Indonesia | Economics

Sunday, October 19, 2008

Clive Crook on the crisis and innovation

Growth economists will tell you that the key to long term growth is productivity improvement, driven by technical changes and innovations. Economic history suggests that technical changes create boom-and-bust cycles as people adapt to the new technology. One can say that the crisis is a consequence of technical changes and innovations.

So, what of the present crisis? Does it suggest the utter failure of market forces, hence a need for an overall greater regulation in the financial market -- and not just those related to the specific problems at hand? FT's Clive Crook on the crisis' impact on the regulatory regime:
There is a broader point. The financial crisis was indeed a failure of regulation. The system was overwhelmed by innovation. Regulators are going to have to catch up and, you could say, try to hold innovation back. But finance is not a normal industry. The question to ponder is this: in which other industries will curbing innovation - also known as market forces - strike governments or voters, in the US or anywhere else, as a good idea?

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  • This is called the disruptive innovation (refer to christensen disruptive tehory) in which that the new innovation which in this case taken place in the finance sector didnt really bring any improvement to the previous situation but a destruction instead.

    Well upheavals are very common in innovation, however some researches found out that out of new products exist, 30% of them will fail soon. Since finance sector doesnt have so many innovation as other sectors do, so 1 innovation called "Derivative", in logic there is a 30% chance that it would fail. Since there is only one innovation regardless the name it bears (say it options, future, index, link, mutual fund, etc), then once the 30% of failure takes place, the whole system will fall down. Take a look at the credit market and its link to the stock market then to the economic state.

    By Anonymous dave, at 10/24/2008 06:54:00 pm  

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