The Role of Financial Innovations in the Current Global Financial Crisis

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.