by Robert Shiller at FT.com:
Many appear to think that the increasing complexity of financial products is the source of the world financial crisis. In response to it, many argue that regulators should actively discourage complexity.
The June 2009 US Treasury white paper seemed to say this. The paper said that a new consumer financial protection agency be “authorised to define standards for ‘plain vanilla’ products that are simpler and have straightforward pricing,” and “require all providers and intermediaries to offer these products prominently, alongside whatever other lawful products they choose to offer”.
The July 2009, HM Treasury white paper “Reforming Financial Markets” similarly advocated “improving access to simple, transparent products so that there is always an easy-to-understand option for consumers who are not looking for potentially complex or sophisticated products.”
They do have a point. Unnecessary complexity can be a problem that regulators should worry about, if the complexity is used to obfuscate and deceive, or if people do not have good advice on how to use them properly. Complexity was indeed used that way in this crisis by some banks who created special purpose vehicles (to evade bank capital requirements) and by some originators of complex mortgage securities (to fool the ratings agencies and ultimate investors).
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