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About the Credit Crunch
You know you are living in a credit crunch when the availability of loans and mortgages drops dramatically, and the conditions needed to actually get a loan in the first place change to become far harder than they had been previously. In a crunch the credit that is available drops independently of the published interest rates.
A credit crunch can occur for a wide variety of reasons, usually it is due to an anticipated decline in the value of the collateral that the banks use when offering loans (house prices crashing, for instance). On occasion the global economy can also prompt a major credit crunch as well when the monetary conditions around the world shift to any large degree. Lack of faith in the financial system can also prompt a credit crunch, if people are made aware of the fragility of banks and the economy then it can prompt a recession forcing banks to seek less risky investments to safeguard their own futures.
One thing we are all acutely aware of in the current credit crunch is that the recent period of a vast amount of inappropriate lending (giving out mortgages to those who could not afford to keep up with repayments for example) is one of the major causes of our current credit crunch, with some lenders being unable to lend anything further due to lack of funds.
It has also been known for some time that the housing market was very overinflated until recently with many properties being sold for vast amounts over their net worth. Whilst it may have been inevitable that the prices would eventually come down again nothing was done in preparation for this meaning that foreclosure and bankruptcy have increased greatly when people cannot afford to keep up with their repayments and the banks discover that their assets are not worth as much as was previously thought, a major contributory factor in the credit crunch.
It is worth remembering that a credit crunch is part of the natural cycle of finance; things will never remain constant but will fluctuate through periods of economy boom followed by an economic downturn. Problems occur when the credit crunch is worse than normal due to a wide variety of circumstances, exactly what is happening at the moment. The economy will recover in short order, experts estimate that between six and eighteen months are needed for the credit crunch to begin to end.
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