Credit Crunch and bruises

The market is in a freefall at the moment and only recently, the US Congress has approved a $700bn bail-out of top American companies, including insurance giant AIG. This matters as ripple-effects from the US economy is felt globally, and countries, like China or EU, that was thought to counter-act this effect did not have enough strength. The root of the current problem is cited to be due to the current credit crunch. I have been oblivious to what is this credit crunch all about but I decided to let my mind free of this ignorance and here is what I found:

1. Credit crunch means sudden shortage of funds for lending leading to reduction of loans available. This can occur due to :

a) sudden increase in interest rates

b) direct money control by governments

c) drying up of funds in capital market.

Companies need loan to do businesses (ie buy stocks) hence lack of loan means inabililty to do business which results in loss of employment and lower income.

2. The current crisis is caused by these steps:

a) Initially, interest rates were slashed in the US to help boost economy after 9-11 and dot-com crash 

b) These lead to cheap debts and were given to inappropriate people (people with low incomes and bad credit). To make subprime mortgages (high risk loan for people with bad credit history) more profitable, mortgage companies package these subprime mortgages into consolidation packages and sold it to financial companies. This meant that mortgage companies borrowed in order to give out mortgages and not financed out of saving accounts or the like.

c) In 2007, US had to increase interest rate to curb inflation which leads to mortgage being expensive. Inflation also caused lower income from household to pay off mortgages. In addition, these mortgages has 2-yr honeymoon period of low interest rates followed by high interest rates the following years. Hence, on 2007 onwards, many defaulted on their mortgages. This lead to several companies to go bankrupt which then leads to huge losses of money by financial companies and banks.

d) This then lead to banks and financial companies to restrict their lending and thus the credit crunch.

e) In the UK and NZ, the credit crunch is caused by brankcruptcy of several financial companies that have high % of risky loans. 

More on credit crunch here or here or here

The song on new iPod nano ad is quite catchy. The link to mp3 is below the YouTube video. As for me, it's time to hit the books for haematology test tomorrow. Yippeee.

     

Chairlift - Bruises