Credit Crunch - Essay Example

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Credit Crunch


During a credit crunch, also known as a "liquidity crisis" or a "credit squeeze", the banks won't or can't lend. Investors can't or won't buy debts. Suddenly it's very difficult to borrow money. There is a lack of easy money. Consumers and businesses have less to spend. There could be serious ramifications for an economy.
Even if the credit crunch is narrowly define as something that affects just banks, private equity and hedge funds, there is little out there to suggest that the British economy is out of the woods. Around the world, banks remain reluctant to lend to each other - or anyone else, for that matter, except blue-chip corporations or mortgage customers who can afford to furnish lenders with large up-front deposits.
House prices are down 13 per cent year-on-year and rising; the boss of Countrywide, the country's biggest lender, says one in 11 borrowers are falling behind on their home loan payments; house repossessions were up 57 per cent in March compared to the previous year; consumer confidence has hit a 26-year low
Almost 7,000 has been wiped off the value of the average British home since October 2007, after house prices dropped for a fifth consecutive month, according to latest survey figures. ...
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Summary

The economics profession is unclear as to what constitutes a "credit crunch." The crucial differences in definition depend on the cause of the contraction and whether credit is rationed by means other than price. Bernanke and Lown (1991) define a credit crunch as:
Author : luzwest

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