What the fuck is a 'Credit Crunch'? 3 Months, 2 Weeks ago
Karma: 10
We here it all the time now on the news, it's the latest buzz word, well words, the 'Credit Crunch', but what the fuck is a 'Credit Crunch'?
Well here's a really good explanation I found on another forum, which I thought I'd share here.
The financial market is all about confidence. None of it is real - it's only money. Numbers and percentages and margins. If everyone is confident then people invest and reinvest and prices go up so they invest again and everyone is happy. Then once in a while something happens to remind them that their castles are built of sand. Suddenly noone has any confidence and the prices tumble. Nothing really changed other than the investors confidence.
In this instance, American banks found that selling mortgages made them lots of money, so they pushed forward schemes to lend more and more to the house buyers. Eventually there were so many buyers that house prices went up so people needed to borrow more in order to buy the houses they wanted. Since everything seemed fine the banks felt they could sell more mortgages by lending more than people could afford to pay back. Sounds dumb now, but it must have made sense to a lot of bankers two years ago. What was worse, was that the US banks didn't have enough money to lend so they borrowed that money from other banks around the world - spreading the risks.
The problem came when banks found lots of their customers couldn't pay back their loans. The banks had to foreclose which meant they now had property on their hands instead of a steady income. When this was seen as a pattern, nobody wanted to buy, so those houses weren't worth as much and the banks had lent out. They lost billions and billions of dollars. The numbers are quite staggering. Since the risk was spread it hit major banks around the world. At first they all tried to make out it wasn't so bad and that they could cover it, if only they could write off that bad business as a loss. Sadly it was worse and more widespread than they let on. Now the confidence bubble is well and truly burst. It will take a lot of sticking plasters to repair that bubble.
Evening Express, 05 Jan 2009 - Ministers reiterated their opposition to downgrading ecstasy today amid claims Government advisers will recommend it be made a class B drug. The Advisory Council for the Misuse of Drugs could urge Home Secretary Jacqui Smith to move the dance drug from class A when it reports later this month.
