Whichever way the Paulson plan goes, it is clear that we are in for a period of heavily regulated finance. The questions are: what type of regulations and how heavily will they be administered?
Many commentators have argued that the problem is not one of inadequate or insufficient regulation and that returning to pre-1980s style heavy-handed regulation would be one of the worst mistakes we could make. According to this line of argument, sapping financial innovation would be very costly.
If so, these advocates owe us a bit more detail about the demonstrable benefits of financial innovation. What I would love to hear are some examples such financial innovation—not of any kind, but of the kind that has left a large enough footprint over some kind of economic outcomes we really care about. What are some of the ways in which financial innovation has made our lives measurably and unambiguously better?
If I had asked this question a little over a year ago, I suppose I would have been hearing a lot about how collateralized debt obligations and structured finance have allowed millions of people to purchase homes that they would not have been able to afford otherwise. Sorry, but you will have to come up with some other examples now.