An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets

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An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets

An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets

Eric A. Posner

University of Chicago – Law School

E. Glen Weyl

University of Chicago; University of Toulouse 1 – Toulouse School of Economics

February 23, 2012

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University of Chicago Institute for Law & Economics Olin Research Paper No. 589


Abstract:     
The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if they satisfy a test for social utility that focuses on whether the product will likely be used more often for hedging than for speculation. Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial speculation before deregulation in the 1990s.

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3 Responses to “An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets”

  1. Sharon says:

    This is a very bad idea. The FDA is incredibly incompetent and corrupt. They would sell out to the highest bidder just like they do with drugs, food and medical devices. Having a FDA for the financial market would be like having a wolf watch the sheep. The power lies with the people. Only the people can change this country but still 20% of the population doesn’t have a clue and the other 20% is just waking up. We need 80% of the population.

  2. Ken Haven says:

    It’s a good idea, unfortunately the FDA is a terrible example.

  3. Sharon says:

    Hi Ken,

    Yes I agree it would be good if we had a government that actually did their job. It’s sad and I’m a liberal but I don’t trust our government anymore after what has happened under Obama. I plan on voting for him but still I have little faith in restoring our country or making it better. We need more people involved and more people that get it. Take care and you’re right, good idea, bad example.

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