The Role of Financial Innovations in the Current Global Financial Crisis

Abstract

Several macroeconomic missteps such as global imbalance have\n\nbeen blamed for causing the current international financial crisis.\n\nOthers have also blamed the excessive Wall Street greed for the\n\ncrisis. While the above factors may have played a supporting role\n\nin the financial crisis, they were certainly not the primary causes\n\nof the crisis. The root cause of the current international financial\n\ncrisis is the abuse of various innovative financial techniques and\n\nnew investment instruments that have been developed. In recent\n\ndecades, the pace of financial innovations has accelerated precipitously,\n\nwhich in turn has driven the explosive growth in both the\n\nsize of global financial markets and its array of new financial\n\nproducts and techniques. The current crisis is primarily the direct\n\nresult of the abuse of some of the latest and most innovative\n\nfinancial techniques, most of which are too esoteric and technical\n\nto be comprehended correctly by both government regulators and\n\nacademic economists. Many crises are usually a byproduct of the\n\ncycle of financial innovations.

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