Banks start charging high interest rates for lending that becomes restrictive and selective. This impacts money (credit) market as mortgages becomes expensive. Stock markets start fluctuating wildly. Savings get reduced affecting pensioners a great deal. Use of credit cards becomes costlier. Foreclosures of mortgages and repossession of mortgaged properties become frequent feature of credit market, and worst the rate of bankruptcy rises.
Credit crunch does not necessarily mean a period of recession. It is in fact a voluntary extension or interruption of monetary policy pursued by the federal bank. The success of any monetary policy depends upon attitude of lending institutions. 'Even if Fed increases the level of bank funds during a weak economy, banks may be unwilling to extend credit to some potential borrowers, and the result is credit crunch.'(Jeff Madura, page 93)1. The government some times introduces a sort of restrictive monetary policy that accentuates credit crunch. Jeff Madura (page 93) while explaining the effects of restrictive monetary policy states that 'as the money supply is reduced, and interest rates rise, some potential borrowers may be unable to obtain loans because interest payments would be too high. ...Show more