CREDIT CRUNCH

Credit crunch

Credit Crunch

Introduction

In 2008, a new financial crisis swept the world, once again brought on in part by overzealous and irresponsible lending policies of Northern banks. The 2008 financial crisis was global in its scope and had particularly harsh impacts on First World countries, including the United States and the United Kingdom. As in 1982, the official response focused on saving the banks through a financial rescue package, while ordinary people faced credit restrictions, job losses, and home foreclosures. The 2008 credit crunch, as it came to be known, is likely to undermine the ability and willingness of First World actors to find a solution to the ongoing problem of Third World debt. Therefore, all the issues related to credit crunch will be discussed in detail.

What is a credit crunch?

A credit crunch or credit crisis is a situation when there is a deficiency of credit to be supplied to both consumers and businesses from traditional financial institutions. It essentially means that the banks and credit card companies are not in a position to give loans to borrowers. They only provide a loan to people and businesses that have an outstanding credit and lots of assets for collateral, but, issued at higher interest rates (Alexander, 2007, 57).

Brief discussion of a credit crunch

Credit Rating Agencies is recognised as well established organisations belonging to a financial industry. There are numerous investment decisions based completely on credit rating, received, from large agencies known as Moody's, Fitch, or S&P. The credit rating is supposed to be based on actual calculations, which analyzes the likelihood that a bond issuer will not be able to pay the regular payments of interest. The credit crunch occurred due to the major halt in this system. The occurrence of credit crunch in 2007-08 in USA highlighted a major institutional fault in the credit rating of the institution, which permitted various credit agencies, to benefit from their impersonal influence (Evans, 2008, 76).

There were three large issuers of credit ratings that generated high percentage of their revenues from the regular payments, made by investment companies, of sub-prime mortgages. This was not a new activity carried out by these firms. The huge source of income for credit rating agencies is the fees that the companies pay to them to acquire the rating. However, the reputation of the credit rating agencies was ignored during the collateralized debt obligations. It is a key instrument for repackaging the subprime mortgages into financial instruments. This action from the credit rating agencies later on affected the whole payment cycle of mortgage transactions. The credit rating agencies were responsible for this negative action made to earn incomes in an inappropriate way. These measures lead to a credit crunch situation in USA, and, it affected their overall economy miserably. Therefore, this is the brief discussion of credit crunch (Baron, 2006, 103).

Historical perspectives

Historically, deregulation emerged as a response to the welfare and Keynesian programs of the 1950s and 1960s and the economic instability ...