Two professors from the University of Chicago - Eric Posner and Glen Wyle - think that new financial products should be vetted by a government agency before being allowed to be sold, sort of an FDA for financial products. And, the FDA is their model. Now, it is true that the FDA has had some problems, but, on the whole, it has been a benefit to we citizens over the years.
The authors don't have a good opinion of Credit Default Swaps; they think it's basically gambling that does nothing good for the financial system. Had they been subject to review and approval by an FDA-like agency, the Great Recession may not have been so great.
The idea of reviewing new financial products by a government agency is not new. The CFTC did it in the 20th century until Congress changed the rules. The FTC and Dept. of Justice use a similar process in deciding on proposed mergers.
How would the process work? In the case of derivatives, the authors say
"Regulators would distinguish the demand for the derivative’s beneficial uses -- diversification and insurance, supplying information to the market -- from the demand for its harmful uses -- avoidance of taxation and regulation, speculation and high-frequency trading. These assessments would help the agency determine whether the financial instrument should be licensed, restricted or prohibited."
It's not a bad idea, but I won't live to see something like this happen.
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