Not long ago, a Nobel Prize winner told a Congressional hearing that financial giants should stick to conventional products.
This raises a lot of questions. What impact would such a government restriction have on product competition? On product innovation? On consumers? On distributors? More on that later.
NU‘s report on the hearing, by Senior Editor Allison Bell, indicates that Columbia University economist Joseph Stiglitz made this suggestion in written testimony to the Joint Economic Committee in April 2009.
“Being too big to fail creates perverse incentives for excessive risk taking,” Stiglitz had said. “The taxpayer bears the loss, while the bondholders, shareholders, and managers get the reward.”
Stiglitz said giant banks should be “forced” to return to the “boring business of doing conventional banking,” and that too-big-to-fail insurance companies should be “limited” to selling “conventional insurance products, with well defined actuarial risks.”
Like it or not, insurance professionals have a stake in this issue.
For as long as I can remember, insurance advisors have wanted and needed new products–conventional and innovative; simple and complex.
Career agents rely on their carriers to provide both types and to allow outside brokering for products not available in-house. Independent agents and brokers expect their primary carriers to offer both types, but they routinely go wherever they must to locate a product to fit a unique customer’s need.
If the too-big carriers can only offer conventional products, the restriction will definitely affect the flow of all that business–and competition.
The nature of the impact will depend on the definition of “conventional” products. Stiglitz said a newly-formed Financial Products Safety Commission should identify which financial products are “safe enough” to be held or issued by the too-bigs, but who knows what definition it would use?
The impact will also depend on how closely the too-bigs adhere to conventional boundaries. This can be tricky, given that products often move from being innovative or off-the-beaten-path to conventional.