What Bought On The Credit Crunch And Who Is To Blame?

The Credit Crunch hasn’t just happened overnight, it’s the result of a long process of bad decisions made by Governments and Banks and Financial Institutions in particular, during the previous boom years. During the Boom Years, we saw a sustained period where Banks and Financial Institutions lent money carelessly and inappropriately to people and businesses who basically could not afford to repay them. The Banks lent at interest rates that might have looked very profitable on the surface, but the reality was that they were not profitable enough to sustain damage caused when debts were written off due to bankruptcies.

When the Credit Crunch Began.

The Credit Crunch officially began in July 2007, when investors lost confidence with the value of securitized mortgages in the US which resulted in a liquidity crisis, prompting a substantial capital injection by Central banks in the USA, the UK and Europe. The trigger that provoked this lack of confidence was the bursting of the $8 trillion US housing market bubble. House prices had been rising for years past reasonable levels of what the properties were worth and what people could afford. People couldn’t afford to buy houses but Banks lent to them anyway, this practise is known as sub-prime lending. When times got hard and people defaulted on mortgage payments, banks would foreclose on properties, but with a lack of credit and great uncertainty in the air people didn’t buy the properties off the bank or if they did, it was at very low prices. This pushed prices down further and amounted to significant losses to the banks that they couldn’t afford. It suddenly dawned on bankers all over the world that this was a serious problem as most international banks had ploughed money in US Sub-Prime lending, being driven by short term returns which were related to huge pay bonuses.

Who is to Blame for the Credit Crunch?

The effects then rippled through all countries, governments and businesses leaving practically no one unscathed. So who is to blame for the Credit Crunch? In my opinion, it’s the Banks and their mentality and attitude to risk. Banks have been gambling recklessly with peoples savings whilst customer’s believed their money was being invested in low risk investments, the reality was it was being put into high risk investments to squeeze more profits for the banks. Bank management are well known for being paid vast bonuses that are linked to short term results so they promote high risk investing strategies. Clearly this practise has to stop and the way bonuses are paid in banks and how they are regulated needs to change, if we are to learn anything from this financial mess. There is one rule however, that we should never forget in the future when times are good; Boom is always followed by Bust!