When innovation is the enemy

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We read transcripts of old Ben Bernanke speeches so you don’t have to:

Seventeen months ago, Federal Reserve Chairman Ben Bernanke spoke to a Fed-sponsored conference in Georgia about Regulation and financial innovation. It’s a typical Fed-chairman speech (read: zzzz), but one paragraph is worth zeroing in on:

Financial innovation has great benefits for our economy. The goal of regulation should be to preserve those benefits while achieving important public policy objectives, including financial stability, investor protection, and market integrity. Although financial innovation promotes those objectives in some ways, for example by allowing better sharing of risks, certain aspects of financial innovation–including the complexity of financial instruments and trading strategies, the illiquidity or potential illiquidity of certain instruments, and explicit or embedded leverage–may pose significant risks. These risks should not be taken lightly.

One can read this many ways in the light of recent events. For our purpose, though, let’s look at how Bernanke uses the word “innovation.” It could “provide great benefits”; it could “pose significant risks.” All leaders say they love innovation, but a little thought about the ramifications of an innovation (beyond “we’ll make a lot of money”) is essential.

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