NPR Planet Money podcast on financial innovation and high-frequency trading

The participants were myself, Felix Salmon, and Mike Konczal (of the excellent Rortybomb) and the link is here.  I haven't heard the final editing but at the time I thought the questioners did a very good job.  They started off with the question of which financial innovations of the last twenty-five years — if any — have been of real value.

Comments

Great line-up. I can't wait to listen to it.

That was very interesting, albeit not very decisive. I would very much like to read a more thorough and comprehensive explication of Professor Cowen's proposals for regulatory improvement and indeed a more detailed written exchange among the parties.

Interesting as it might have been, however, the hosts seemed amateurish and the whole production seemed of somewhat less than professional quality.

The hosts are really amateur.... this woman wants to "stop the tape" to figure out who's talking? They also seem like they're spending more time with their simplistic summaries of what you're saying than what you're actually saying. Despite how much I'd like to hear your thoughts, Tyler, I'm not sure I can finish this.

Bloomberg nails it near the end saying, "It's all about what you think financial innovation is [or what 'financial innovation' means]." The entire debate seems a matter of semantics. Cowen accepts some "simple rule" against leverage, while Salmon counters that leverage need not be simple.

In a heavily regulated business like finance, gaming the regulations is innovative and potentially very profitable. Gaming regulations needn't generate any additional wealth but may only redirect entitlement to wealth toward the gamers. I can't disagree with Salmon on this point. Most libertarians seem to agree, in the abstract, that regulation tends most to prompt this gaming and its unintended consequences.

Salmon also argues for a precautionary principle while Cowen seems to argue for the caveat emptor form of market regulation, but Cowen makes this exception for "excessive leverage". Salmon wants to walk his elephantine regulatory ambition through this needle of a loophole, and he seems to have ample room.

I agree with Cowen that suffering the pitfalls of "inadequate" regulation is preferable to the excessive restraint of a strict precautionary principle, so I wonder why Cowen wants the exception. Let bankers leverage as much as they like, as long as they suffer the losses. Let Cowen lose his bank deposits too. It's only money.

I'm not being facetious here. Let the bank deposits go. Let the state pension funds invested in AIG's shares and other derivatives go too. Do we need these securities propped by "leverage regulation"? I suppose a decent, reasonably equitable social safety net is preferable. Both are state interferences in the market.

We certainly need a willingness to extend further credit when losses are written off. In a recession with unwinding leverage, the recovery requires more leverage to replace the winding leverage.

The further we advance into an innovative future, with more and more factors of production organized in innovative (risky, experimental) ventures and with consumers free to choose between a dizzying variety of alternatives, even shifting preferences wildly practically from day to day, the more important this not-so-precautionary principle becomes.

But maybe it's not so politically palatable.

Seems fine to me. It's amateurish, but it's a podcast. I'm gonna have to shut it off if the hosts keep stopping the tape to repeat what Tyler or Felix just said.

Perhaps next time each speaker could say his or her name before saying anything, to clarify things.

I would say Exchange Traded Funds have been a positive financial innovation. They allow ordinary investors to diversify in ways they never were able to before.

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