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Recurring Financial Crises—The Causes

In: The Next Financial Crisis and How to Save Capitalism

Author

Listed:
  • Hossein Askari

    (George Washington University)

  • Abbas Mirakhor

    (International Centre for Education in Islamic Finance (INCEIF))

Abstract

A financial crisis is manifested as a crash in any number of asset prices or as a banking crisis and a freezing of credit. These crises have serious economic fallout—sharp and prolonged decline in economic output and a spike in unemployment—as an impaired financial system spares no sector of the economy and deleveraging takes time. There is no shortage of explanations for financial crises: moral failure, fraud, Ponzi schemes, lax regulations, supervision and enforcement, prolonged period of low interest rates, government bailouts of “too big to fail” institutions enabling excessive risk taking, economic shocks, animal spirits, rapid rise in debt, and the list goes on. To our mind, the real culprits of financial crises are (i) preeminence of interest-rate-based debt contracts and (ii) fractional reserve banking.

Suggested Citation

  • Hossein Askari & Abbas Mirakhor, 2015. "Recurring Financial Crises—The Causes," Palgrave Macmillan Books, in: The Next Financial Crisis and How to Save Capitalism, chapter 2, pages 16-34, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-54437-7_2
    DOI: 10.1057/9781137544377_2
    as

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