How “Financial Innovation” In US Financial Markets Stymied Real Innovation

After all the financial shenanigans by Wall Street that have been uncovered over the past decade, it’s a wonder we aren’t all back to stuffing our mattresses with bills.

[SOURCE: (c) IMTFI, used under Creative Commons license]

Even after the busts that revealed how many stock market analysts were in bed with the investment banking arms of their firms.

Even after Enron was found to be manipulating energy markets causing consumers to pay much more than necessary for electricity and gas.

Even after the ridiculous mortgage-backed securities fraud, ratings agencies being in bed with the banks, and systemic abuse of sub-prime mortgages.

Even after AIG fraudulently insured nearly the worlds’ entire financial market with complex credit default swaps, many times over their ability to pay such claims.

Even after Wall Street firms were complicit in helping European Union countries such as Greece hide the size of their debt, putting the whole Eurozone single currency at risk.

Even after Wall Street firms were implicated in using leverage from derivatives to increase food futures prices so artificially high that it caused food riots in many countries.

Even after Morgan Stanley was shown to be dishonestly handling the Facebook IPO, only telling a select few about an earnings downgrade.

Even after banks were shown to be manipulating the LIBOR index, one of the most fundamental pricing indexes for many loan products.

Even after banks were implicated in ripping off local governments bycolluding to rig bids on municipal bonds.

Now we are presented with a study showing that high frequency computer-algorithm based trading is siphoning billions out of regular investors profits by crowding out their ability to make fair market trades.

A lot of money has been sucked out of the general economy by “financial innovation”– innovation that, for a while, was luring our best and brightest minds out of school to chase these big bucks that served no real economic benefit to society as a whole.

Now things seem to be changing again. Wall Street is seeing a brain drain as then best and brightest seem to be coming back to more mundane innovation industries such as software startups. Maybe we’ll even start making things in this country again that raise everyone’s standard of living rather than just “innovating” new ways to rip off the general public.

Do you see a new ethic coming, and perhaps a rebalancing of the role of the financial industry in our economy?


  1. […] Not all innovation is good. In fact, companies should only focus innovation that creates and strengthens competitive advantages, and optimize everything else through best practices or outsourcing. […]

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