Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God's work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint? I hear about these wonderful innovations in the financial markets and they sure as hell need a lot of innovation. I can tell you of two - Credit Default Swaps and CDOs - which took us right to the brink of disaster: were they wonderful innovations that we want to create more of? You want boards of directors to be informed about all of these innovative new products and to understand them but I do not know what boards of directors you are talking about. I have been on boards of directors and the chances that they are going to understand these products that you are dishing out or that you are going to want to explain it to them, quite frankly, is nil. I mean wake up, gentlemen - I can only say that your response is inadequate.
Emphasis added, of course ... full quote is here. Very fun reading. But further on he gets specific about where the core of the problem is -- a total lack of innovation in things that matter.
As Mr. Volker says, it's hard to see how "financial engineering" has made things better for most of the customers or society in general:
The most important financial innovation that I have seen the past 20 years is the automatic teller machine, that really helps people and prevents visits to the bank and it is a real convenience. How many other innovations can you tell me of that have been as important to the individual as the automatic teller machine, which is more of a mechanical innovation than a financial one? I have found very little evidence that vast amounts of innovation in financial markets in recent years has 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. Indeed, it was quite good in the 1980s without Credit Default Swaps or CDOs. I do not know if something happened that suddenly made these innovations essential for growth. In fact, we had greater speed of growth in the 1960s and more importantly it did not put the whole economy at risk of collapse.
Again, emphasis added. But the point is key -- what, exactly, is the point of much of the frenetic behavior behind "financial innovation"? The people standing in the middle making it up tend to get rich. But I have always been told that capital markets help create wealth for society as a whole by enabling more efficient distribution of capital to productive purposes, as opposed to "planned economies". I don't have any doubt whatsoever that central planning of any kind can be horribly stupid about resource allocation -- I just don't have any evidence that this is confined to government planning. Seems to me that large companies are just as bad when it comes to discerning more productive ways to do things or creating new opportunities. But I digress.
If the "financial engineering" of the past 20 years hasn't added any value, or has only added minimal amounts, yet has resulted in huge wealth transfers to those responsible for creating the products, then it looks to me like a colossal waste of time and energy. And borderline theft. Any way you look at it, it should put the notion of ethical corporations to bed. There are a lot of ethical people on Wall Street, I've had the pleasure to work with many. But there aren't any firms I would cite as ethical in the way Volker is talking about -- willing to stand there and say "We've got new toys that go faster and faster, and new ways to move stuff around -- but it doesn't really add anything, so we won't do it, and we'll call our brethren out on it too". Simply put, it doesn't matter how ethical the people are if the corporate entity's incentives are limited to profits and competitive "league tables". Add in a few unethical, vicious people, and there's hell to pay. As we've seen.
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