What is Credit Crunch?
People, especially those involved in businesses and companies usually rely on lenders and banks to provide the financial assistance they need to stabilize and grow. However, a credit crunch can be a problem that hinders a lot of people from getting ahead in their money situations. Here is a description of the condition and some reasons why it can happen and change the way individuals go through the system.
Describing the Condition
Credit crunch is also known as credit crisis or credit squeeze. It is a reduction in the overall availability of credit or loans or an immediate pressure on the conditions needed to get a loan from banks and other financial institutions. A credit crunch usually involves a drop in the presence of credit independence of a growth in official interest rates.
During such times, the link between credit availability and interest rates will significantly alter, in a way that credit gets less available during any given official interest rate, or a stoppage will occur in the clear correlation between credit availability and interest rates. An example is when credit rationing happens. Frequently, credit crunch occurs together with a flight from quality by investors and lenders, as these individuals look for risky investments, usually at the expenses of medium or small industries and businesses.
The Reason
There are plenty of reasons why financial institutions like banks immediately slow down or stop lending activity. The stoppage may be because of an anticipated reduction in the collateral value used by banks to protect the loans. The stoppage may also be due to an exogenous alteration in the conditions of money. Other reasons include the central government commanding direct credit controls on the banking system, or also a heightened risk perception on the solvency of other financial institutions included in the banking system.
More Causes
A credit crunch may be triggered by a continuous period of improper or careless lending wherein losses for investors and lending agencies in debt, when the loans foul out and the maximum extent of bad debts are presented. The banks may concurrently decrease credit availability, as well as boost the cost of getting credit by increasing interest rates. During other situations, lenders might not be able to lend more money, even if they want to, because of previous losses.
On Overinflation
Credit crunch typically may also be triggered by a decrease in the market prices of formerly overinflated assets and describes the financial crisis that ensues from the drop of prices. The effects can include bankruptcy and widespread foreclosure of entrepreneurs and investors that arrived late in the market, as the costs of inflated assets drops slowly.
On the contrary, a liquidity crisis results when an effective industry suddenly discovers that it is not capable at the moment of getting the bridge finance required to expand the business and smoothen the cash flow payments. Getting access to more credit lines and trading through the crisis can let the business find its way through the problem and make sure that viability and consistent solvency is achieved.
Mark to Market
The mark to market strategy is ideal sometimes during a credit crunch, or even to sell or enter liquidation if the business capital affected is not enough to survive the phase of the credit cycle after the boom. During a liquidity crisis, it might be needed to go into more lines of credit, as more chances for growth and progress can present themselves as soon as the liquidity crisis is done.
A long term credit crunch is the other side of cheap, convenient and abundant lending techniques, which are also called closed credit or easy money. During the upbound phase of the credit cycle, asset costs can go through stages of competitive bidding, which causes inflation in a certain asset market. A speculative price bubble can ensue. A temporary growth in economy and employment can also result, as the new rise in debt production boosts the money resources and triggers economic activity.
The Economic Bubble
People involved in an economic bubble discover that the area of collapse was very visible. Some dynamic characteristics of the economic bubble may not be very different from pyramid schemes. People need to be more aware of the circumstances before they start investing in a variety of conditions and terms.
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Author: Selva Sugunendran CEng,MIEE,MCMI,CHt,MIMDHA,MBBNLP,MABNLP.Selva is an Integrated Systems Business Consultant,Internet Marketer,Master NLP Practitioner and Master Hypnotherapist.
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