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19 DePaul Bus. & Comm. L.J. 1 (2020-2021)

handle is hein.journals/depbcl19 and id is 1 raw text is: Misaligned Incentives in Markets: Envisioning Finance That Benefits All of Society Dr. Ryan Clements1 The modern financial system is plagued by misaligned incentives that allow some firms to extract distributive profits, and direct wealth transfers in their favor, without producing anything of value, or im- proving society with enhanced employment or socially useful innova- tion. Many modern financial products and activities serve no underlying economic or productive purpose. The system is creating market intermediaries of astounding size, power, profitability, and ec- onomic and regulatory policy influence. Some financial firms ex- pressly profit from heightened interconnection and complexity, while others benefit directly from increased volatility. Yet we all bear the costs of this evolved financial system when it unravels due to its inter- connectedness with the real economy, and our increased reliance on markets. This article advocates for a financial system that is de- financialized, de-complexified, more transparent, and better orien- tated to productive ends in a way that benefits all of society, not just the firms who reap asymmetrical payoffs in a complex system, inter- mediate capital, create financial products, or run the plumbing in a system that ultimately serves them best. This article gives support to Hyman Minsky's money manager cap- italism hypothesis by showing how the financial system has evolved since the 2008 crisis because of misaligned incentives. In support of this contention the article profiles numerous post-crisis trends and events in financial markets where misaligned incentives emerge, in- cluding moral hazard in debt origination, how some financial firms benefit from volatility; the real winners of the GameStop meme stock saga; problems from price dislocations in credit exchange traded funds (ETFs) during the coronavirus pandemic crash; conflicts in the construction and composition of indices; market disruption from volatility-linked exchange traded products (ETPs); misaligned 1. Assistant Professor, Chair in Business Law and Regulation at the University of Calgary Faculty of Law. The author wishes to thank Professor Lawrence G. Baxter, Professor James D. Cox, Professor Elisabeth D. de Fontenay, Professor Arthur E. Wilmarth, Jr., Lee Reiners, the Duke Global Financial Markets Center, and Professor Bryce Tingle for helpful guidance and advice. Any inaccuracies are the sole responsibility of the author. 1

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