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Recommended Readings: Finance

 

The Summer of '07 And The Shortcomings of Financial Innovation
by Joseph R. Mason | Journal of Applied Finance, Spring/Summer 2008

Various  financial innovations developed over the past several decades failed in the summer of 2007, as the sub prime crisis got under way. The $9 trillion of US securitizations that spawned  various instruments including asset-backed securities, mortgage-backed securities,  collateralised debt obligations, asset-backed commercial paper, structured investment vehicles, and credit default swaps  had grown into a monster of an unregulated and conflicted market. The author argues that financial innovations invariably  create conditions of asymmetric information that can lead to financial crises and panics. Also, financial innovations that are not fundamentally diversifying, market completing, or capital deepening will not survive to become mature financial market products. He concludes that finance academics should spend more time focusing on financial efficiencies and less time focusing on Wall Street hype in order to better understand which  financial arrangements are beneficial to savers and borrowers, therefore promoting economic growth.