Justin Fox makes a pretty remarkable statement:
The only recent financial crises (other than the current one) that were seriously associated with financial innovation were the 1987 stock market crash ("Black Monday") and the Long-Term Capital Management crisis. Black Monday was in no small part caused by portfolio insurance, while LTCM used pretty much every new derivative it could get its hands on in its doomed "arbitrage" strategy. However, it's worth noting that Black Monday and the LTCM crisis were also two of the least damaging financial crises in the post-Depression era.
In the grand scheme of things, financial innovation has largely been a sideshow in modern financial crises. The real lesson of modern financial crises is that the most severe crises are those that are caused by the bursting of a housing bubble. See e.g., Reinhart and Rogoff (2008):
[A]ll major financial crises have been associated with some financial innovation or another.Really? How about, for example, the Asian financial crisis? That principally involved old-fashioned foreign exchange markets. Or how about the S&L crisis? Nope, the main culprits there were residential and commercial mortgages. The Japanese financial crisis of the 1990s? That involved nonperforming mortgages and commercial loans that soured after the massive real estate and equity bubble burst—and there was definitely nothing "innovative" about Japan's financial sector, that's for sure. The LDC debt crisis? No again—that involved syndicated sovereign debt, which is a centuries-old practice.
The only recent financial crises (other than the current one) that were seriously associated with financial innovation were the 1987 stock market crash ("Black Monday") and the Long-Term Capital Management crisis. Black Monday was in no small part caused by portfolio insurance, while LTCM used pretty much every new derivative it could get its hands on in its doomed "arbitrage" strategy. However, it's worth noting that Black Monday and the LTCM crisis were also two of the least damaging financial crises in the post-Depression era.
In the grand scheme of things, financial innovation has largely been a sideshow in modern financial crises. The real lesson of modern financial crises is that the most severe crises are those that are caused by the bursting of a housing bubble. See e.g., Reinhart and Rogoff (2008):
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