The role of financial innovations in the current global financial crisis

Abstract

Several macroeconomic missteps such as global imbalance have

been blamed for causing the current international financial crisis.

Others have also blamed the excessive Wall Street greed for the

crisis. While the above factors may have played a supporting role

in the financial crisis, they were certainly not the primary causes

of the crisis. The root cause of the current international financial

crisis is the abuse of various innovative financial techniques and

new investment instruments that have been developed. In recent

decades, the pace of financial innovations has accelerated precipitously,

which in turn has driven the explosive growth in both the

size of global financial markets and its array of new financial

products and techniques. The current crisis is primarily the direct

result of the abuse of some of the latest and most innovative

financial techniques, most of which are too esoteric and technical

to be comprehended correctly by both government regulators and

academic economists. Many crises are usually a byproduct of the

cycle of financial innovations.