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[T478]The Global Credit Crunch

by Mark Stubbles, Mar

Unless you've been living on another planet for the past year, you've probably heard about this global financial crisis the “credit crunch”, you've probably heard about the negative impact its having on the worlds largest economy (the US) and therefore the world economy. Banks and financial institutions mainly in the US and UK are having to be rescued by governments.

Just exactly what is a “credit crunch”?

A credit crunch happens when banks begin clinging to their money rather than lending it out. The result of this is that fewer people are able to get loans, credit cards and mortgages so things that we would buy if we had those credit facilities – such as houses, cars, holidays and so on – are no longer an option.

House prices fall because no one can get finance to buy them, inflation rises because shops are having to spend more to make the same profit and it all spirals out of control.

Why did it happen?

The USA led the way for the crackdown on credit because their mortgage market went into a severe slump. The US had a massive subprime mortgage market and houses where rising in value so fast lenders couldn't keep up with the demand, these lenders saw an opportunity to make more money by lending to people with low incomes or bad credit histories. These borrowers were a greater risk so the lenders could charge more in interest, they weren't too worried if people couldn't pay, because of the rising houses they would be able to reposes or foreclose on the house and get their money back. But then it all went horribly wrong as more and more of these people found they couldn't afford to pay their mortgages more and more houses were put back on to the market, this made prices drop and the banks started losing money.

Banks from all over the world had invested in this market and they all started to lose money, others just couldn't get the money to lend to their own customers. The international money markets don't work as many believe, most people think when they go to the bank for a loan or mortgage it is the bank themselves that put up the money, this is not the case the bank borrow the money they lend you from pension funds and investment banks like Lehman Brothers.

Due to the sub prime crisis these usually sources have either dried up, can't or won't lend, many banks won't even lend to each other because their not sure who's share price is going to tumble next. The result of this is that only people with exceptional credit history are able to get loans, credit cards and mortgages.

Should I be worried?

That largely depends how much you rely on credit, whether you hold any shares in any banks and equally as much on how good your credit history and credit score are. It's still pretty easy to get a mortgage in the UK but only if you have a flawless credit history.

People who don't are going to find the going a lot tougher, whether that's for a mortgage or a credit card or loan.

What's going to fix it?

There are many factors and circumstances that must all fall into place before this situation improves. For instance the rate of inflation needs to fall along with interest rates, the stock market needs to be more buoyant, overseas economies particularly in America need to be stronger and we need more disposable income and better pay to enable us to buy more goods and services. In the main, it's nothing we as individuals can do; it's all dependent upon global finances and the cost of oil which has started to come down in recent weeks.

?Credit Crunch? is the name given to the global crisis that has been affecting the financial markets for the past year. The crisis is causing many people to get further into debt ? the only winners appear to be the debt management companies. The crisis affects everyone ? not just those working in the financial sector, so this article aims to break down the credit crunch for you into an easily digestible article.

So what exactly is the credit crunch?

The term ?credit crunch? refers to a condition in the global market where money borrowing becomes far less easy. Banks and investors become less willing to lend money to anyone, which drives up the price of debt products such as loans, credit cards and mortgages.

How did it happen?

Following past crises such as 9/11, central banks on both sides of the Atlantic lowered their interest rates to stimulate growth in the global economy. This resulted in many credit-unworthy people borrowing beyond their means. Debt products were sold in huge numbers to people on low incomes and typically these debt products were sold at low interest rates, but only for the early part of the repayment period. At the end of the introductory period their interest rates shot up, and repayments rose dramatically. Many people defaulted on their loans, and had their homes repossessed. With nothing to repay the loans with, the banks had to simply write-off these debts, which meant they had a lot less money than they thought

How does this affect the European markets?

European banks bought up the sub-prime loans, packaging them into financial products known as collateralised debt obligations.

Rather than realizing the return-on-investment they were expecting, the packaged debts have become worthless, and impossible to sell.

How does this affect the rest of us?

The cost of borrowing will continue to rise, which means that interest rates may skyrocket. Only the people with great credit ratings will benefit from great deals, the rest of us will need to tighten our belts or prepare for costly debt repayments.

The overall effect of the credit crunch differs depending on who you speak to. Some say we are on course for a global depression similar to that caused by the 1929 Wall Street Crash. Others say that this is just a minor correction of the global economic markets and the situation will soon stabilize.

The latter may be hard to believe when you consider that a record number of people are now looking for debt management advice to help them manage their repayments. With many central banks ploughing money into the system, however, the crisis could soon subside, but it's anyone's guess exactly what will happen next in the credit crunch saga.

The situation in the US can be used as an indicator as to what will happen in Europe. They are currently experiencing massive price rises of basic food stuffs and fuel. They are also experiencing one of the worst periods of home repossessions in US history.

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Both Mark Stubbles & Andrew Redfern are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Mark Stubbles has sinced written about articles on various topics from Finances. To get regular updates on the latest credit crunch news and views visit the site also has a lot of useful tips for. Mark Stubbles's top article generates over 1300 views. to your Favourites.

Andrew Redfern has sinced written about articles on various topics from Recreation and Sports, Travel and Leisure and Shopping. Andrew Redfern is an expert in and has assisted many organisations and individuals resolve their debt problems. He also advises companies on strategies. Andrew Redfern's top article generates over 60500 views. to your Favourites.