Financial Innovation

I've said it before and I'll say it again, we don't need more financial innovation! I'm glad both Pauls, Volcker and Krugman, are on the same page.

Ask a banker why he/she is entitled to a multi-million dollar bailout and the answer is this: its the only way to attract and retain talent in a dynamic industry like finance. And without talent, there would be no financial innovation.

So explain again how financial innovation has benefitted us (the general public)? Well, I am told that financial innovation has made the capital markets more efficient, price discovery has improved and risk has can be better managed by distributing them across different parties through the use of derivatives.

So let me ask you again, what has financial innovation done for society? Let's look at specifics, let's look at good and the bad:

The Good:
- ATM Machines: No more waiting in line at the bank teller.

The Bad:
- Subprime Mortgages: You get a giant loan to buy the house of your dreams and you don't even have to prove you can afford it! Oh wait, you think you can afford it because you've been lured in by teaser rates (adjustable rate mortgages) that go from 2% to 20% after the first two years.

- Alt-AA Mortgages: Same as the Subprime, it's a little harder to get because you have to make up a more a believable income when you fill in the forms. But don't worry, no one really checks on what your REAL income is.

- Asset Backed Securities (ABS): Package a bunch of these mortgages together, pretend they make money and sell them off a sucker (preferably a bank too big to fail)

- Collateralized Debt Obligations (CDO): Package a bunch of ABS's, take them off your company's balance sheets, complicate things by dumping them in a Special Purpose Vehicle (SPV), tell everyone that it's 100% safe because its bankrupcty remote, and just mint money!

- CDOs Squared: CDOs of CDOs. Now things have gotten so complicated, neither the buyer nor seller really understands what they own or are trying to sell. But does it really matter when money is made so easily?

- Naked Short Selling; Removal of the Uptick Rule: You get to drive a proper brick and mortar business into bankrupcty by continuously short selling and driving the price down. Bankers say its better for us because it makes pricing more efficient.

- Derivatives: It's a bet on whether the price of something else goes up or goes down. There are two ways you get to profit from it consistently, i) you can predict the future because you are God; ii) you have information that no one else has (don't ask me how he got it).

- Credit Default Swaps (CDS): Get insurance companies and treasury deparments to write banks a blank check. Hey, what's a $50 billion write-down when AIG, the Federal Board of Reserve, Bank of England and the Swiss National Bank will bail you out regardless? Wait, it gets even better, you get to write $50 billion off AND pay yourself a bonus.

Banks should be boring utility companies providing credit that greases the wheel of the economic engine, no different than a gas or water company providing us with things essential to the running of a modern day society. All other functions are unecessary, dare I say, even parasitic.