New Financial Products

by Elaine Schwartz    •    Mar 19, 2010    •    706 Views

Instead of a garage or a laboratory, think of an office or a conference room. And, rather than a computer or an aircast, imagine a junk bond or a bank account.  All of these products, at one time were invented.  

In a recent Brookings article,  Robert Litan discusses the products created by financial innovation. His purpose, which we will look at tomorrow, was to reply to Paul Volcker’s negative view of recent financial innovation.  For now, let’s just identify a variety of relatively new financial products (inventions). 

Grouping the new products into the financial function that they affected, Litan includes the following: 

Payments:  ATMs, credit card expansion, debit cards

Saving: money market funds, indexed mutual funds, hedge funds

Investment: ARMs, home equity lines of credit, collateralized debt obligations

Risk-Bearing: futures options, credit default swaps

The Economic Lesson

Imagine a convex line on a graph with goods as the Y-axis and services as the X-axis. Then, because someone invents something–maybe the computer–the line moves outward because that society is able to produce more. The “rounded outward” line is called a production possibilities frontier. It displays maximum productive capability.  With innovation, productive potential typically increases. 



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