Innovation and the Global Financial Crisis: Systemic Consequences of Incompetence

Intense innovation has changed the fi nancial sector dramatically in the last 30 years. Rajan (2005) identifi es four main drivers: regulation-deregulation, which generates ‘circumventive’ product development (Holland, 1975); institutional change caused by deregulation; globalization made possible by information and communication technology (ICT); and general technical change mainly due to ICT. Benefi ts of innovation are commonly regarded as an open-ended, linear function of innovation volume and intensity: ‘faster diff usion means a higher societal return’ (Frame & White, 2004, p. 118). Yet we know that practically all innovations also have less benefi cial consequences, which often are systemic in nature, and this reduces the net value for users and at least some members of society (see chapter 4 in this book).