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.