Comparison of Cyclical Theories
Having reviewed the major theories of financial crises, we turn now to a comparison of their similarities and differences. Despite the widely different times and places upon which these theories were based, there are certain common approaches among at least a majority of the writers. These approaches taken together do not constitute a theory, but do indicate a certain perspective on how to approach the task of empirically testing the various theories. In addition, they provide a convenient framework that can be used to focus on the particular differences among the theorists, and to highlight specific theoretical questions to be investigated.
Without such a basic perspective it would be difficult to know how to approach the data. As Schumpeter has said, "Raw facts are, as such, a meaningless jumble." 1 One needs to know how to organize the data, what questions to ask, and on what variables to focus.
That perspective consists of two major points. First, financial crises are the result of the normal functioning of the economic and financial systems over the course of the business cycle. Endogenous processes take place near the peak of the expansion phase of the business cycle, in particular, the deterioration of the financial condition of the business sector, which set the stage for a financial crisis. This point may be termed the general business-cycle perspective.
Second, the crisis is brought about because of developments in the demand and supply of credit. The key to understanding why the crisis occurs is to be found in the way the supply of credit falls short of the demand. Especially important here is the role of the commercial banks. The crisis itself is a response to these developments which involves a disruption to the financial system. This point is referred to as the credit-market perspective.
With this general orientation, it is possible to approach the data in a coherent