Innovating our way to a financial sector meltdown

The global financial crisis that occurred in 2008 can be viewed as a systems accident that was fueled, in part, by innovations in the financial sector.

The term “innovation” is often viewed in a positive light. But, in an essay in the new Winter 2009 issue of the MIT Sloan Management Review, Peter Cebon of the Melbourne Business School looks at the financial crisis that occurred in the fall of 2008 as a systems accident –and, specifically, a systems accident that was fueled in part by innovations in the financial sector. Notes Cebon:

While innovation can be extraordinarily valuable, innovations, whether in genetically modified organisms or financial instruments, can contribute to systems accidents. Consequently, an innovation economy needs a strong and intelligent regulatory regime that aggressively manages systemic risks.

3 Comments On: Innovating our way to a financial sector meltdown

  • dankeldsen | January 15, 2009

    Very interesting take. When I began focusing on innovation within the Perot Systems Innovation Lab, my frequent quip was that innovation is desired in almost every area of business, but you need to keep an eye out for “creative accounting.” I’d primarily meant internally focused creative accounting ala Enron, Worldcom, etc., but turns out that the creative financing via collateralized debt was an even greater danger than the earlier financial scandals.

    Balancing the potential risks with benefits is always a bloody good idea with regards to innovation, and for novel financial arrangements, a bit better oversight and analysis of the ramifications would certainly seem to be warranted.

    Cheers,
    Dan Keldsen
    Co-founder and Principal
    Information Architected, Inc.
    “Is your information architected for innovation?”

  • Shahid Atique Malik | April 13, 2009

    A lot was done in the financial sector that was legal, but not right and not correct. Someone made the interesting observation that more women at the top would have kept a check on this. Rather like women at a rugby bash, or at a baseball game.

    But on a more serious note, all cultures in the widest sense have weaknesses that can be fatal. And the obsession of the Anglo Saxon culture with legality over what is just, may have played a very large part in this. Ironically, Rawls would have a lot to say on this. In the cultural context of the US and Britain, the simplicity of property rights and legal dealings has it’s very strong points. But we may have discovered it’s near fatal flaws too.

    Regards

    Atique Malik PhD
    Edwardsville, IL 62025

  • kuklera | August 27, 2009

    Regulating the behaviour of innovative activitities is a good idea and a prerequisite for ‘landing’ the innovation in society. However, in our capitalist economy, the owners of the innovative technologies will make so much more money, being able to outspend any regulator in investments in knowledge and modelling capabilities. Next to that, a regulator, by definition, is reactive, which means pretty late in this high speed economy. This leaves ethics, particularly corporate responsibility, as the only viable option for regulation, ie. self regulation based on moral grounds.

    Regards,

    Adriaan Kukler PhD
    Creative Industry Sofa
    Amsterdam

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