An FDA for the financial world?

Gretchen Morgenson, a 2002 Pulitzer Prize winner, writes a must-read column in the New York Times Sunday business section. She often sheds light on malfeasance in the financial services industry. She has a habit of noting that big banks scream against government involvement and regulation, except when they need the government to bail them out because their derivative bets went bad.

Sunday's column involved an interview with two University of Chicago professors who recently published a paper with a thesis that suggested aspects of the banking industry should be regulated by an organization like the U.S. Food and Drug Administration.

Basically, each new derivative - credit default swaps, for example - would be evaluated like a new drug to measure the speculative nature and possible adverse side effects of the product.

The link to the column is here.

The link to the paper, via the University of Chicago Institute for Law & Economics and the Social Science Research Network, is here.

Eric A. Posner is a law professor and Glen E. Weyl is an assistant economics professor.

In the abstract, they suggest:

"The financial crisis of 2008 was caused in part by speculative investment in complex derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. We propose that when firms invent new financial products, they be forbidden to sell them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations."