The functional perspective of financial innovation and real estate

Abstract

Two broad schools of thought dominate theories regarding financial innovation. One seeks to explain the process of security design in terms of relatively static organizations creating and promoting their wares and services competitively, generally in response to shifts in technology, taxes or regulation. The other approach stems from an understanding of the basic universal functions the financial system is called upon to deliver. I argue that the latter perspective is a more robust and adaptable framework for explaining the process of innovation. Furthermore, this functional perspective explains why cyclical shifts in certain sectors such as real estate stimulate the need for new and innovative financial products.