Credit Crunch - a deep insight
The US credit market runs on two wheels. One wheel is borrowing and the other is lending. Credit crunch is a situation in which the wheel of lending gets jammed leading to a sudden decline in lending, that is, credit. This situation will automatically jam the other wheel. So if there is a credit crunch, borrowers are not able to find lenders. And even if they find them, the credit is available at unusually high interest rate.
Many reasons will lead to credit crunch.
1. Increased perception of risk due to many reasons.
2. Imposition of credit controls or a sharp restriction in money supply.
Increase a risk perception causes the worst kind of credit crunch. When the lenders are not sure about the creditworthiness of borrowers, there is an increase in the risk perception. This makes lenders nervous and they stop lending. When one of your wheels is in a rut, you can't expect the other wheel to keep on moving. As a result, the flow of credit comes to a grinding halt.
What causes lenders to doubt the creditworthiness of borrowers?
Lenders doubt the creditworthiness of borrowers when they are not sure about getting their money back. The memory of recent defaults adds fuels to suspicion, and lenders became reluctant to lend. You may think that the lenders can demand high interest rates of taking a risk and part with their cash. the problem however, is that it is difficult to set a price for risk when you are uncertain about the likely lose. This is how the defaults of 'sub prime mortgages' in the US started as a fear of the werewolf in the financial markets this year.Lenders where not sure when their borrowers would turn into werewolves. Small depositors started lining up outside their banks. Even banks started fearing each other, which led to the worst kind of crunch seen in the inter-bank markets. This kind of fear and uncertainty is a perfect recipe for credit crunch.
What can happen if credit crunch persists for long?
A credit crunch affects not only borrowers but also our financial markets and the economy. With the onset of credit crunch, interest rates shoots up. But even high rates may fails to bring lenders to the market. High interest rates put a break on new investments and consumer demands, which may ultimately slow economic growth. Net deals are scrapped due to lack of credit. Leveraged borrowers takes the heaviest blow. Lenders may start demanding their money back. Even sound borrowers may default due to sudden demand for repayment. This can surely sets the financial markets on fire.
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I am a little confused how this rebate back to consumers will lift this economy out of its doldrums. We have people who cannot afford homes but we are going to give them money to go buy big screen televisions? If they used it to make a couple months mortgage payments until they got their finances straightened out - maybe I can understand that.
As recessions generally supporting by macro factors, which has less deep roots, it will certainly bounce back. It is the law of economy. No need to fear and confuse. It is a timley happening process started from the beginning of human life :-)
The credit market is in the tank. Good luck raising money. Until the banks start to lend we won't see a lot of change.
depends the situation in the nation.....!
The simple truth is that banks just don't want to lend. Until money starts to flow we are all out of luck.
Its because their debtors running out of money and not able to pay back. To solve this, govt's generally introduce huge packages to support economy.
Glad to see that someone is trying to help the economy.
Nice to hear that! Thanks!
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