Playing with fire

Financial innovation can do a lot of good, says Andrew Palmer. It is its tendency to excess that must be curbed

FINANCIAL INNOVATION HAS a dreadful image these days. Paul Volcker, a former chairman of America’s Federal Reserve, who emerged from the 2007-08 financial crisis with his reputation intact, once said that none of the financial inventions of the past 25 years matches up to the ATM. Paul Krugman, a Nobel prize-winning economist-cum-polemicist, has written that it is hard to think of any big recent financial breakthroughs that have aided society. Joseph Stiglitz, another Nobel laureate, argued in a 2010 online debate hosted by The Economist that most innovation in the run-up to the crisis “was not directed at enhancing the ability of the financial sector to perform its social functions”.
Most of these critics have market-based innovation in their sights. There is an enormous amount of innovation going on in other areas, such as retail payments, that has the potential to change the way people carry and spend money. But the debate—and hence this special report—focuses mainly on wholesale products and techniques, both because they are less obviously useful than retail innovations and because they were more heavily implicated in the financial crisis: think of those evil credit-default swaps (CDSs), collateralised-debt obligations (CDOs) and so on.

Russia's presidency

Vladimir Putin will once again become Russia’s president. Even so, his time is running out

THE point of elections is that their outcome should be uncertain. But everybody in Russia knows that Vladimir Putin, who is now prime minister, will be elected president on March 4th. This is not because he is overwhelmingly popular, but because his support will be supplemented by a potent mixture of vote-rigging and the debarring of all plausible alternative candidates.
The uncertainty will come after the election, not before. Developments in the past few months have shown that Mr Putin cannot rule his country indefinitely. The beginning of the end of his reign has begun (see article). Whether it is a good end or a bad one is up to him.

THE LIBERTARIAN

Thursday, March 1, 2012