Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
... attitude, but that institutions are intrinsically past-bound, without any need of motive or attitude to explain that fact.

That is, institutions are regular habits of behaviour and legitimising folkviews regarding those habits that provide regularity to social interactions which allows people to function. They are at their most fundamental level supported by our need to make ourselves understood if we want to mobilize any social activity -- they provide the grammer and syntax to social interactions that make people's actions comprehensible to others.

Institutions are intrinisically part of those things we take for granted as we make the routine decisions of our day to day life.

Institutions are not completely rigid, but institutional change normally involves a substantial investment in effort and quite often an intrinsically risky appeal to sovereign authority to resolve disputes over what rules are applicable ... so there has to be a more than trivial pay-off to changing institutional rules, and there is of course no guarantee that a "socially optimal" choice will be made when there is a fight over the institutional rules in force in a given setting.

Further, once a change is achieved in a given social setting, it is easier to win change in a neighbouring setting by appeal to the precedent of the change that has already been established, rather than winning support for a novel institution, so institutional change often runs in "tracks", as decisions are won based on innovations already established in what are seen as similar social settings.

And of course, the more dramatic the institutional innovation, the more dramatic the unexpected consequences of the change are likely to be.

Indeed, a major appeal of this mix of all-equity finance and right-to-output finance is the institutional conflict between debt finance and Islamic prohibitions on fixed debt obligations ... this is a structure of finance that can be quite readily approved as not falling foul of those prohibitions.

As far as why banks are not aggressively pursuing this form of financial partnership, note that under existing capital adequacy requirements, the same amount of money put into fixed nominal debt obligations of the same credit rating would be allowed to back more obligations than this form of direct participation stake in revenue or profits or output. That is, the fixed interest obligation is assured income until it can no longer be serviced, at which point it collapses, while this form of finance degrades gracefully when faced with system-level adverse impacts (like, say, a synchronized global recession mixed together with an international financial meltdown).

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Feb 22nd, 2009 at 03:09:21 PM EST
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