Innovating ourselves into a hole
Financial insiders are really “spooked,” says Paul Krugman in The New York Times, because they “don’t understand the complex financial system they created.” Blame “financial innovation,” a phrase that should now “strike fear into investors’ hearts.” Not all innovation—it’s nice that you can “withdraw cash on weekends”—but especially “the alphabet soup of CDO’s and SIV’s, RMBS and ABCP.” Instead of spreading risk, as advertised, they “spread confusion” and lured investors into bigger risks than they realized. We let the banking industry innovate, and “what it did was to innovate itself, and the rest of us, into a big, nasty mess.”
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