Financial innovations and hiding the risks

This weeks Economist has a feature and an editorial on financial innovation which got my mind going.

Financial intermediation is to act as the intermediary between savers and those who would use the savings.  It allows large projects to go ahead.

It also involves risk.  One is the risk of inflation and the other is the risk that the user of the savings will make unsatisfactory decisions which result in loss.  When you allow somebody else to make decisions involving your money  in most cases their interests will come before yours.

Can we really expect regulators to protect us from our own greed as well as the greed of those who work in the financial industry?

It may be that financial innovations work to hide the risk – from the original savers and most of the people working in the industry.  So long as things are going well innovations will work to hide the risks but when something goes wrong somebody will have to take the losses and those somebodies will probably be the original savers.

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