As for a clearly useful piece of recent financial engineering, I have to say I’m having difficulty with that one. The stuff I’m most excited about right now is decidedly low-tech: peer-to-peer lending, community development credit unions, opt-out pension contributions, that sort of thing. The whizz-bang stuff tends to be much less valuable.
I have to say I’ve been thinking about this a lot lately ever since having a conversation about the state of finance a few weeks ago and reading Liar’s Poker for the first time. The reality of the situation seems to be something like this: People need capital and in response to that the banking system has been built for tons of players to take little pieces of that capital as it gets from lender to borrower. The question that was presented me during my conversation (and I’ve been pondering since) is, “if you were to rebuild the financial system from scratch with only the knowledge that there are people who need capital, what would you do?”
Obviously I don’t know the answer, but one of the innovations Salmon mentions, peer-to-peer lending, seems like a pretty good place to start. Along those lines I’m pretty fascinated to think of where you could go with a site like Kickstarter, which essentially lets a bunch of folks “invest” in a project. Or look at celebrities and their ability to reach their audience directly and now raise money for their own projects rather than having to find financing. Interesting things are afoot. (Though certainly some more things will need to be thought through as we move from $5 “donations” to $5,000 “investments”.)
As for the second piece of insight, Salmon offers this up on regulation and the Fed:
As far as preventing a re-run of this crisis is concerned, that’s probably going to be the remit of the Fed, which is a better idea than giving that mandate to anybody else. But whether the Fed will be successful I don’t know: it’s hard to tell banks to stop making money, just because you don’t really understand how they’re making money.
I’d say that sounds about right. (I don’t have anything to add to this one other than it struck me as a very good point.)