This collective volume is about financial innovation, its history, and its potential to cause or to prevent financial crises. In assigning blame for the recent economic crisis, many have pointed to the proliferation of new, complex financial products - mortgage securitization in particular. The prominent economists from academia, policy institutions, and financial practice who contribute to this book, however, argue that it was not too much innovation but too little innovation and the lack of balance between debt-related products and asset-related products that lies behind the crisis. Preventi ... More

This collective volume is about financial innovation, its history, and its potential to cause or to prevent financial crises. In assigning blame for the recent economic crisis, many have pointed to the proliferation of new, complex financial products - mortgage securitization in particular. The prominent economists from academia, policy institutions, and financial practice who contribute to this book, however, argue that it was not too much innovation but too little innovation and the lack of balance between debt-related products and asset-related products that lies behind the crisis. Prevention of future financial crises neither requires nor is assisted by regulation that stifles financial innovation, but by a policy and regulatory framework that helps broaden the informed use of financial innovation and its positive impact on the economy. The book, which includes two contributions from Robert Shiller as well as a discussion of Shiller's "MacroMarkets" tool, considers the key ingredients of financial innovation from both academia and industry; historical and recent examples of financial innovations; the positive potential but also the risks of financial innovation, with special emphasis on housing; rationality- and behavioral-based viewpoints on the causes of the recent crisis; the link between the cycle of financial innovation and financial crisis; and how future innovation-linked crises might be avoided.