The future of financial innovation

In the wake of the sub prime meltdown, the rapid pace of financial innovation in the past decade has been criticized. Innovation proceeded so fast that regulators were caught on the wrong foot. But the solution clearly does not lie in throttling innovation. No society can progress without innovation. Innovation creates new possibilities. And by their very nature, new things are risky. But that does not mean we go back to the past. Consider the following:
§ Credit cards, if they are misused can cause considerable problems. Does it mean we must ban credit cards?
§ Online payments can be very risky in a world where hackers abound. Does it mean we must stop online payments?
§ High speed transport can result in major casualties if there is an accident. Does this mean we must go back to primitive modes of transport?
§ Virtual collaboration tools are reducing the personal touch and leading to behavioural dysfunctions such as superficiality, multi tasking, inadequate concentration while doing a job and so on. Does it mean we must stop the use of email and social networking?
§ Derivatives can be and have been used by some unscrupulous individuals. Does it mean we should ban their use and thereby take away an important means of transferring risk?
§ Securitization was used ingeniously by banks to minimize capital backing. Does it mean we should ban securitization and take away an effective means of making illiquid portfolios liquid?
§ Speculators fuelled a housing boom. The boom was partly facilitated by innovative mortgage instruments. Does it mean we must put a blanket ban on these instruments and deny the aspirations of millions of people who want to own a home?