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A One-Handed Economist?

by Elaine Schwartz    •    Mar 20, 2010    •    TIME TO READ: 1 minute

Let’s not look at CDOs, SIVs, ARMs, TIPs or ATMs. Nor do we need specifically to consider credit default swaps, securitization, hedge funds or venture capital. Instead, we can go to the question that Robert Litan asks at the end of his 47 page Brookings paper on financial regulation:

“What deserves preemptive screening?”

During the past century our government has decided which products need screening before entering the market and those that will receive regulatory oversight only after a problem is identified.  Pharmaceutical innovation is the perfect example of prior approval. By contrast, car, train, and plane makers regularly implement progress without a regulator’s restraint.  Only when they have a problem have government regulators intervened.The question we now face is how to regulate financial innovation? Before or after?

In his paper, Litan expresses concern that prior restraint of new financial products could retard the progress that has fueled GDP growth, created convenience, and facilitated monetary distribution. With cost/benefit analysis of an array of new financial products from the past three decades, he illustrates the good, the bad, and the so/so. Disagreeing with the Volcker Rule, Litan then asks if the cost will be too great if innovation is constrained by prior approval. 

Your opinion?

The Economic Lesson

For every decision, there are costs and benefits. Defining cost as sacrifice, economists encourage all of us to assess cost and benefit when making a decision–to say, “On the one hand…but then on the other….”  For that reason, Harry Truman once asked for a one-handed economist.    

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