Credit Crunch- A Conspiracy?

There is a lot of hue and cry about the prevailing credit crunch and it won’t be wrong to say that almost all sectors of the economy felt the ripple effects of the economic slowdown. The credit crunch that originated in the United States sent tentacles to far off places.

Many financial experts are wondering whether the credit crunch was intentional or is it a reality. Credit crunch had been seeping into the economy for quite sometime. Whether you call it miscalculation or lack of far-sightedness of statisticians, the result is in front of us. Rising prices, rate adjustments etc are 2 of the most important aspects of the slowdown.

What are the credit crunch conspiracy theories?

• Some are of the opinion that credit crunch can be attributed to the following factors-
• Credit crunch is what the lenders were looking forward to
• The statisticians miscalculated the deals
• The business entities despite being warned were ignorant
• Certain unforeseen events confused experts.

Scenario 1-

Credit crunch is what the lenders were looking forward to

The first scenario is being brushed aside by many. So, we leave it for the time being.

Scenario 2-

The statisticians miscalculated the deals

The second scenario may not be absolutely true. The main reason being these professionals earn their livelihood by doing the work of "actuaries". So, this may be a distant possibility.

Scenario 3-

The business entities despite being warned were ignorant

The 3rd scenario may have some truth in it. It is not uncommon for organization heads to ignore certain facts. However, is it possible for all organization heads to ignore facts? It is not possible for a single organization head to influence the credit crunch! Undoubtedly, there are several instances when heads of an organization do alter facts for their benefit (short-term incentives as well as bonuses). Even amidst tremendous downsizing, there were quite a few number of high profile layoffs. It proves that the financial organizations do not hold their heads responsible for the slowdown in the economy.

Scenario 4-

Certain unforeseen events confused experts

The 4th theory can’t be ignored altogether. It has got some backings. Hundreds of lenders may have approved loans to the subprime borrowers without anyone noticing it.

Returning to scenario 1 again

Although there are a number of factors, it is being ascertained that a combination of factors led to the financial crisis. Coming back to the 1st theory, many are of the opinion that the lenders have rightly placed us where we are today. The lenders have eaten away a major slice of the economic pie. Moreover, they are also approaching central and state banks for support and they also expect stimulus packages from the Fed to bail them out. Nevertheless, a major portion of their earnings get translated into taxes.

In a nut shell, it can be concluded that a combination of several factors have led to the credit crunch. If the lenders had mistakenly calculated the outcome of subprime lending, how can the statisticians be spared? Rise in property prices is not uncommon; we have had such instances before. So, the outcome could have been assessed.