08/29/2009 05:12 am ET | Updated May 25, 2011

Ah, Wall Street. Seeing The Real You at Last.

Well, I sailed through the storm
Strapped to the mast,
But the time has come
And I'm seeing the real you at last.

--Bob Dylan, "Seeing the Real You at Last"

Innovation. It is a lovely word that teases the mind with the notion of expansive possibilities. Pushes out the frontier. A win-win game. Just as Americans once expanded westward to relieve social tensions, we are now exhorted to have a rather imprecise faith in the notion of technological change to deliver us from our current troubles. Embracing that starship to unlimited possibility and deliverance requires a faith that cannot be easily refuted: Who, after all, is against progress?

David Noble, who has written so powerfully about this in his series of books including America by Design, Religion of Technology and Beyond the Promised Land, has explored this mythology of redemption and salvation through changes in technique and deference to undefined dreams of "possibility." It is time to apply his perspective to the religion of financial innovation.

We have seen the financial sector, with its massive resources and access to the best minds of public relations, work to create what Stuart Ewen calls "spin." The sector has busied itself with presenting new financial techniques, guilded as glories of 21st century innovation. In the deregulatory era of finance, we have been ever-so-persistently encouraged to draw the comparison between developments in financial products and the great leap forward in social uses of computers and the Internet, or advances in biomedical research. Former mathematicians, physicists, and computer scientists redirected their energies and Ph.D. tenacity to the domain of finance. Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future.

Skeptical questioning -- "Where are the benefits to be found?" -- was frowned upon or ignored. "Just doesn't get it," the whisperers would say. The skeptic was discredited with the insinuation that he or she was either 1) jealous of those who were making money and progress at the same time, or 2) had fallen down like a tired horse and just could not keep up with the new breed of thoroughbreds on Wall Street. After all, what kind of human spirit would get in the way of progress?

The reason I bring forward the notion of "spin" is that I sense that the great benefits of financial innovation were not self-evident, and that some form of intimidation or coercion was needed to keep the genie of doubt in its bottle. If a great Wall Street luminary were actually forcefully questioned, could he really convince grandma and you and me that he was making the world a better place? The point of the exercise, the spin, was to create deference to this process, to deter questioning and create social license, to make what those rocket scientists were doing appear as though their work was not merely profitable but something that would benefit us all. It was presented like a free option to the public: Wall Street pays these guys and "shazam!" They do things that make us all better off. No reason to get in the way of that, or even suggest that your Congressman or friendly bank regulator keep an eye on the proceedings.

The subtle message was, "Get out of the way." Such was the Kool-Aid poured into our glass by the financial press and pundits. That capital avoidance and tax avoidance and regulatory evasion were involved in offshore and off- balance-sheet methods was rarely emphasized, as the notion of innovation was paraded like a badge of valor.

Then we had the crisis. The side effects and spillovers and bailouts reminded us that what we had allowed to unfold was not a free option on progress but something that had a downside, too. It's funny how a crisis changes your perceptions. Derivatives are weapons of mass destruction, said Mr. Buffett, who owns large blocks of stock in many of the financial weapons manufacturers. Paul Volcker claims now that the only worthwhile innovation he can cite is the ATM machine. (And the banks have doubled the fees for using them post bailout!).

Despite these recent protestations, I am witnessing the lingering hangover of deference to so-called "innovation." It permeates the debate on regulation. We hear that getting in the way of new technique may cause more problems than it solves. Or that the innovators can always outrun the regulators. Or, and this is my favorite, that nothing you do to stifle these new derivative products like credit default swaps will (ominous music in the background) lead to "systemic risk." Systemic risk is the new stun-gun phrase to impart dread to those who would tamper with this delicate machine.

Malarky. This is all code for defer to the wishes of those who make money from these techniques.

Financial engineers on Wall Street are employed to make money for Wall Street firms and themselves. There is no hidden code that says they will design their products to align private and social benefits and costs. That is precisely where a healthy role for regulation and laws and enforcement can be envisioned. At the same time, it is important not to be romantic about that vision, though. Regulatory policy often does not live up to the romantic appeal, as theories of collective action and regulatory capture have illuminated.

My takeaway is distinctly unromantic. It is that, devoid of these religious-like connotations, innovation simply implies the use of a new method or technique. It can be harmful or it can be helpful. Let's keep score.

For Robert Johnson's ideas on how to re-tool innovation to work for the rest of us, view the complete post at NewDeal2.0.