Skip to footer

An FDA for financial products?

A new paper proposes that new financial products be put through screening by a federal agancy, similar to the Food and Drug Administration. Could this prevent future financial meltdowns?

|
Cheryl Ravelo/Reuters/File
In this file photo, a worker counts dollar bills being exchanged inside a money changer in Manila. Scholars at the University of Chicago are proposing that new financial tools be put though federal screening, but is the idea feasible?

Two University of Chicago scholars have posted an intriguing paper for establishing future "rules of the game" to reduce the likelihood of future financial market meltdowns.

To quote Posner and Weyl; "We propose that when investors invent new financial products, they be forbidden to market them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if and only if they satisfy a test for social utility. The test centers around a simple market analysis: is the product likely to be used more often for hedging or speculation?"

What strikes me here is to not forget the difference between partial equilibrium and general equilibrium.  When the FDA examines a new drug to see if it will allow it to be sold to the public, it conducts clinical trials to study the direct effect of this drug on those who are suffering from a medical condition.  This "treatment effect" is a reduced form parameter that can be estimated using conventional methods.  The FDA can get away with conducting partial equilibrium analysis.  

In contrast, in the case of new financial instruments , if we are serious about evaluating the net benefits of allowing such new products then we need to write down a dynamic general equilibrium model of how the economy would evolve with and without the new set of contracts.  This must be an example of the theory of the second best because I have always thought that opening up new markets can only increase our well being because we can always choose not to participate in the market.   The "theory of the 2nd best" always strikes me to be a big mess where economists haven't made much progress.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.
editor@csmonitor.com
Subscribe
Mark Sappenfield
Editor

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

Subscribe to insightful journalism

QR Code to An FDA for financial products?
Read this article in
https://www.csmonitor.com/Business/Green-Economics/2012/0215/An-FDA-for-financial-products
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe