CREDIT CRUNCH

Credit Crunch



Credit Crunch

Introduction

The aim of this paper was to analyzed the main causes of the current credit crisis in UK and what measures UK governments have been taking to try to solve the problems caused by it? The credit crunch makes it impossible for companies to loan because of the shortage in the availability of loans or credits from the banks and other lenders who are worried of rising bankruptcies and mortgage defaults.(Arnold,2007,56) The banks or other lenders want to minimise their risk resulting by increasing the cost of obtaining the loans (i.e. charging higher interest rates) or reject all loans except for safest loans. During credit crunch, many businesses may have trouble with their cash flow causing them to lay off their employees or even close down due to insufficient funds resulting from inability to get loan or credit.(Balls,2006,25)

Main Points

Definig Credit Crunch.

Consequences And Causes of Credit Crunch.

Policies For Uk Government Need To Implement.

Fiscal Policy

Level of aggregate demand

Monetary Policy

Conclusion

Discussion

The term "credit crunch" is used to describe a sudden cut in availability of loans or credit that include mortgage, credit cards, and inter-bank lending or when the cost of obtaining loans from the bank has suddenly increase.

Hughes (2008) defied that “Access to the consumer credit market in the UK has dramatically altered since the introduction of the first credit card in 1967.” (Hughes ,2008,5) Consumers are now able to access credit via a multitude of non-traditional suppliers, such as high-street shops and the internet, in addition to banks and building societies.(Morgan,1998,102) The consumer credit market has fundamentally changed and the range of credit products available has grown at an unprecedented level. Indeed, HM Treasury noted that a majority of households 'have seen a dramatic rise in the availability, flexibility and affordability ofcredit'.(Lown,2006,1575)

Shiller(2008) said that “convenient access to credit has contributed to several problems - record levels of consumer debt, an increase in irresponsible lending practices, the imposition of extortionate interest rates and ineffective legislative protection of consumers.”( Shiller,2008,56)

These concerns have left many people and communities with little or no access to affordable credit.According to the National Consumer Council, affordable credit contains five key elements: access to loans that are simple and transparent; lenders that are sympathetic towards low income consumers' circumstances; simple loan application procedures; small loans over a short period of time; and affordable repayments.(Humphrey,1997,3) For individuals, lack of access to affordable credit can lead to higher credit charges, limited access to financial products and services, lack of security, child poverty and unemployment. For society, it imposes additional costs on the state benefit system. The uncertainty in the global financial markets has led to a dramatic reduction in the availability of affordable credit, or credit crunch.(Bernanke,1991,205)

HOW AND WHY DOES IT HAPPEN?

Consequences And Causes:

UK and KSA mortgage lenders did not lend so many bad mortgages. Although mortgage lending became more relaxed in the past few years, it still had more controls in place than the US.

However, it caused very serious problems for Northern ...