Tuesday 12th June 2012 – 14:15 to 15:15

Speaker(s): Daniel Awrey (Law, University of Oxford)

Innovation. The word is evocative of ideas, products and processes – the printing press, the light bulb or penicillin, for example – which have somehow made the world a better place. In the frothy days leading up to the global financial crisis, many viewed financial innovation as unequivocally falling into this category. Underpinning this view was often an unwavering belief in the self-correcting nature of markets and their consequent optimality as mechanisms for allocating society’s resources. This belief, in turn, exerted a profound influence on how we regulated modern financial markets. The crisis has revealed the folly of this market fundamentalism as a driver of public policy. It has also exposed conventional financial theory as fundamentally incomplete. Amongst other omissions, the conventional ‘demand-side’ view of financial innovation blinded policymakers to a host of pressing regulatory challenges ranging from uniformed contracting, to fraud and other opportunistic behavior, to the unprecedented build-up of systemic risk. The objective of this paper is thus to start us down the path toward a more complete theoretical account of the nature, sources and private and social welfare implications of financial innovation. In the process, it also aspires to move us incrementally toward a more constructive equilibrium between the insights of financial theory and how we conceptualize and pursue the objectives of financial regulation.

Part of the OMI Seminar Series