The story of the financial crisis - and not knowing what to doSeminar on banking reform at DIIS last weekOne of the key prerequisites of the global financial crisis was the widespread belief in the manifold benefits of financial innovation. Financial innovation would generate liquidity at low cost; distribute risk away from the core of the financial system; create higher yield alternative assets for pension funds; and promote the ‘democratization’ of finance. In fact, however, financial innovation did not generate any of these golden outcomes. And yet, current regulatory reform processes don’t challenge this grand narrative about the benefits of financial innovation. Why? Because academics, journalists and politicians still lack a convincing, alternative narrative about finance and its proper role in the global economy. This was the main argument presented by Professor Karel Williams and Professor Ewald Engelen at a seminar on banking reform at DIIS last week. With two interlinked presentations Williams and Engelen addressed the technical and political difficulties that prevent an effective redirection of banking and finance. In the first part they highlighted the huge discrepancy between the stories of the benefits of financial innovations such as securitization and credit default swaps that dominated in the boom and their actual effects on the financial system fully revealed by the bust. In the second part they explored the political difficulties of establishing democratic control of elites and the limits of technocratic benevolence after a major knowledge failure. |
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