Page 44 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.72, # 1, 2015, pp. 40-49

by banks are not debt but trust account or money transferred to bank in trust, and yield

from operation is divided between owner of money and manager (bank).

Thus profit/loss sharing will provide more equitable distribution of risks and

losses between companies, banks and depositors and so prevent the concentration of

risk, which will make the financial system more stable.

Debt rigidity causes a debt crisis not only during recession but during economic

growth too. So during economic growth when companies‘ incomes and asset prices

increase but they liabilities remain, the value of external financing becomes less than the

value of internal financing (i.e. comparative value of external financing decreases) that

encourage them to borrow more. And credit boom as it was suggested by the Austrian

school creates the prerequisites for debt crisis.

According to the Austrian business cycle theory the boom-bust cycle is

generated by excessive credit expansion by the banks which offer loans at low

interest rates. Due to the availability of relatively inexpensive funds, companies

invest in capital goods for "longer process of production" technologies, but later

when economy enters recession and borrowers‘ become unable to fulfill debt they

are forced to discounted sale of the capital assets which were purchased with such

bank credit (Mises, 1912).

Debt rigidity, credit crisis and Japanese crisis

Above mentioned allows us to look at Japan crisis in a new way. According to

Richard Koo this crisis is caused by balance sheet distress that forces the debtors to

pay down debt (Koo, 2011). He notes that when a debt-financed bubble bursts, asset

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