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.

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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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