common feature of all financial crises. Looking at a dataset comprising 14 advanced countries between 1870 and 2008, Schularick and Taylor (2009) find that "for the most part, financial crises throughout modern history can be viewed as "credit booms gone wrong� (Eichengreen and Mitchener, 2003)�. The most important variable in predicting financial crises, they find, is past credit growth, a result which is robust even when they control for other key macro variables. In a separate paper Taylor (2012) goes further, stating that: "Over 140 years there has been no systematic correlation of financial crises with either prior current account deficits or prior growth in public debt levels. Private credit has always been the only useful and reliable predictive factor."
These results would seem to validate the theories of economists such as Minsky. What are the effects of financial crisis on the economy? As outlined earlier, an increase in lending by banks increases purchasing power and so aggregate demand in the economy, and this leads to a boom either directly through increases in lending to businesses or consumers, or indirectly due to the effects of lending on assets prices and therefore on wealth and consumption. As a result there is a strong causal link between increasing debt and falling unemployment. However, crucially an increase in debt beyond the earning capacity of the economy is unsustainable.
fig. 4.3- Change in Debt andEmployment since 2992
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