The blogosphere is ablaze with reactions to an op-ed in the Wall Street Journal about Securitization.  In light of the upcoming roundtable on securitization with Cathy Shakespeare next Tuesday, I thought I would point people toward one of the more interesting perspectives, on the legal blog The Volokh Conspiracy, and related articles on whether financial innovation is good or bad.  Reuters’ Felix Salmon says it’s bad, while Robert Shiller says it’s good. There are also some excellent discussions of the differences between a liquidity crisis and a solvency crisis.  As it says on the Volokh blog:

If you saw the essential crisis as one of liquidity, this meant that Fed-injected funds into the markets would allow the necessary breathing space for market participants to discover and incorporate new information that, in a true liquidity crisis, would show that things were not as bad as feared and the panic could stop. A liquidity crisis, in other words, is a crisis of information. Full information will either show investors (or depositors) that the institution is not in trouble, or that a guarantor stands behind it. Full information stops the panic; the injection of funds is to provide a space for full information to develop.

I strongly recommend these thoughtful articles, but I would like to add my accountants’ two cents.  Financial innovation, even when exceedingly complex, seems likely to be good if the goal is actually to share risk in better ways, provide people with access to liquidity and capital they couldn’t otherwise get, and so on–even for securities that seem on the face of it no better than gambling (like weather derivatives).  But innovations that are constructed entirely to circumvent regulatory requirements or get off-balance-sheet financing impose a lot of costs (like complexity) without many societal or economic benefits.

This is a point that is pretty obvious to accountants, but the economists don’t place all that much emphasis on the distinction