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 banks thought that the global economy is a renewable source. They consider it as an ocean of wealth which will never be exhausted. The allocation of resources in the case of a bank is mainly the loans of different forms to the customers. This allocation has not been done properly by the banks. They have allotted loans to all the people irrespective of the financial strengths of the customers. They have not conducted any reviews to assess the financial setups of the customer at present and also they failed to forecast the future.
On the other hand, the greedy customers accepted all the offers from the banks with both hands. They have approached the banks for everything and the banks were ready to fulfill their dreams. The banks were too focused on selling their goods or services rather than buying the goods or services. They thought the success of banking business rest on selling rather than purchasing. They never bothered too much about the returns against the services they provided. In their opinion, American economy was capable of facing any challenges or threats from the