A New Approach to the Cause and Progress of Financial Crisis for the Management of a Firm and the Nation

Yongshik Choe, Hyun-jung Kim

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In this paper, we try to reveal the principles that cause the processing stages of economic crisis as follows. First, most of economic crises are caused by a financial crisis because financial variables have the biggest variation in the economy as the principles of credit creation and credit destruction work altogether. Second, most of financial crises go through three stages of manias, panics, and crashes as Kindleberger clarified. Third, manias are caused by the time-shift of demand from the future which increases further the current demand and raises the prices of real estate and stocks. Fourth, panics are caused by the hollowing-out of demand which is caused eventually by the demand time-shift, with bubbles broken. Fifth, crashes are caused by the principle of credit destruction which decreases the money amount by the credit multiplier, resulting in a financial crisis. When this principle of financial crisis is understood well, it would be possible to foresee the development of the financial crisis and to prevent some damages such as a bankruptcy due to a sudden lack of liquidity. Then the crisis management would be performed better than before. This paper would contribute to a successful business management and to the evolution of economics.

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Round Building

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