of external financing becomes less than the value of internal financing (ie 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 lt; # justify gt;
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 recession that forces the debtors to pay down debt (Koo, 2011). He notes that when a debt-financed bubble bursts, asset prices collapse (figure 1) while liabilities remain, leaving households and businesses balance sheets underwater. In order to regain their financial health and credit ratings, households and businesses to repair their balance sheets are forced to pay down debt and refuse new borrowing. Moreover, Koo notes that even after companies and households balance sheets are fully repaired they refuse to borrow money and he connects it to debt trauma .we think that as borrowing assumes the fulfillment of debt in future, Japanese lending crash is caused not by deterioration of balance sheet, but by fears of companies that their future incomes and assets value will be insufficient to repay debt: as companies income and asset value decline during recession, debts in periods of recession don t decrease; and it is downward debt rigidity that explains why private sector in Japan pays down debts and refuses new borrowing. Banks also during recession are less willing to lend as banks because of risks to be unable to pay debts to depositors tighten the requirements for debtors and so decrease the lending.low lending activity in Japan is caused by downward debt rigidity that on the one hand, makes companies less willing to borrow, and on other hand, makes banks less willing to lend.the only way to overcome the reluctance of both firms to borrow and banks to lend is profit participating financing. It will prevent fears of companies to face loan default and so will make them more willing to take loan. Banks also will be more willing to lend as participation of debtors in profit/loss of banks will diminish the fears of banks to face insolvency to depositors and thus will make banks more tend to lending.
Figure 1. Nikkei index and the dynamics of land prices in Japan
rigidity and banking problems in US and euro area countries
debt rigidity crediting crisis
Debt rigidity problem is urgent for US and European countries too. As it can be seen from figure 2 the share of securities in banking assets in US is 19%, in some euro area countries this figure is about 35%. Taking into consideration record low interest rate in US and euro area (figure 3 and 4) it is obvious that expected rise in interest rate will have negative effect on banking sector, because rise of interest rate will decrease the value of securities banks hold and so will make difficulties for them to fulfill their obligations towards depositors and other creditors.
2. Share of debt securities in total assets of banking sectors in US (July 2 014) and euro area (2012), percentage of total assets, 2012
3. Federal Funds Rate, end of period,%
4. ECB interest rate
Conclusion
to wage and price rigidity debt rigidity restricts flexibility of markets and makes them unable to adjust quickly and adequately to the shocks in economy. To make real sector more flexible and resistant to shocks, companies liabilities similarly to income and assets price should be flexible. Liability flexibility can be provided by profit/loss sharing. Profit participating financing will strengthen stability of banks too as money attracted by banks are not debt but trust account or money transferred to bank in trust.rigidity negatively influences lending too. On the one hand the companies, because of the fear to face insolvency on loans, reduce demand for credits. On the other hand banks also because of risks to face insolvency to depositors tighten the requirements for debtors. Thus the reluctance of both firms to borrow and banks to lend may be overcome by profit participating financing.
Debt rigidity problem is urgent for US and European countries too. Taking into consideration near-zero interest rate in US and euro area it is obvious that expected rise in interest rate will decrease the value of securities banks hold and so will provoke banking crisis.
References
