Eric Posner's Bloomberg Op-Ed Advocates an FDA for Securities

An FDA for Securities Could Help Avert Crises
Eric Posner and Glen Weyl
Bloomberg.com
April 2, 2012

In February, Mary Schapiro, chairman of the Securities and Exchange Commission, said the agency is looking for ways to rein in high-frequency traders. That is, the people who use computer algorithms to buy and sell derivatives at lightning speed to make instantaneous profits.

High-speed trading can waste resources and cause market disruptions. So the commission is right to look into high-speed trading. But it must realize that this is only one issue at the edge of a vaster problem that requires significant government intervention.

The larger challenge is that much of the U.S. financial system is devoted to wasteful activity -- useless trading that advances no important economic interest but, at the same time, creates a dangerous risk of economic crisis. The way to control this wasteful speculation is to require government approval of all new financial products, subjecting them to the same sort of examination and regulation that the Food and Drug Administration applies to new medicines.

Faculty: 
Eric Posner