Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

772 Money, Bank Credit, and Economic CyclesFinally, we must make a few important clarificationsregarding the concept of “innovation” in the financial marketand the essential difference between so-called “financial innovations”and the technological and entrepreneurial innovationsintroduced in the sectors of industry and commerce.While any technological and entrepreneurial innovationadopted successfully in commerce and industry should bewelcome from the beginning, since such changes tend toincrease productivity and better satisfy the desires of consumers,in the financial sector, where activities should always takeplace within an unchanging framework of stable, predictable legalprinciples, “innovations” should initially be viewed with suspicion.Indeed, in the sphere of banking and finance, innovations maybe considered positive when, for example, they consist of newcomputer equipment and software, channels of distribution,etc. However when “innovations” directly influence the roleessential legal principles must play in providing the inviolableframework for the functioning of the entire market, thesechanges will tend to inflict serious harm on society, whichshould reject and crack down on them. Hence it is a bad joketo term a “financial innovation” that which is ultimatelydesigned to hide frauds and to circumvent general legal principlesvital for the healthy functioning and maintenance of amarket economy. 74Financial products conform to the different contract typeswhich have traditionally developed within the law, and the74 There are also financial innovations which, like takeover bids, fulfill alegitimate function in the market and do not in themselves violate anytraditional legal principle, but which become corrupted in the presenceof fractional-reserve banking and credit expansion unbacked by realsaving. A concise, yet exhaustive analysis of the financial “innovations”which have emerged as a result of the poorly named process of “financialderegulation” (which has largely consisted of reducing the complianceof the financial sector with traditional legal principles) appearsin Luis Barrallat’s book, La banca española en el año 2000: un sector entransición (Madrid: Ediciones de las Ciencias Sociales, 1992), pp.172–205. We should point out that many of these financial “innovations”arise within the fertile environment of feverish speculation (“irrationalexuberance”), a consequence of the credit expansion fractional-reservebanking fuels.