This paper briefly analyses the major reasons for the credit crunch started in the last year.
The major reason for the current financial crisis is the unwise lending habits of the financial institutions like banks. “Banks found ways to increase the number of mortgage loans through strategies such as interest only mortgages, 100% mortgages and lending to people with poor credit histories” (Who is to Blame for Credit Crunch?). American public have the habit of spending all the money they earned without saving anything for the future. When they are need of money they approached the banks and the banks were ready to give them loans as much as they required, without assessing their financial capabilities. Banks never calculated that an economic crisis like the current one may happen in near future.
“The gap between base rates and bank rates has increased as the banks seek to increase the profitability of their loans. The cost of arranging a fixed rate mortgage has increased significantly” (Problems of Credit Crunch).The banks also reduced the interest rates on mortgages which encouraged the people to go for buying expensive houses. Moreover congress has given tax reduction to those who were buying expensive houses in order to stimulate the real estate sector. In other words, mortgages have been encouraged by both the government and the banks and the public readily accepted the offer put forwarded by the banks and the government. "Washington failed to rein in" the two government-sponsored entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which ran into trouble by underwriting too many risky home mortgages to buyers who have been unable to repay them” (Factcheck.org)
Government or the congress did nothing to control the unhealthy lending habits of the banks. Government also failed to