Understanding
Why The Credit Crunch
Cannot Simply Go Away
Few people understand
why the credit crunch started to begin with, let alone why it can't simply go
away. There are very good reasons why it is still in effect, and why it may remain
well into 2009. Following the news on the economy
can be a confusing experience if you do not have a clear understanding of economics.
Though there are many issues with the local and international economy that have
people glued to their televisions and radios for information, the issue of why
the credit crunch has taken over so much of the world and when it will go away
is among the most watched issues at this time. If you
do not know a lot about how economics work issues like this are difficult to grasp.
This is especially true for people who have not yet experienced personal problems
as a result of the credit crunch, because they have not felt an effect on their
own life and do not understand what is causing so many others hardships, the banks
and big business included. There are several reasons why
the credit crunch has not been relieved, and in fact may not be for a year or
more to come. Banking Practices The
main reason why the credit crunch got started to begin with was banking practices
that handed large loans to people who did not have the ability to pay it back.
Banks saw risky loans as a way of getting a large profit, because they could offer
subprime loans which collected a higher interest rate, as well as higher fees
for late and missed payments. This happened mainly in the mortgage industry since
the real estate business was booming when it became popular. Credit card companies
also got into the subprime lending trend. The end result
was a mass number of loan defaults that has led to the foreclosure crisis still
going on right now. Why the credit crunch is still lingering is because these
bad debts are still falling into the hands of lenders who make the risky deals.
More homeowners are slated for foreclosure right now then possibly ever before
and each one that defaults makes the overall situation even worse. Also,
right now the banks are not loaning money to one another and many are requiring
federal bailout to maintain operations. The cost is then passed on to the consumer
in the form of higher lending rates, and right now you must have good credit to
get even those higher raters. The financial industry is the leader of our economy
right now, so until they get their books straightened out and start to lend money
again the end to this credit crunch is far off. Foreclosures Residential
home foreclosure has been an issue for over a year now, but the situation is expanding
to more commercial foreclosures as businesses go under and cannot afford to pay
for buildings purchased for operations. This is a big factor in why the economic
tension has sustained so long, because all of these foreclosures put more bad
debt on the banks and the investors who purchased the loans when times were good.
The property attached to the loans is now worth much less than is owed on the
loan, so even after the property is seized and sold the investors will take a
loss. There is only so much bad debt a bank can sustain
without it cutting into the available money to extend new loans, and this is a
major reason why the credit crunch has not yet ended. The government bailouts
are trying to help on this end by taking over some of the bad debts, but as long
as foreclosures are still collecting the situation will likely continue as well.
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