> The increased friction that would be created by simplifying financial instruments across the board would probably facilitate a lot of rent extraction for people working in finance
You can have rent extraction through complexity as well as through friction. It's not obvious to me that a more complex, deregulated system is more efficient than a regulated, simpler system. I know that is the dichotomy that is usually talked about - a balance between efficiency and morality, but the sort of marginal increases in GDP we're talking about could easily be wiped out by other factors, for instance complexity that the clients can't understand, and greater instability in the general economy.
I agree that regulation is an important part of controlling information asymmetries, obfuscation of risks etc, and that regulation can mean better signals and be more efficient than only relying on the reputation of institutions.
What I was saying though, is that a blunt approach of declaring that financial instruments can only have some specific measure of complexity would eventually limit the resources available to new projects and businesses. The tangent about rent extraction was a distracting and motivated by my suspicion that a lot of people simply resent incomes in the finance industry, and want to see them make less money regardless of net impact on the economy. However, just as a baker counter intuitively makes more when the price of flour increases, less fine-tuned and efficient financial markets could ultimately make more money for the people working in finance.
I think that there is a belief that complex financial instruments inefficiently insert extra steps into the flow of finance and extract rent from those manufactured inefficiencies. Yet, a better reading is that they circumvent some inefficiency elsewhere in the financial system, and the people who implement that gain in efficiency are able to extract a little of the decreased waste until they too are circumvented.
You can have rent extraction through complexity as well as through friction. It's not obvious to me that a more complex, deregulated system is more efficient than a regulated, simpler system. I know that is the dichotomy that is usually talked about - a balance between efficiency and morality, but the sort of marginal increases in GDP we're talking about could easily be wiped out by other factors, for instance complexity that the clients can't understand, and greater instability in the general economy.