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Can anyone explain the credit crunch??
Former Member
Posts: 1,876,323 The Mix Honorary Guru
Hello all...bit of a mean feat to be asking but here goes:
Basically I was wondering if anyone can give me an overview of what the credit crunch actually is, and what caused it. Obviously it's a worldwide issue and something that will affect everyone, and I feel it's important for me to understand it.
I'm a fairly intelligent gal but have absolutely no knowledge of economics/money/stockmarkets etc, so hopefully someone will be able to tell me in layman's terms, with no jargon or abbreviations!
Anyone who does feel like telling me should know that they're working from a basically clean slate: all I know is they can't just "make more money" because it's the value of the money, not the quantity of it that matters, but that's about it!
Thank you and good luck!
x
Basically I was wondering if anyone can give me an overview of what the credit crunch actually is, and what caused it. Obviously it's a worldwide issue and something that will affect everyone, and I feel it's important for me to understand it.
I'm a fairly intelligent gal but have absolutely no knowledge of economics/money/stockmarkets etc, so hopefully someone will be able to tell me in layman's terms, with no jargon or abbreviations!
Anyone who does feel like telling me should know that they're working from a basically clean slate: all I know is they can't just "make more money" because it's the value of the money, not the quantity of it that matters, but that's about it!
Thank you and good luck!
x
0
Comments
Money (thats borrowing money) became very cheap, central banks gave out absolutely loads and therefore it became profitable to borrow and then invest your loan into something else. This is called leverage.
Anyway, the key issue was the housing market (especially in the US). A smart set of traders in New York decided that they could sell on mortgage debts as a form of investment.
So, bank A gives out 5 loans, then sells those loans to pension funds, banks in other countries etc.
The problem was that because money was so cheap too much of it was given out, and the ratings of these loans was misrepresented.
So banks bought loans thinking they were good, when in fact they were not. And because the bank giving out the loan wasnt carrying the risk they didnt care who they lent to.
Fast forward to now, banks all over the world now have huge piles of these loan investments, and no one really knows which ones are good, and which arent.
So, bankers are nervous because they dont know who is holding the crap. This has led them to be very cautious about lending to each other, and to us.
This has led to a massive spike in the cost of borrowing, and the house of cards has fallen down.
In an effort to get banks to start lending again governments are basically buying the bad debt, or buying stakes in the banks to give them money.
Make sense?
And if you want a loan, you goto a building society?
http://news.bbc.co.uk/2/hi/business/7618653.stm