Credit Crunch: What Caused It & Who's To Blame?
It’s no
secret that the ongoing credit crisis that has plagued the American
economy since late 2006 has spread world-wide. Fueled by an
overwhelming increase in US home foreclosures, the American-born credit
crunch spurred on a massive global financial meltdown as anxious banks
and governments reduced lending and raised interest rates to protect
assets. Not surprisingly, this decrease in private
and governmental lending has left many businesses out in the cold,
leading the world’s economy in an increasingly downward
spiral. Although the international credit crisis has been a
long time in coming, the rapid decline in our global economy has left
many people scratching their heads wondering: how exactly did the
credit crisis come about?
The ongoing credit
crunch that we’re experiencing today is due largely in part
to the American sub-prime lending fallout. In the early part
of the decade, buoyed by a spirit of consumerism, US banks began
lending to sub-prime borrowers –
“sub-prime” meaning consumers that were considered
a credit risk, and therefore more likely to default on a loan
– with “teaser” interest rates and little
or no regard for credit risk. Although sub-prime lending was
a major factor of the US housing boom in the late 1990s, many sub-prime
borrowers waited for interest rates to decrease on their mortgages
before refinancing at a fixed rate. However, when banks
increased their interest rates after the “teaser”
incentive period was over, many borrowers found themselves unable to
make their mortgage payments. Foreclosures began to multiply,
and in late 2006, the US housing bubble had been burst.
The American credit
crisis had a swift ripple effect on the global economy.
Unregulated by lending practices, many international banks began to
significantly reduce sub-prime lending and increase interest rates on
current loans in order to curtail further losses experienced through
consumers unable to make their mortgage payments. Mortgage
lenders around the world, including banking powerhouses IKB Duetsche
Industriebank, Northern Bank, and The Bank of China, began to report
massive losses, and several more filed for bankruptcy. The
ongoing collapse of the international mortgage industry sent
governments, consumers, and stock markets into panic mode, which has
only further tightened the hold of today’s credit crunch on
our global economy. As banks and governments across the world
call in sub-prime loans and cut jobs in order to stay afloat, the
International Monetary Fund (IMF) has quoted worldwide monetary losses
at $945 billion dollars.
There is no one person
or institution to blame for the ongoing global credit crisis.
Irresponsible borrowers looking for easy credit, banks specializing in
sub-prime lending, government and lending regulators, and central banks
are all equally responsible for the credit crunch that we’re
experiencing today. Although the global economy has suffered
unprecedented monetary losses – and will continue to do so
for some time - there is still hope for the future, as the
world’s top thinkers and policy makers gather to come up with
new laws and regulations that will prevent the sub-prime lending crisis
from ever happening again.
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Article thanks to
compareyourbank.com.au who compare bank
accounts and credit card offers from major banks.
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