MBS- FNMA 4.5 price: 101-18

10-yr Treasury Yield: 3.50%

What Has Financial Innovation Ever Done for You?

This is a great article by Huffington Post contributor Eric Schurenberg (CBS MoneyWatch Editor in Chief) with this quote from Paul Volcker:

I hear about these wonderful innovations in the financial markets and they sure as hell need a lot of innovation. I can tell you of two – Credit Default Swaps and CDOs – which took us right to the brink of disaster: were they wonderful innovations that we want to create more of? 

…. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.

A few years ago I happened to be at a conference of business people, not financial people, and I was making a presentation. The conference was being addressed by a very vigorous young investment banker from London who was explaining to all these older executives how their companies would be dust if they did not realize the joys of financial innovation and financial engineering, and that they had better get with it.

I was listening to this and I found myself sitting next to one of the inventors of financial engineering who I did not know, but I knew who he was and that he had won a Nobel Prize, and I nudged him and asked what all the financial engineering does for the economy and what it does for productivity. Much to my surprise he leaned over and whispered in my ear that it does nothing. I asked him what it did do and he said that it moves around the rents in the financial system and besides that it was a lot of intellectual fun.
The most important financial innovation that I have seen in the past 20 years is the automatic teller machine… How many other innovations can you tell me of that have been as important to the individual?