An interesting article in Business Week by Peter Coy, asks “can we protect consumers (from financial innovation) and still be creative?” [Incidentally — Business Week was put up for sale by McGraw Hill last week. There were few buyers.  Business Week’s famed investigative reporting has reportedly been hamstrung…].

His answer?   

In spite of the public’s mistrust, entrepreneurs and academics are plunging ahead. They’re working on ideas they hope will help the consumer borrow more safely and build wealth more reliably. Some are ambitious, like reducing homeowners’ exposure to declines in local housing prices. Others are fanciful, like an electronically rigged wallet that becomes harder to open when your bank account is low, an idea from the Massachusetts Institute of Technology.

Let us remember Joseph Schumpeter’s memorable phrase: Creative destruction. All creation involves destruction.  Old things have to die in order for new ones to be born. That is one interpretation. Another is: All creative things can be used destructively. It is not inherent in the innovations, but in the people who use them.  

Sub-prime mortgages in principle made housing affordable even for low-income people. A great idea, if used properly. But it was used to enrich unscrupulous thieves. It is not the fault of the innovation, but of those who misused it.

Financial innovation will continue. As it does, hopefully those who pioneer in it will remember that the foundation of capitalism is in creating long-run sustainable value for people,  in creating customer margin as well as company profit margin. The “I’ll be gone, you’ll be gone [before the earthquake we created happens]” principle that drove much financial innovation in the past is hopefully dead and buried.

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