The Financial Times reports today that investment banks, including Goldman Sachs  and Barclays Capital, are inventing new schemes to reduce the capital cost of risky assets. Financial innovation, which brought about the current economic crisis, is far from dead.

Instead of shifting risk to the economic agents and institutions most willing and able to bear risk, financial shifted risk to the imprudent, the reckless, and the fraudulent. As recent history showed us, this may cause costly financial crashes, defaults and bankruptcies. As Willem Buiter pointed out in his Maverecon blog, financial innovation does not only distribute risk in the economy inefficiently, but also increases the total quantum of risk as it increases the likelihood of abnormal times—panics, manias and crashes—occurring, and the scope and severity of financial crises.