Post by unlawflcombatnt on Apr 6, 2007 3:22:18 GMT -6
Below are excerpts to a great article from "naked capitalist" titled Is Financial Innovation Really As Beneficial As It's Supposed to Be?.
The article questions just how beneficial all of the new financial "innovations" really are, and whether their negatives may outweigh their positives.
"Is Financial Innovation Really As Beneficial As It's Supposed to Be?
A post from a reader, "Toothless Fed," argues that the latest wave of financial innovation has produced "profit grabs" by the few at the expense of the many, Ponzi schemes, and an erosion of traditional values like prudence....
Other people are coming to the similar conclusions, they simply aren't always stating them as emphatically....
Economist Hyman Minsky observed that creditors become more lax about lending standards during times of stability. He divided borrowers into three types: the upstanding sort that can pay principal and interest; speculative borrowers (or "units"), who can pay interest but have to keep rolling the principal into new loans; and "Ponzi units" which can't even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky's comment:
Over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight of units engaged in speculative and Ponzi finance....
So according to Minsky, during protracted periods of stability and growth, lending becomes so lax that more and more funds go into speculative activities, until central banks start raising interest rates and the dodgier schemes (and the asset prices that escalated due to their operation) collapse.
Now the argument that no one is willing to make (yet) is that all this financial innovation is in fact disguising (or perhaps even promoting) what Minsky would call "speculative units" and "Ponzi units."....
The full article can be found at
www.nakedcapitalism.com/2007/03/is-financial-innovation-really-as.html
The article questions just how beneficial all of the new financial "innovations" really are, and whether their negatives may outweigh their positives.
"Is Financial Innovation Really As Beneficial As It's Supposed to Be?
A post from a reader, "Toothless Fed," argues that the latest wave of financial innovation has produced "profit grabs" by the few at the expense of the many, Ponzi schemes, and an erosion of traditional values like prudence....
Other people are coming to the similar conclusions, they simply aren't always stating them as emphatically....
Economist Hyman Minsky observed that creditors become more lax about lending standards during times of stability. He divided borrowers into three types: the upstanding sort that can pay principal and interest; speculative borrowers (or "units"), who can pay interest but have to keep rolling the principal into new loans; and "Ponzi units" which can't even cover the interest, but keep things going by selling assets and/or borrowing more and using the proceeds to pay the initial lender. Minsky's comment:
Over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight of units engaged in speculative and Ponzi finance....
So according to Minsky, during protracted periods of stability and growth, lending becomes so lax that more and more funds go into speculative activities, until central banks start raising interest rates and the dodgier schemes (and the asset prices that escalated due to their operation) collapse.
Now the argument that no one is willing to make (yet) is that all this financial innovation is in fact disguising (or perhaps even promoting) what Minsky would call "speculative units" and "Ponzi units."....
The full article can be found at
www.nakedcapitalism.com/2007/03/is-financial-innovation-really-as.html