The Credit Crunch

We have all been hearing about the credit crunch in the last year, but what is it really?  How did we get into the credit crunch and how will we get out?  The credit crunch or crisis is a financial squeeze not only on the residents of the UK, but also on the financial sector as a whole.

There are several reasons that the UK is in a credit crunch.  The main reason stems back to the US.  The US subprime market collapsed early in 2007.  The banks were unable to support the many delinquent loans they were accruing as a result of easy mortgages, and other types of loans.  Without the repayments from consumers the banks had to repossess, and try to sell the properties.  Many of the banks in the UK such as Northern Rock had interested in the US banks and loans.  When the credit crunch in the US began to happen to the banks in the UK that weren’t prepared, those banks had to deal with the fall out.  In fact Northern Rock had to be saved by the Bank of England, in order to save the bank from closing its doors on their good standing consumers.

It is not just about the subprime market, but what has happened in the US has affected the global economy because the banks don’t have the money to support themselves.  As the banks around the world and especially in the UK started suffering, other things began to happen.  Many of the banks investors began to pull out.  They didn’t want to offer the easy money loans to consumers with risk.  Instead they felt there was too much risk to stay in the investment market.  With this loss the banks suffered even more, because they couldn’t get cheap enough products for consumers.  This meant no money coming in to recoup the losses.

On another side of the credit crunch was the actual mortgage process.  Many of the loans come from a wholesale market.  When the wholesale market collapsed because of the cheap products not moving, this caused a further crisis.

The entire point of the credit crunch is the lack of liquidity for the banks that trickles down to the consumer.  When the consumer is struggling because of economic inflation, poor job salaries, or loss of employment, we are bound to see liquidity issues.  Individuals don’t have the money to spend on a mortgage that they could barely afford.  So, while the credit crunch started in the mortgage arena it has spread to credit cards as well.

Many of the credit card companies have seen an increase in use and therefore debt as the residents in the UK and around the world are using them to supplement their income.  This supplementation comes due and the consumers still don’t have the cash flow to pay it off.  The credit crunch is a vicious cycle that can end only when the banks and building societies are able to pass on the savings the Bank of England has been allowing with the interest rate drops.