Summary
The price of financial innovation can be like the ends of a pendulum. I would compare it to say research in medicine - except that there are no clinical trials for financial products. Just as thalidomide created major deaths/deformaties relating to the birth of children in the 1960's so CDO's without adequate testing have created mayhem in the first years of this century. I draw the parallel between thalidomide and CDO's because in both cases there was said to be great innovation without adequate backup research and testing. Bernanke in the referred article speaks of the good of financial innovation. I agree - but then clinical and proper testing of financial products is equally necessary for financial products. This is the emphasis of my analysis below.
Analysis
1. The present era of finance has seen the erosion of real wealth on a unprecedented scale.
2. The blame for this has been put on accounting standards and financial innovation.
3. The blame to my mind is wrongly placed.
4. Financial innovation has to be properly tested. Untested products which result in losses cannot put the blame on accounting standards which are but a measuring rod of accounting gains and losses.
5. The entire economy is dependent on the accounting fraternity to properly measure the contribution to wealth of each economic wealth creating entity.
6. When the wealth is created and incomes increase the credit goes to the marketers, engineers and innovators. When the destruction takes place the chorus is that the measuring rod is wrong.
7. What is required is proper research before half tested financial products are unleashed like missiles on the economy. Only then will the economy grow in a steadfast manner. The problem lies not with accounting but with the innovators who do not test their products properly.
