I don’t have a problem with financial innovation, per se. None of the following were “bad” products for the first several years of their existences: securitized mortgages, credit default swaps, option ARMs, etc.
The problem is that the nature of Wall Street is to push every innovation (which may be perfectly useful on a limited scale) to the point that it starts to fail. And recently we had a whole bunch of these pushed to the edge and failing all at the same time.
A simple “30-year fixed-rate mortgage” was once considered a major financial innovation. Would it be better if we eliminated mortgages (or credit cards?) altogether? I think not.
I don’t think the problem is innovation. The problem is the degree to which these innovations are foisted upon folks who should have no exposure to them.
