Dynamism and Innovation in Finance: The Path to Future Bailouts

The financial technocracy is really having to stretch to explain the miscalculations of the last few years and to reinforce the message that fiscal health can be restored to the global economy as long as financial markets are allowed to flourish again through innovation and dynamism .

Alan Greenspan in a piece in the Wall Street Journal , which was primarily designed to exonerate himself from any suggestion that it was his own management of short term interest rates that was a primary cause of the current financial crisis, makes the point that we will have to rely upon the dynamism of the private sector to ensure future prosperity

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr. Greenspan’s successor was also keen to emphasize the need for financial innovation in his address to the Council on Foreign Relations in Washington DC on March 10th.

While there was really nothing surprising in his remarks, perhaps the most interesting part of the speech was right at the end when he said - "it is unrealistic to hope that financial crises can be entirely eliminated, especially while maintaining a dynamic and innovative financial system."

Sounds like financial engineers can breathe a sigh of relief and also sounds like taxpayers should be ready for another bailout after we get through with this one.

But for me at least the real quote of the week must surely be from Tim Geithner who was interviewed on the Charlie Rose show and expressed the current challenge in these inimitable words.

There’s capital that wants to come into the system, but it just can’t get financing.

In a sentence, there truly is the enigma of modern finance.

Comments

[prudentinve...:]

Financial excesses of "innovation and dynamism" are impossible with natural interest rates. Natural interest rates are (a) above inflation by a margin that covers tax on earned interest; and (b) are high enough to warrant caution and due diligence regarding how borrowed money is invested.

Mr. Greenspan set interest rates below their natural values for so long, that he created an unnatural economic environment, with obvious results. Any claim that this crisis would have been possible without his misguided interest rate policies is absurd.

Mar 12 08:02 AM

[pacman1947:]

Clive -- Interesting choice of words:
from Wiki -- An enigma (from Greek ανιγμα, plural enigmas or enigmata) is a puzzle, something mysterious or inexplicable, or a riddle or difficult problem.

Greenspan and Geithner, Bernanke, too, display unique sphinx-like characteristics while espousing arguments that can best be described as you have elegantly done.

Did Greenspan say that the private sector will be the one to solve the puzzle? Is that the answer to the riddle?

Then, my friend, why is the government trying to do their job? Are these mental giants the only hope and salvation for us mere mortals?

Mar 12 08:05 AM

[biomedlives:]

"Financial innovation" brought us subprime mortgages, credit default swaps, and negative amortization loans. In the future, I'd prefer to do without that kind of innovation.

Mar 12 09:29 AM

[Gem Hudson:]

Is the money any good? Weigh the money to the ounce of gold and if found wanting, the money is more paper than of any worth. They have been fractionalize the reserve of money out from an congressional I.O.U. bonds. Because print money is nothing but paper money until earned but if the money is worth their weight in gold, the money appreciate to the price for an ounce of gold. Appreciating money pay out less because earned money become capital money.

Burn, commie. Burn. Because you are not progressing for our prosperity but prosper for your agenda.

Mar 12 10:40 AM

[morph366:]

Re pacman's comments -

Perhaps what the author was suggesting by the use of the word enigma could be summarized by thinking of the financial world in terms similar to a Las Vegas act with large scale illusions - a more lavishly produced version of traditional showbiz routines involving smoke, mirrors trap-doors etc.

Mar 12 10:59 AM

[AndrewBaker:]

Government intervention in interest rates are a big cause of the present problem: as prudentinvestor says above, interest rates should be at a level where the lender can make a profit after inflation and taxes, and where the borrower has to consider what their use of the money will produce in real terms given the interest payments that must be made. When rates overshoot in either direction, you get harmful results, being unnatural asset price inflation on the downside (which is what has happened) or stifulling of economic activity on the upside, which is what will happen when quantitive easing has had its day and deflation is pushed aside. Governments won't let companies go bust right away, so we have to take the hit and re-build from now: they will prolong the misery with their intervention, and claim but for them it would have been worse. Plus ça change.

Mar 12 12:03 PM

[Jim Hawthorne:]

We now have a 'Financialized' Economy, mainly based on moving money around to facilitate mindless consumerism sated by overseas production; a kind of sad shell-game.

While the Financial Sector may well claim to be both Dynamic and Innovative, all I see is a tired old whore gleefully struggling into a new Wal-Mart Lyrca mini-skirt so as to once again hit the streets as the new and improved 'Miss Dynamic & Innovative'.

Yes, the poor old dear will require yet another bail-out.

Mar 12 05:54 PM

[PainfullyAware:]

Complexity Favors The Sinister.

"Financial Engineering" is a ruse.

Mar 12 07:36 PM