Financial Innovation: Hurting or Helping the Poor?

One speech that was recently made by the chairman of the Federal Reserve Ben S. Bernanke had talked about having the need to find the right source of balance – to strive and reach out to attain the highest level of consumer protection while being able to do without removing the many beneficial effects. The beneficial effects that he had talked about was referring to consumer choice as well as access to credit’s responsible innovation. Then again, where is this balance which the regulators have been talking about? All throughout the history of America, many politicians have seen that their many constituents ended up seeing the credit access as something that is highly empowering as well as exploitative. At the moment, it is difficult to decide if making such credit available to a lot of subprime borrowers had ended up helping them or resulted in their being taken advantage of due to ignorance.

Historical Perspective

During the 1970s, there were many efforts made in order to deregulate the entire financial industry as it started in its modest beginnings. The many regulators have ended up repealing and even amending many laws which had restricted the activities of the bank. Some of these include the interest rates which they can charge on some loans or even pay on their bank deposits. Now that there was a lot of freedom with which they can use for their financial products, there are greater risks associated with these new potential buyers. The result was the experimentation on the new credit terms for these different customers. And because of this, there was now even greater access to credit. It was only recently that this type of freely flowing credit ended up being seen as a sort of social progress. Because of financial innovation, there were more people coming from the middle and lower income brackets who finally ended up having their own access to this credit which was essential in starting their own businesses or in buying their own homes (and any other thing that was also associated with attaining the American Dream).

Why This, Why Now?

While the loans which people received turned out to be the expensive ones that was seen as the only trade-off of these financial institutions. It was also a requirement that was stipulated in order to continue making these risky loans. And a lot of these high-risk customers may also try to abstain and refrain from taking out some expensive debts and just try to live within what they can afford. Also, there it was before the time when financial institutions ended up making these loans available – a time when there were high interest rates to be considered as usurious, so the poor people ended up turning to loan sharks just so they could get credit.