A short beginner’s guide to the credit crunch causes.If you are still alive, you have probably heard about the world credit crisis, which also had a great impact on the whole economy. But let us start from the beginning....
The origins of the current credit crisis lie back in 2007, when the
subprime mortgage crisis took place.
In order to avoid the economy moving into recession, the US government cut interest rates down to 1%, but with a plan to increase this rate slowly by the amount of 0.25% each year approximately.
Therefore, many people started to take
ARM’s - adjusted rate mortgages, in other words, mortgages with NOT constant interest rates.
But what happened later: when the loans went back to the normal monthly price, it became
unaffordable for many people to pay their mortgages back.
That couldn’t have created such a big problem unless another important factor - house prices - had played a great role in widening this crisis.
Normally the banks would cover their losses by selling the houses, but as the house prices went down, banks faced great losses and, as a result,
the lack of liquidity.
Banks found it hard to borrow money from the wholesale markets and even to lend to each
other, which caused the
global credit freeze.That crisis affected the banks all over the world and for some of them ( Nothern Rock was the first) the nationalisation was inevitable.
Another important action taken by government was a bail-out of 700bn of pounds to buy ‘toxic’ assets from the banks.
That all illustrates the main events and the basic points of the credit crunch.
But it is still not over...
