulting firm specializing in lodging, said, “Marriott is certainly the most aggressive and visible in the industry [with its] unusual financing techniques.”8 In the six months following Marriott’s LP announcement, another L&H official informed Forbes that “several other chains are already beating down our door asking for help in setting up similar deals.”9 The Chesapeake Hotel Limited Partnership became the second syndication, a nine-hotel offering that sold out quickly in 1984.

Rentier Capitalism: Who Owns the Economy, and Who Pays for It?
by Brett Christophers
Published 17 Nov 2020

Just during the decade beginning in 1995, mortgage lending increased by over 500 per cent.25 Needless to say, the growth of mortgage securitization, enabling lenders to access the vast funding capacity provided by wholesale markets, was integral to this history.26 Nonetheless, securitization – of mortgages and (almost) everything else – is not the only way in which financial deregulation and liberalization have fostered the massive diversification and accumulation of financial assets in the UK since the 1970s. Derivatives have been another obvious and much-debated focal point of financial innovation and expansion. I will say more in due course about the nature of the rents earned on these various asset classes (both new and old), but it is worth noting here that, in many cases today, the rents are literal. Assets are, in effect, hired out – like an apartment, they are lent by their owners to third parties, the latter paying the former a fee for the temporary use of the asset.

The Joys of Compounding: The Passionate Pursuit of Lifelong Learning, Revised and Updated
by Gautam Baid
Published 1 Jun 2020

(When it comes to investments, the romantic appeal of being a party to a technological revolution or an entirely new industry or invention often dominates profit considerations in investors’ minds.) A bubble typically is characterized by some major technological revolution, cheap liquidity, financial innovation that disguises higher leverage (in John Kenneth Galbraith’s words, “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version”), amnesia about the last bubble, and abandonment of time-honored methods of security valuation. The fuel is borrowed cash and margin purchases.

The Taking of Getty Oil: Pennzoil, Texaco, and the Takeover Battle That Made History
by Steve Coll
Published 12 Jun 2017

Indeed, he was already being lionized in the national business press for having “outfoxed” Gordon Getty and for rescuing Texaco from its years of corporate drift brought on by declining reserves. Suddenly, Texaco was an aggressive, vital, expanding oil giant, no longer the Seven Sisters’ mean-spirited spinster. For his part, J. Hugh Liedtke was badly stung. For all his successes in the oil business, for all his financial innovations and takeovers and spin-offs—for all of Pennzoil’s spectacular growth—he had fallen short in the one deal that would have put him over the top. For Hugh Liedtke, there could never be another deal like Getty Oil again. The company was so rich, and so divided against itself—it had been a once-in-a-lifetime opportunity.

The Long Game: China's Grand Strategy to Displace American Order
by Rush Doshi
Published 24 Jun 2021

As Lenovo’s leadership team noted in an apologetic message posted online, “We all unanimously believe that Chinese companies should unite and should not allow outsiders to play them against each other.”82 If China’s efforts continue to be successful, Beijing may be able to lock in its approaches and extend its lead in certain key global technologies to the detriment of universal values and US interests. Technology also intersects with other more conventional goals of Chinese economic statecraft. For example, China has largely struggled to reduce its vulnerability to the dollar, but it clearly hopes that with the issuance of its own digital currency it might ride a disruptive wave of financial innovation to blunt US financial advantages and build its own at a global level. Chinese officials have long been worried about the possibility that Facebook’s plan for a digital currency, Libra, would constitute the kind of epochal transformation that would once again bolster the US dollar system. Wang Xin, director of the People’s Bank of China’s research bureau, stated that “if the digital currency [Libra] is closely associated with the U.S. dollar . . . there would be in essence one boss, that is the U.S. dollar and the United States,” which would have geopolitical consequences.83 That concern led the People’s Bank of China to accelerate plans for its own digital sovereign currency, with hopes that it could help China reduce its reliance on the dollar and leapfrog ahead of enduring US advantages.

Americana: A 400-Year History of American Capitalism
by Bhu Srinivasan
Published 25 Sep 2017

To retaliate, the older league hastily announced a two-team expansion, including a team slated for Dallas to specifically punish Hunt. Predictably, the start-up league had its share of financial woes. Hunt’s Dallas team lost so much money, as did the NFL’s new Dallas Cowboys, that Hunt moved the team to Kansas City, renaming it the Chiefs. But Hunt did have one financial innovation up his sleeve that perhaps saved his league. Unlike the NFL, the AFL started out by bundling its entire league as one television package. Rather than each team negotiating, the equal revenue sharing among the AFL teams helped the teams in smaller cities, and it increased each owner’s vested interest in the collective enterprise.

Americana
by Bhu Srinivasan

To retaliate, the older league hastily announced a two-team expansion, including a team slated for Dallas to specifically punish Hunt. Predictably, the start-up league had its share of financial woes. Hunt’s Dallas team lost so much money, as did the NFL’s new Dallas Cowboys, that Hunt moved the team to Kansas City, renaming it the Chiefs. But Hunt did have one financial innovation up his sleeve that perhaps saved his league. Unlike the NFL, the AFL started out by bundling its entire league as one television package. Rather than each team negotiating, the equal revenue sharing among the AFL teams helped the teams in smaller cities, and it increased each owner’s vested interest in the collective enterprise.

Liberalism at Large: The World According to the Economist
by Alex Zevin
Published 12 Nov 2019

These would ‘not give that Indian child a better life’, and ‘tying trade to rules that forbid her from working will not help her either: that way lies greater poverty, not a better education.’48 In a sign of how concerned Crook and other editors were about the growth of anti-globalization sentiment in these years (a fact obscured by what came after), on 11 September 2001 – the day two planes crashed into the World Trade Center in Manhattan – the Economist on newsstands had nothing to do with Middle Eastern terrorists. In red, white and black, the cover read ‘Pro Logo’, and savaged the Canadian activist Naomi Klein for her ‘utterly wrong-headed’ No Logo (1999), the best-selling ‘bible of the anti-globalisation movement’.49 For his part, Emmott spied untrammelled vistas for financial innovation until the end. In his last signed piece in 2006, he hailed US banks for entering sectors served only by payday lenders and pawnbrokers. Citibank signed an agreement with 7-Eleven to put cash machines in 5,500 stores, while credit card companies ‘targeted the unbanked and under-banked’ – poor minorities and immigrants, who stood to gain from access to cheaper credit.

The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous
by Joseph Henrich
Published 7 Sep 2020

Godoy, R., Byron, E., Reyes-García, V., Leonard, W. R., Patel, K., Apaza, L., Eddy Pérez, E., Vadez, V., and Wilkie, D. (2004). Patience in a foraging-horticultural society: A test of competing hypotheses. Journal of Anthropological Research 60 (2), 179–202. Goetzmann, W. N., and Rouwenhorst, K. G. (2005). The Origins of Value: The Financial Innovations That Created Modern Capital Markets. New York: Oxford University Press. Goh, J. O., Chee, M. W., Tan, J. C., Venkatraman, V., Hebrank, A., Leshikar, E. D., Jenkins, L., Sutton, B. P., Gutchess, A. H., and Park, D. C. (2007). Age and culture modulate object processing and object-scene binding in the ventral visual area.

The Age of Turbulence: Adventures in a New World (Hardback) - Common
by Alan Greenspan
Published 14 Jun 2007

The episode shook the market. But it's indicative of the development of this sector, and of the financial system generally, that when another notable U.S. hedge fund, Amaranth, collapsed in 2006 with a loss of more than $6 billion, the world's financial system registered scarcely a tremor. A recent financial innovation of major importance has been the credit default swap. The CDS, as it is called, is a derivative that transfers the credit risk, usually of a debt instrument, to a third party, at a price. Being able to profit from the loan transaction but transfer credit risk is a boon to banks and other financial intermediaries, which, in order to make an adequate rate of return on equity, have to heavily leverage their balance sheets by accepting deposit obligations and/or incurring debt.

The Narrow Corridor: States, Societies, and the Fate of Liberty
by Daron Acemoglu and James A. Robinson
Published 23 Sep 2019

Southern Italy—by the mid-twelfth century ruled by Norman kings—and Spain were also well placed, but did not have communal governments. So neither took over the trade the way that communal northern and central Italy did. This had a lot to do with how the communes promoted the institutions necessary for trade. This is obvious when we look at the financial innovation that was so critical for trade. Here the Italian communes led the way. As their economic activities spread around Europe, they set up bases in all the places they traded. More important, they invented the bill of exchange, which became the prime method to organize medieval commerce. Imagine that a Florentine cloth manufacturer wanted to buy high-quality Norfolk wool in England.

The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite
by Duff McDonald
Published 24 Apr 2017

Any notion that he might somehow turn against his former industry was dispelled during his confirmation hearing, when Shad told the Senate Banking Committee that he favored easing regulatory requirements on business, including the Foreign Corrupt Practices Act of 1977, which he felt posed “competitive problems for American industry.”1 He also signaled his intention to cut costs, and to spend less than the agency’s authorized budget. He then proceeded to do everything he’d said he would, prompting the Wall Street Journal to deem it “the most sweeping deregulation in the agency’s 50 years.”2 Shad’s past and present careers then collided spectacularly, when Wall Street did what it so often does with a financial innovation, and took it too far. The rash of junk bond–fueled takeover activity led to a coincident rise in insider trading—by 1985, three-quarters of all takeover bids were preceded by suspicious surges in stock prices—and Shad suddenly found himself in the uncomfortable position of investigating and prosecuting not just people he knew but the companies they ran—Shad’s protégé at Hutton, Frederick Joseph, was CEO of Drexel Burnham Lambert when the Ivan Boesky/Michael Milken insider trading scandal broke.

The Silk Roads: A New History of the World
by Peter Frankopan
Published 26 Aug 2015

W., here, here Bush, George W., here, here, here, here Bushihr, here, here, here nuclear site, here, here Bustani, José, here Būyid caliphate, here, here Buyl, Bernardo, here Byzantium (Byzantine empire) alliances with Khazars, here collapse of, here, here competition with Viking Rus’, here and Crusades, here deteriorating relations with west, here golden age of, here and Mongol threat, here and rise of Seljuks, here Cádiz, here Cadman, Sir John, here Caesarea, siege of, here Caffa, here Caffaro, here Cairo, here, here, here, here, here arrival of Mansa Musa, here and rise of Mamluks, here Cakchiquel Maya, here Calcutta, here, here Caldwell, John, here Calicut, here, here arrival of Vasco da Gama, here Calvin, John, here Cambodia, here, here Cambon, Paul, here camphor, here, here Campion Vaughan, Lieutenant Edwin, here Canary Islands, here, here Candida (concubine), here cannabis, here Canterbury, here, here Cão, Diogo, here Cap Breton, here Cape Verde islands, here, here cardamom, here, here Carter, Jimmy, here, here, here, here, here Carthage, here, here cartography, here, here Caspian Gates, here castles, building of, here Castlereagh, Lord, here Catalan Atlas, here Catalaunian Plains, battle of the, here Catherine of Aragon, here Catherine of Braganza, here cave temples, Buddhist, here, here Cavour, Count, here Ceuta, here, here Ceyhan, here Ceylon, see Sri Lanka Ch’oe P’u, here Chaadaev, Pyotr, here Chaghatay (Mongol warlord), here Chamberlain, Neville, here, here Chang’an, here Characene, here Charax, see Basra Charge of the Light Brigade, here chariot racing, here Charles V, Emperor, here, here Charles II, King, here Cheapside Tournament, here Chechnya, here, here, here Chekhov, Anton, here Chelmsford, Lord, here Chelyabinsk nuclear plant, here chemical weapons, Iraqi use of, here Cheney, Dick, here, here, here, here, here Chengdu, here Chernenko, Konstantin, here Cherniaev, General Mikhail, here Chernigov, here, here chess, here, here China Arabs reach, here British relations with, here Christian missionaries in, here, here culinary habits, here and drug addiction, here economic crises, here, here economic growth, here, here, here, here famine in, here financial innovations, here and huaxia concept, here impact of climate change, here intelligence cooperation with US, here knowledge of outside world, here Mongol conquest, here, here, here, here, here pays tribute to steppe nomads, here period of transition, here relations with Rome, here road system, here silver inflows and increased trade, here and Soviet invasion of Afghanistan, here and spread of Buddhism, here struggles with extremism, here Timurid conquest, here China Development Bank, here Chinese Eastern Railway, here Chirac, Jacques, here Chongqing, here Christian art, halo in, here Christian Assyrians, here Christianity competition with Judaism, here, here competition with Zoroastrianism, here, here, here as European common denominator, here Khazars and, here, here languages of, here and militarism, here, here and missionary activity, here, here Mongols and, here outbreak of militancy, here and quest for unity, here reconciled with Buddhism, here sectarianism, here spread of, here, here, here, here, here Christians and early Islam, here, here persecution of, here, here, here, here, here and slave trade, here Churchill, Winston, here, here, here, here, here, here, here, here and First World War, here and naval conversion to oil, here and post-war world, here, here, here wartime conferences, here, here Ciano, Count, here Cicero, here Cieza de León, Pedro, here, here cinnamon, here, here, here, here, here, here, here, here circumnavigation, here Clemenceau, Georges, here Clement V, Pope, here Cleopatra, Queen, here Clerk, George here climate change, here, here, here, here Clinton, Bill, here, here Clinton, Hillary, here Clive, Robert, here ‘Cloth of Antioch’, here cloves, here, here, here, here, here, here Cochin, here, here Coimbatore, here ‘coin wars’, here coinage Christian, here, here debasement of, here Greek, here Islamic, here Khazar, here and long-distance trade, here, here, here, here of Menander, here and monetisation of trade, here Mongol, here Persian, here Roman, here, here, here, here Seljuk, here Colombo, here, here Columbus, Christopher, here, here, here, here, here, here, here, here, here and liberation of Jerusalem, here, here parallels with, here, here and religious warfare, here ‘Commissar Order’, here Communism hammer and sickle flag, here and Islam, here origins of, here and pan-Arabism, here resurgence, here Concessions Syndicate, here Confucianism, here, here Confucius Institutes, here Conolly, Arthur, here Constantine, Emperor, here, here, here Constantinople and Allied First World War aims, here arrival of Jews in, here as Christian centre, here, here, here, here defensive walls, here fall of, here, here founding of, here, here hit by financial crisis, here Italian interests in, here, here, here known as Mikli-garðr, here Persians threaten, here and pilgrimages, here plague in, here planned Russian occupation of, here reception of Türkic ambassadors, here sack of, here contra-corsarios, here Copeland, Miles, here coral, here, here, here Córdoba, here, here, here, here Corfu, here, here Corinth, here Cornwallis, Lord, here Corsica, here Cortés, Hernán, here, here Cotte, Edouard, here Council of Chalcedon, here, here, here Council of Clermont, here Council of Nicaea, here Cox, Sir Percy, here, here Crete, here, here Creusot-Loire, here Crimean War, here crocodiles, here Crusades, here, here, here, here, here, here, here, here failure of, here, here, here, here Ctesiphon, here, here, here, here, here, here Cuba, massacre of villagers, here Cuban missile crisis, here, here, here Cuerdale (Lancashire), here Cumans, here, here Curzon, Lord, here, here, here, here, here cyber-terrorism, here Cyprus, here, here Cyril, Patriarch, here, here Cyrus the Great, here, here Cyrus, Patriarch, here Czechoslovakia, occupation of, here Dahl, Roald, here Daladier, Edouard, here Dallam, Thomas, here Dalrymple, William, here Damascus, here, here, here, here, here, here, here, here Damietta, here Dandanakan, battle of, here Dandolo, Doge Enrico, here Daniel of Morley, here Dara, here, here, here Dar-es-Salaam, embassy bombing, here Darius the Great, here, here Darius III, King (of Persia), here Darré, Richard, here Dāwud, Muammad, here, here, here death sentences, Islamic sanction for, here DeGolyer, Everette Lee, here Dehua, porcelain production, here Delft, ceramics industry, here Delhi, here, here Delphic maxims, here Delta Force, here, here Demetrius, bishop of Antioch, here Deng Xiaoping, here Detti, Guido, here Deutsche Bank, here devakula (temples of the divine family), here Dewashtich (ruler of Panjikent), here Dhahran bombing, here Dias, Bartolomeu, here diet, improvements in, here Dinis, King (of Portugal), here Diocletian, Emperor, here, here Disraeli, Benjamin, here Diu, Ottoman attack on, here Dīwān lughāt al-turk, here dīwān, office of, here Djenné, here dodos, as gifts, here Donbas basin, here Dost Muammad, Shah, here Dostoevskii, Fyodor, here Dreyfus, Louis G., here Drummond-Wolff, Sir Henry, here, here Dubrovnik (Ragusa), here, here Dubs, Adolph, here Duisburg, here Duleep Singh, Maharajah, here Dulles, Allen, here Dulles, John Foster, here, here, here, here Dunhuang, here, here, here, here Dunsterville, General Lionel, here Durand, Sir Mortimer, here Dürer, Albrecht, here Dutch East Indies, here, here Dutch East Indies Company (VOC), here, here, here, here Dutch Republic, rise of, here, here Dutch West Indies Company (WIC), here Dzungarian gate, here East India Company, here, here, here, here, here, here, here Easter, date of, here Eastland Company, here ebony, here, here Eden, Anthony, here, here Edessa, here, here, here, here, here, here, here Edward I, King, here Edward VII, King, here, here Egypt achieves independence, here Alexandrian conquest, here anti-British rioting, here Arab conquest, here, here Crusaders and, here, here exports of luxury goods, here Fāimid conquest, here, here, here grain exports, here Ottoman conquest, here overthrow of Farouk, here, here and pan-Arabism, here Persian conquest, here plague in here relations with Portugal, here and rise of Mamluks, here, here and rise of Saladin, here Roman conquest, here Roman recovery of, here Venetian interests in, here Eichmann, Adolf, here Eisenhower, Dwight D., here, here, here ‘Eisenhower doctrine’, here El Alamein, battle of, here El Escorial, palace of, here Elephanta, cave temples, here elephants, as gifts, here Elizabeth I, Queen, here Ellenborough, Lord, here Ellora, cave temples, here Elmina, here Elphinsonte, Major-General, here Elwell-Sutton, Laurence, here Emesa, here England armed forces, here break with Rome, here, here collections of antiquities, here and emigration to America, here maritime revolution, here plague in, here population growth, here relations with Low Countries, here relations with Ottomans, here relations with Persia, here, here relations with Spain, here, here, here and slave trade, here voyages of discovery, here see also Britain Enlightenment, here, here, here Entente Cordiale, here Enver Pasha, here Erasmus, here Erbil, here Ermolov, General Aleksei, here Etemad, Dr Akbar, here Ethiopia, here, here, here Eto’o, Samuel, here Ettel, Erwin, here Euclid, here Eudokia, here Euler, Leonhard, here eunuchs, here Euripides, here European Union, here, here Eurovision Song Contest, here Evelyn, John, here Faisal I, King (of Iraq), here Faisal II, King (of Iraq), here Falkenhayn, General Erich von, here al-Fārābī, Abū Nar, here Farman-Farma, Prince, here, here Farouk, King (of Egypt), here, here fashion houses, here fasting, here, here, here Fatehpur Sikri, here Fat Alī, Shah, here Fāimid caliphate, here, here, here fatwas, here Ferdinand and Isabella (of Spain), here, here Fez, here Field of Blood, battle of the, here financial crisis, fifteenth-century, here, here Firdawsī, here fire temples, Zoroastrian, here, here fish, worship of, here Fisher, Admiral Sir John, here, here Fitzwilliam Museum, here flagpole, world’s tallest, here Fleischer, Ari, here Florence, here, here, here, here ‘fool’s gold’, here footwear, prices of, here Ford, Gerald, here Ford Foundation, here Ford Motor Company, here, here Fort Nassau, here Fort Ross, here Foster, Norman, here ‘Four Masters’, here Foxconn, here Fra Angelico, here France armed forces, here fall of, here, here, here First World War aims, here and Red Line Agreement, here, here relations with Persia, here relations with Russia, here, here Francis of Assisi, here Franco-Prussian War, here frankincense, here, here, here, here, here, here Franks, General Tommy, here Franz Ferdinand, Archduke, here, here, here, here Fraser, Sir William, here Fraser-Tytler, Sir Kerr, here Frederick Barbarossa, Emperor, here Frederick II, Emperor, here French Revolution, here Frobisher, Martin, here Fulton, Missouri, Churchill’s speech at, here, here furs, trade in, here, here Furtado, Nelly, here Fürth, here Fusā, here, here, here Gaddafi, Muammar, here Galileo Galilei, here galley-slaves, freeing of, here Gama, Vasco da, here, here, here, here, here, here Gamelin, General Claude, here Ganjavī, Mahsatī, here Gansu corridor, here, here Gao, here Gardane, Comte de, here Gārgī Samhitā, here Gates, Robert, here, here Gaugamela, battle of, here Gaul, here, here Gazprom, here Geneva Protocols, here Genghis Khan, here, here, here, here, here, here Genoa and Black Sea trade, here competition with Venice, here, here, here decline of, here destruction of Pisan fleet, here and gold trade, here plague in, here rise of, here, here, here, here, here, here George III, King, here, here George V, King, here George, Clair, here Georges-Picot, François, here Georgia, here, here Gepids, here Germany agricultural production, here and approach to First World War, here, here develops siege mentality, here food shortages, here, here increased animosity towards, here pact with Soviet Union, here, here, here, here, here, here, here plague in, here and Second World War defeat, here, here unification, here Getty, J.

Security Analysis
by Benjamin Graham and David Dodd
Published 1 Jan 1962

Both during and immediately after World War I, no self-respecting NYSE member firm facilitated a client’s switch from Liberty bonds into potentially more lucrative, if less patriotic, alternatives. There was no law against such a business development overture. Rather, according to Graham, it just wasn’t done. A great many things weren’t done in the Wall Street of the 1930s. Newly empowered regulators were resistant to financial innovation, transaction costs were high, technology was (at least by today’s digital standards) primitive, and investors were demoralized. After the vicious bear market of 1937 to 1938, not a few decided they’d had enough. What was the point of it all? “In June 1939,” writes Graham in a note to a discussion about corporate finance in the second edition, “the S.E.C. set a salutary precedent by refusing to authorize the issuance of ‘Capital Income Debentures’ in the reorganization of the Griess-Pfleger Tanning Company, on the ground that the devising of new types of hybrid issues had gone far enough.”

Palo Alto: A History of California, Capitalism, and the World
by Malcolm Harris
Published 14 Feb 2023

Enterprising small California capitalists elevated themselves, compensated appropriately for their assumed risk and filling the vacuum where, after the collapse of the cattle barons, a new Anglo West Coast aristocracy was required. Visionary workers such as Theodore Judah could make a class leap, too, if everything worked out, which made California a strong draw for the ambitious, clever young men whom the railroad required. Everyone wins but the Indians, a United States settlement motto. But financial innovation offered many opportunities for actors up and down the model to cut corners and mark cards, none more than the Associates. The stock system meant that investors were induced to buy pieces of paper of no fixed worth, based only on their confidence; that was a recipe for fraud. Everyone wanted something for nothing, but only some of them could get it.

The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (The Princeton Economic History of the Western World)
by Robert J. Gordon
Published 12 Jan 2016

In the 1890s, most houses in Muncie, Indiana, were built for rental, but the Lynds estimated that in 1923, the rental portion had declined to only 10 percent.38 They attribute this change to the development of “building and loan associations” after 1900, which made it possible for many members of the working class to consider homeownership. In the mid-1920s, fully 75 percent to 80 percent of new Muncie homes were built for owners, with mortgages provided by four associations, and a bank executive estimated that 85 percent of those purchases were “working men.” A parallel financial innovation was the development of the real estate mortgage bond, which greatly facilitated the enormous but unsustainable boom in building both large and small apartment buildings in the 1920s. Builders could obtain money in advance of construction to finance the entire construction project, with only minimal down payment requirements.

The Quest: Energy, Security, and the Remaking of the Modern World
by Daniel Yergin
Published 14 May 2011

Insull assured other utility executives in 1910 that if they priced their product cheaply enough, they would greatly increase their sales and “you will begin to realize the possibilities of this business, and these possibilities may exceed your wildest dreams.”12 “NATURAL MONOPOLY”: THE REGULATORY BARGAIN To build his empire, Insull used the great financial innovation of the day—the holding company—a company that controls part of or all the interest in another company or companies. Insull constructed a pyramid of these holding companies, with each tier holding a controlling interest in the one below, on down to the base—the power plants themselves. In such a way, Insull, through his holding companies, could control a huge amount of assets with a relatively small outlay of capital, and thus reap outsize returns.