[jolepp]

...Eric A. Posner, a law professor, and E. Glen Weyl, an assistant professor in economics, argue that regulators should approach financial products the way the F.D.A. approaches new drugs.

The potential dangers of financial instruments, they argue, “seem at least as extreme as the dangers of medicines.”

They contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all — those that serve only to increase speculation, for example — would be rejected, the two professors say.

“It is not the main purpose of our proposal to protect consumers and other unsophisticated investors from shady practices or their own ignorance,” they wrote. “Our goal is rather to deter financial speculation because it is welfare-reducing and contributes to systemic risk.”

It is a refreshing rejoinder to the mantra on Wall Street — and in some circles in Washington — that financial innovation is always good and regulation is always bad. Bankers often argue that complex financial products are among America’s great inventions.

But given that exotic instruments played a central role in the credit crisis, it is worth questioning the costs and benefits of such financial innovations. The paper by Mr. Posner and Mr. Weyl provides a basis for what could be a productive dialogue.

“We tried an experiment with a very radical form of deregulation that has very little basis in sound economic science,” Mr. Weyl said in an interview last week. “What we’re advocating is to do the best we can to put the genie back in the bottle.”
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http://www.nytimes.com/2012/04/01/business/how-a-financial-products-agency-c...investors.html