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US Re-Regulation of Financial Markets Without Undermining Innovation

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The US is currently attempting to deal with the biggest financial crisis since the Great Depression. How could the government re-regulate financial markets without undermining the needed innovative capacity of financial institutions?

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Re-regulation of financial markets

Financial innovation refers to development of new financial products designed to cater to client's needs such as offsetting risk, provide financing, etc. During 2007, multiple financial products were developed, like adjustable-rate-mortgage, the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps (CDS). The use of these products increased manifold over a period, which led to the crisis. The CDS enabled an infinite amount to be wagered on a finite value of housing loans outstanding. Hence, financial crisis is a perfect example of an innovation which was not used as per its intended use and which lead to a disaster.

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The United States re-regulations of financial markets without undermine innovations are examined.