IDEAS home Printed from https://ideas.repec.org/p/uow/depec1/wp09-01.html
   My bibliography  Save this paper

Regulating Financial Innovations Without Apology

Author

Abstract

This paper views the housing and credit bubble 2001-2008 in a stylized manner, namely as a sequence starting with a financial innovation in 2001 followed by the superimposition of other financial innovations leading to the prevalence of uncertainty in Knight’s sense and ending in the last quarter of 2008 with both market failure and regulation failure. This ‘debt bubble sequence’ is just a slice of a dynamic process of stupefying complexity involving ignorance in a fundamental way. Few analysts would deny that a financial innovation, namely the sub-prime mortgage,combined with market participants’ ignorance about the size and location of the risk underlying complex financial products was a critical factor conducive to the financial meltdown 2007-2008. To the extent that financial innovation does bear the blame, the most obvious question is whether anything can be done to help reduce the degree of public’s ignorance about financial innovations and to prevent destabilizing innovations from entering the market.The main claim of this paper is that society should be involved in exercising directive intelligence through an appropriate institutional arrangement over the intricacies and technicalities inherent to financial innovations. Specifically, the paper proposes a new institutional arrangement conceived with the aim of strengthening financial system reliability and breaking the ‘government regulation-financial innovation’ vicious circle.

Suggested Citation

  • Pol, Eduardo, 2009. "Regulating Financial Innovations Without Apology," Economics Working Papers wp09-01, School of Economics, University of Wollongong, NSW, Australia.
    • Handle: RePEc:uow:depec1:wp09-01
    as

    Download full text from publisher

    File URL: http://www.uow.edu.au/content/groups/public/@web/@commerce/@econ/documents/web/uow056713.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Stephen Bell & John Quiggin, 2006. "Asset Price Instability and Policy Responses: The Legacy of Liberalization," Journal of Economic Issues, Taylor & Francis Journals, vol. 40(3), pages 629-649, September.
    2. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
    3. Miller, Merton H., 1986. "Financial Innovation: The Last Twenty Years and the Next," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(4), pages 459-471, December.
    4. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    5. Lucas, Robert E., 1977. "Understanding business cycles," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 5(1), pages 7-29, January.
    6. Shiller, Robert J., 1978. "Rational expectations and the dynamic structure of macroeconomic models : A critical review," Journal of Monetary Economics, Elsevier, vol. 4(1), pages 1-44, January.
    7. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    8. Lerner, Josh, 2006. "The new new financial thing: The origins of financial innovations," Journal of Financial Economics, Elsevier, vol. 79(2), pages 223-255, February.
    9. John J. McConnell & Eduardo S. Schwartz, 1992. "THE ORIGIN OF LYONs: A CASE STUDY IN FINANCIAL INNOVATION," Journal of Applied Corporate Finance, Morgan Stanley, vol. 4(4), pages 40-47, January.
    10. Simon, Herbert A, 1979. "Rational Decision Making in Business Organizations," American Economic Review, American Economic Association, vol. 69(4), pages 493-513, September.
    11. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alaa Alaabed & Mansur Masih & Abbas Mirakhor, 2016. "Investigating risk shifting in Islamic banks in the dual banking systems of OIC member countries: An application of two-step dynamic GMM," Risk Management, Palgrave Macmillan, vol. 18(4), pages 236-263, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Thomas Delcey & Francesco Sergi, 2019. "The Efficient Market Hypothesis and Rational Expectations. How Did They Meet and Live (Happily?) Ever After," Working Papers hal-02187362, HAL.
    2. Thomas Delcey & Francesco Sergi, 2019. "The Efficient Market Hypothesis and Rational Expectations. How Did They Meet and Live (Happily?) Ever After," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02187362, HAL.
    3. Kim, Teakdong & Koo, Bonwoo & Park, Minsoo, 2013. "Role of financial regulation and innovation in the financial crisis," Journal of Financial Stability, Elsevier, vol. 9(4), pages 662-672.
    4. Fratianni, Michele & Giri, Federico, 2017. "The tale of two great crises," Journal of Economic Dynamics and Control, Elsevier, vol. 81(C), pages 5-31.
    5. Mehmet Balcilar & Riza Demirer, 2014. "The Effect of Global Shocks and Volatility on Herd Behavior in Borsa Istanbul," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 142-172, March.
    6. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    7. Michael D. Bordo, 2014. "The Federal Reserve's Role: Actions Before, During, and After the 2008 Panic the Historical Context of the Great Contraction," Book Chapters, in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 6, Hoover Institution, Stanford University.
    8. Maximilian-Benedikt Herwarth Kohn & Pedro L. Valls Pereira, 2017. "Speculative bubbles and contagion: Analysis of volatility’s clusters during the DotCom bubble based on the dynamic conditional correlation model," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1411453-141, January.
    9. Cochrane, John H., 1994. "Shocks," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 295-364, December.
    10. Calvo, Guillermo, 2012. "Financial crises and liquidity shocks a bank-run perspective," European Economic Review, Elsevier, vol. 56(3), pages 317-326.
    11. Franklin Allen & Douglas Gale, 1998. "Bubbles and Crises The Economic Journal," Center for Financial Institutions Working Papers 98-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
    12. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-255, January.
    13. Bradley Jones, 2015. "Asset Bubbles: Re-thinking Policy for the Age of Asset Management," IMF Working Papers 2015/027, International Monetary Fund.
    14. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," FRB Atlanta Working Paper 2009-10, Federal Reserve Bank of Atlanta.
    15. J.M. Berk, 1998. "Monetary transmission: what do we know and how can we use it?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 51(205), pages 145-170.
    16. Chollete, Loran & Ning, Cathy, 2009. "The Dependence Structure of Macroeconomic Variables in the US," UiS Working Papers in Economics and Finance 2009/31, University of Stavanger.
    17. John C. Persons & Vincent A. Warther, "undated". "Boom and Bust Patterns in the Adoption of Financial Innovations," Research in Financial Economics 9601, Ohio State University.
    18. Guzin Gulsun Akin & Ahmet Faruk Aysan & Gültekin Gollu & Levent Yildiran, 2014. "Formal and Informal Regulations for Credit Card Payment Services," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 1-33, March.
    19. Robert E. Carpenter & Steven M. Fazzari & Bruce C. Petersen, 1995. "Three Financing Constraint Hypotheses and Inventory Investment: New Tests With Time and Sectoral Heterogeneity," Macroeconomics 9510001, University Library of Munich, Germany, revised 09 Oct 1995.
    20. Antonina Waszczuk, 2014. "Assembling International Equity Datasets – Review of Studies on the Cross-Section of Common Stocks," BIFEC Book of Abstracts & Proceedings, Research and Business Development Department, Borsa Istanbul, vol. 1(2), pages 34-65, March.

    More about this item

    Keywords

    Toxic financial innovations; Knightian uncertainty; debt bubble 2001-2008; relevant regulation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uow:depec1:wp09-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Siminski (email available below). General contact details of provider: https://edirc.repec.org/data/deuowau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.