Tags: paul | volcker | financial | innovation disastrous

Volcker: Financial Innovation Disastrous

By Marc Davis   |   Wednesday, 16 Dec 2009 08:27 AM

All those mind-boggling financial products that nobody understood were no help to the U.S. economy, and led it to the sorry state from which it is now attempting to recover.

So says Paul Volcker, chairman of the President's Economic Recovery Advisory Board, in an interview with The Wall Street Journal, at the Journal's Future of Finance Initiative conference in London recently, according to a report in MarketWatch.

There is not a "shred of evidence" that innovation provided any benefit, said Volcker, who was Chairman of the Federal Reserve under Presidents Carter and Reagan.

Volcker pointed to credit default swaps and collateralized debt obligations as among the innovative financial products that, "took us right to the brink of disaster."

The economy "was quite good in the 1980's without credit-default swaps and without securitization and without CDOs," Volcker said.

Volcker was quick to assert, however, that he was not opposed to innovation per se.

"I do not want to stop you all from innovating, but do it within a structure that will not put the entire world economy at risk."

Summing up his thumbs-down view on previous innovations, Volcker said, "The most important financial innovation I've seen in the last 25 years is the automatic teller machine."

Once Warren Buffett agreed with Volcker. Credit default swaps "are financial weapons of mass destruction," Buffett once said.

But with a change in SEC regulations of the notorious CDS earlier this year, Buffett's Berkshire Hathaway has issued $4 billion in CDS, according to a Forbes.com report.

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