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What is the credit crunch?*

Nobdoy will tell me for crist sake! And why is it bad? people keep complaining about it :) Thnx :)

Answers:

1) Gordon Browns Favorite Cereal Credit crunch is a term used to describe a sudden reduction in the general availability of loans (or "credit"), or a sudden increase in the cost of obtaining loans from the banks.

2) A lot of people use credit for things like houses, cars, credit cards, & education. The companies issuing the credit depend on getting paid back but an unusually large amount of loans have defaulted so the issuers of the credit feel the "crunch". That means they run out of money to lend because people aren't paying them back as promised. It's bad for taxpayers because our money is going to "bailout" mortgage companies who made poor decisions. It's bad for people who want to borrow money because there may not be money available for them to borrow. If people stop spending money it's bad for the overall economy. The effect trickles down to just about everyone eventually.

3) For years, the banks have been loaning out money to people who could not really afford the loans. Because the borrowers couldn't really afford the loans, they had difficulty repaying the loans. This kept on building and building until the banks were negatively affected by the consumer inability to pay back the loan. This is bad because banks rely on income from loans and interest to stay afloat. When you deposit your money in the bank, the bank will then invest your money to make money. If the bank invests its deposits in loans that aren't repaid, the bank then does not have enough money to return deposits to its customers.

4) Basically lenders/banks were doling out credit like hot bread to a lot of people who couldn't afford the debts (mortgages, car loans, personal loans) in the first place. Their fears were soothed by being told that they could afford the loans because interest wouldn't be payable for several years so the monthly payments started out really small and all seemed well until..... The interest kicked in especially on mortgages and suddenl people realized that they really couldn't afford their now huge payments. So they stopped paying. Investors put up a lot of money on securities that were guaranteed by these mortgages which obviously fell through. To top it off people who were once sitting on high property values used their homes like credit cards to buy even more stuff and of course the home values dropped like a rock and they owed more than it was worth. People stop paying, investors lose money. Investors lose money, they stop investing. People stop investing, banks lose money. Banks lose money, banks stop lending. Banks stop lending, people are screwed.

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