Theoretical Analysis of the Effect of Creation of Credit during Financial Crisis

The occurrence of financial crisis between 2007-2009 is one of the most important economic events in the past decade. The main streams of economic thought (keynesian and Neoclassical) have developed different theories by resting upon their own intellectual school's principles. Because of their disregard of the institutional considerations of economic system, such as the role of creation of these studies validity, are not able to explain the main roots of crisis. This paper sees the creation of credit in a standard banking system has a basic role in creating a financial crisis. For evaluating this claim, first, the kinds of financial crisis are made known, and then the effect of the process of creating credit on the formation of financial circles is discussed. The theoretical model which is used is an economic growth model concerned with financial intermediaries (banks), which is established by means of adding monetary and banking sectors to Frank Ramzi's economic growth model. This model has been explicitly through optimum control theory solved and the dynamics of business trades and financial crisis will be explored. The research findings indicate that credit creation and unreal values are the main reasons of financial crisis. Therefore, the prerequisite for overcoming a financial crisis is the reliance of financial system on real values: an issue which is observed by Islamic banking.