Financial Evolution And Innovation

The ascent of money has been essential to the ascent of man.

Financial innovation is not the work of mere leeches intent on sucking the life’s blood out of indebted families or gambling with the savings of widows and orphans.

It is an indispensable factor in man’s advance from wretched subsistence to the giddy heights of material prosperity that people know today.

Every minute of every hour of every day of every week, someone, somewhere, is trading. New financial life forms are evolving. For example, in 2006, the volume of leveraged buyouts (takeovers of firms financed by borrowing) surged. “Securitization”, whereby individual debts like mortgages are ’trenched’ then bundled together and repackaged for sale, pushed the total annual issuance of mortgage backed securities, asset-backed securities and collateralized debt obligations. The volume of derivatives - contracts derived from securities, such as interest rate swaps or credit default swaps (CDS) - has grown even faster. Before the 1980s, such things were virtually unknown. Private equity partnerships have also multiplied, as well as a veritable shadow banking system of ‘conduits’ and ‘structured investment vehicles’ (SIVs), designed to keep risky assets off bank balance sheets.

The latest financiall innovations had brought about a fundamental improvement in the efficiency of the global capital market, allowing risk to be allocated to those best able to bear it.