Even if there is no misuse, should we not be concerned with incentives to create more complex instruments that can only be understood by a handful of educated people, leading to obfuscation of risks under the guise of innovation? Are we not seeing too many “once-in-a-hundred-year” accidents? III. Who benefits from innovation?
Up to now, I have deliberately remained vague on the objectives of innovation. Why do financial institutions innovate? Innovations are better ways of doing business, but better at what? Broadly speaking, the core function of financial institutions is intermediation.