SMART MONEY

Palmer, the head of data journalism at the Economist, disagrees with those who see innovations like derivatives as responsible for recent financial bubbles and crashes, and he argues that the world needs even more financial innovation.

In a survey of monetary and financial history, the author examines the development of financial products. These include advances in peer-to-peer lending, which remove banks as middlemen in transactions that are made possible, in part, by mathematized search functions related to data mining. Palmer identifies companies across the world—e.g., Lending Club, Transfer Wise and Zest Finance—that are moving into areas where banks and other lenders provide either predatory or very little service to their customers. Nonleveraged methods of financing, providing cheaper short-term finance using nontraditional forms of collateral, are being developed for those qualified—e.g., student lending, payday loans, housing and retirement finance. Palmer traces these innovative methods to the tradition of financial mathematics begun as early as the 13th century with Leonardo Fibonacci. The author explores the respective pioneering contributions of both Fibonacci and 17th-century astronomer Edmond Halley. The former worked out how to calculate the “ ‘present value’ of cash flows—that is, how much a future amount of money is worth today, given that money can earn interest in the meantime,” and the latter helped develop the concepts of annuities and life tables for insurers. “The problem with financial innovation is not that products have original sin,” writes Palmer, “but that the financial system is programmed to change these products in ways which make them more dangerous.” As examples, he points to recent high-tech and mortgage bubbles. With state institutions apparently reaching their financial limits, the author sees plenty of room for expansion of innovations.

An intriguing argument that can bear further study.