Who Needs a Financial Products Agency?

It is very clear to any keen observer that financial engineering does not necessarily result in products with social value. In many cases, those who work actively to design sophisticated financial products are not always certain of their real effects on markets or other products. Staring from this realization, it is unsurprising to me that many well-intentioned people are keen to ensure that financial engineering is limited to producing products with proven social value. Gretchen Morgenson of the NYT presents that same argument and features the paper by Eric Posner and E. Glen Weyl of the University of Chicago. The two professors state that there is a distinction between the real economy and the financial services industry and this may justify regulation of the latter and not the former.

The summary of their proposal contained in this paper is that the creation of a Financial Products Agency is necessary o ensure that there is adequate testing of the social value of new products before release to the market. To my mind, the reasoning about the distinction between real markets and the financial services industry is impeccable but the proposal for creating an agency for determining social value is less convincing. Indeed, I think that it is a very bad idea that is incapable of putting to effect. My reason for this skepticism is that the determination of social value would be difficult to determine because market participants would not define it in the same way. In addition, placing a regulatory committee to determine what social value a product would have is a very nebulous endeavor that would introduce subjectivity to these decisions.   

The only way for society to ensure that socially useful products continue to thrive is to communicate to institutions that generate these solutions that they will bear the costs of any failures. It is not necessary to require clairvoyance on the part of an agency or body.