A short introduction to the Credit Crunch

A Short History Lesson - Extra Money
Over the past 10 to 20 years worldwide productivity has increased greatly. One result of this has been to see an increase in the supply of money worldwide (for example to prevent demand pull inflation). Many countries chose to invest surplus funds in the USA, because the US economy has traditionally been seen as an economically strong and politically stable place to invest (external environment factors).

Other External Factors
Over the same period, we have seen the rise of Globalisation. We know that one effect of Globalisation is the easier flow of money between people and countries. One way that many Governments have chosen to increase the flow of money in their economies has been to deregulate their financial markets.

What happened to that extra money?
This certainly happened in the USA, and as a result, many US financial markets were in a position to operate under less strict lending criteria. Some US financial institutions began to use their use their excess funds to supply mortgages for people who under the old, stricter regulations, would not receive mortgages – this became know as the subprime market.

Finally - the Credit Crunch!
When people began defaulting on mortgages they shouldn’t have had in the first place this first effected subprime lenders (who normally work outside central bank supervision), but then impacted on more recognised funds lenders. This has created a general panic in the international financial sector and a reluctance to lend (being shown by higher interest rates ), thus draining a market used to being awash with cheap money - Credit Crisis.

Check out these Links to learn more on the Credit Crunch

1. This item here is a short explanation of the causes of the crisis, and the impact that it has started to have on the UK economy.
2. For more details check out this BBC link on the Credit crunch