Prescription Financial Products

NEW DELHI – One positive fallout of the financial crisis of 2007-201? is our realization that financial products can be as complex and dangerous as drugs. This realization has led to innovative ideas and experimentation with new laws, regulations, and institutions around the world.

In India, the government has announced the establishment of the Financial Stability and Development Council (FSDC) to address inter-regulatory coordination issues and provide macro-prudential supervision. In the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and new initiatives to monitor the safety of financial products, could alter the architecture of finance.

Several proponents of these new ideas have openly used the analogy with drugs. It has been argued that if, in 2007, the US had a Financial Products Safety Commission akin to its Food and Drugs Administration, the market would not have been flooded with “teaser” mortgages that entangled millions of households in chains of predatory credit.

What is especially sophisticated about the new ideas cropping up in the US, Europe, India, China and elsewhere is the recognition that, as with drugs and toys, it is impossible to say in advance which financial products we should allow and which we should not, because we cannot conceive of all the products that can and will come to market. Hence, the need for a judgmental body that can look at a new product and form an opinion about its desirability.