Credit crunch

 

What with the global economy crisis that has suddenly gripped a number of countries and that has been predicted to reach its peak in 2009, the words ‘credit crunch’ have fallen more and more often, in a pessimistic tone and with a negative connotation. A few years ago, the term was one that was only known to expert economists, but today, there are few people who have never at least heard those two little words. But what does that ominous phrase really mean and what are the implications? What is a credit crunch and why is it of importance; how does it relate to today’s economic situation?

What is it?

A credit crunch (which is also called credit crisis or credit squeeze) can be quite simply described as a reduction in the availability of loans. Basically, what this means is that banks will less readily hand out loans or credits to borrowers because the economic situation does not allow it. This is usually independent of the interest rates that are valid for the credit. A very common cause for a credit crunch can simply be a period preceding the crunch where loans and credits were handed out carelessly. It is also usually a side effect of a recession, because lenders are so afraid of going bankrupt that they will not give away their money readily, possibly increasing lending rates to a point where they become almost impossible to pay for the majority of people, making a great number of people less inclined to even request a loan. This can be called a vicious circle because due to the lack of credits handed out, the recession becomes harder to break out of and is prolonged. For the average person, a credit crunch means more expensive mortgages and credit cards, just to cite a few examples, and for investors and people who are active on the stock market, it means a considerably higher risk.

Why now?

The present credit crunch is said to be a consequence of the generally bad economic situation that the world finds itself in at the present moment in time. One theory is that on the ninth of August 2007, a crucial economic step was taken that engendered the credit crunch and the economic problems that the world is facing today. On this day, the European Central Bank and the US Federal Reserve injected the huge sum of ninety billion dollars into insecure financial markets. A crucial, undeniable reason for the current credit crunch is simply that banks and other lenders were lax for years, giving away money cheaply. This caused investors to seize the chance and borrow cheap money, which created an investment bubble that was bound to burst at some point. In fact, experts have been predicting the current situation for quite some time now, but very few people listened. Amongst the people blamed for the situation were politicians including George Bush and Gordon Brown, who were both said to have predicted the crisis but did very little to prevent it. The credit crunch is not the only sign that the global economy is in a recession. Housing prices are falling, credit card offers are becoming fewer, many currencies are losing some of their worth, and the end is not yet in sight. Some economists are even comparing the current situation to that of the global crisis that followed World War one.

What to do

From a global perspective, the most commonly accepted solution for the crisis and with that, the credit crunch, would be borrowing – from the public, for example - and spending to get the economy going again. This is in according with Keynes’ principles of spending money during recession and saving it up during times of prosperity. For individuals, the key is to be careful with investing and, if at all possible, to refrain from doing so altogether for a while. The stock market has been becoming increasingly insecure for a while now, and the risk of investing anywhere is hard to determine.

As an individual, of course, there is nothing or very little you can do about the great scheme of things, unless you are in a position where your actions have considerable influence on the economy. However, despite the credit crunch and the recession, there are some things you can do to prevent too big an impact on your life. Try not to invest in the stock market, be wary about taking up mortgages… just use general common sense and you can be a lot more optimistic about your money.