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Financial Innovation and the Distribution of Wealth and Income

40 Pages Posted: 11 Aug 2010  

Margaret M. Blair

Vanderbilt University - Law School

Date Written: August 10, 2010

Abstract

Now that Congress has passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators promulgating the rules under this new bill must tackle a major problem that the reform bill addresses only indirectly. This is the problem of excessive “leverage” – financing with too much debt. Leverage permeates the modern financial system. Leverage makes the system too large, in the sense that large parts of the system operate outside the reach of regulators, and the system has a tendency to create vastly too much money and credit, thereby causing asset bubbles. Asset bubbles create the illusion that the financial sector is adding substantially more value to the global economy than it really is, and expose the rest of the economy to too much risk. Moreover, too much of society’s resources go to compensate the people in the system who are causing this to happen.

Keywords: Financial innovation, Financial reform, Financial regulation, Leverage, Asset bubbles, Financial crisis, Income distribution, Wealth distribution, Shadow banking system, Money multiplier, Money markets, Asset securitization, Derivatives, Repurchase agreements, Capital requirements, Monetary aggregat

JEL Classification: E00, E4, E5, E6, G00, G1, G2, J00, J3, K2, R3

Suggested Citation

Blair, Margaret M., Financial Innovation and the Distribution of Wealth and Income (August 10, 2010). Vanderbilt Law and Economics Research Paper No. 10-22; Vanderbilt Public Law Research Paper No. 10-32. Available at SSRN: https://ssrn.com/abstract=1656451

Margaret Blair (Contact Author)

Vanderbilt University - Law School ( email )

131 21st Avenue South
Nashville, TN 37203-1181
United States
615-322-6087 (Phone)

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