Some time ago I wrote:
What I would love to hear are some examples ... 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?
There were a few good suggestions in the comments thread (which I felt still fell below the threshold of significance I had established). But now Steve Waldman has risen to the challenge and posted a very useful and thoughtful piece on financial innovation. Most of the examples he offers seem useful and valuable--"venture capital and angel investing, the democratization of access to financial information (e.g. Yahoo! finance), the democratization of participation in financial markets (e.g. the growth of internet and discount brokerages that offer easy access to a wide variety of stocks, bonds, and exchange-traded derivatives, both domestic and international"--although I would need to know a lot more about some of these before I can be sure. I will leave it to the readers to judge whether any of his examples pass my test of significance.
Steve also offers thoughts on what makes for good and bad financial innovation. This I thought was the most useful part of his post. You really have to read it, as I cannot do full justice to it (short of copying and pasting the whole thing).
My question to him would be this: OK, now that we have collectively gotten over our finance fetishism, and are willing to accept that some innovations can be bad, what does this mean for regulatory and supervisory approaches?
For example, it is one thing to say that good innovations are those that are transparent, and another to figure out how policy sorts out the degree of transparency of innovations and how policy makers treat innovations of different kinds. Does this line of thinking imply that some degree of paternalism in regulation is unavoidable ("no, you cannot issue this particular complicated derivative!")
(By the way, I do not quite agree with the nitpicking that Steve does in his post, but I will leave that aside because it may get in the way of the more interesting and important conversation.)