What is the credit crunch?
The credit crunch came about as a result of a number of factors. While some theories on its origin are slightly off-the-wall, with a minority believing it is the result of a global conspiracy to ‘enslave the population and dominate the earth’, the more credible theory is that the crunch is a result of lenders’ carelessness in the years after 9/11 and the dotcom crash.
After 9/11, economies across the globe faltered, leading central banks to lower interest rates to aid recovery. As a result, banks were able to give their customers cheap loans, with many, in the US in particular, lending money to customers who did not have the assets to secure them against – called sub-prime mortgages.
To keep their cashflow up, the banks bundled up the mortgages and sold them on to banks and investors around the world. As borrowers’ fixed-rate mortgages came to an end, they began to default on their loans by the thousand, causing interest rates across the globe to rise.
At the same time, prices have risen sharply. Oil prices have been the main culprit for this, rising by around 60% in the last year alone. This has caused many other prices to rise, with the cost of essentials such as food and petrol chief among them.
As a result, banks have tightened their belts significantly, cutting down on their lending. Despite dropping house prices, many first-time buyers are unable to get a mortgage, and businesses and individuals looking to banks for financing are being rejected in droves.
As Richard Lambert, director-general of the employers’ organisation CBI, put it during a speech, the downturn can certainly be partially blamed on ‘greedy bankers, dozy regulators and incompetent policymakers’ – but it is also part of a bigger picture, involving a series of ‘mega trends’ which have been building up since the beginning of the decade.