Credit Crunch And Its Effects On The World Economy Essay

Credit Crunch And Its Effects On The World Economy Essay

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The concept “credit crunch” was firstly introduced during the Great Depression of the 1990s. It refers to a reduction in the availability of loans and other types of credit at a given interest rate. Under a condition of credit crunch, banks are supposed to hold more capital than other time and become reluctant to lend with a fear of bankruptcies and defaults. In the 1990s, shortage of financial capital and low-quality borrowers forced the banks to reduce the loan supply. But that one of 2007 was more complicated than ever before.

A credit crunch occurs when house prices drops and subprime mortgage defaults increased. An economic event intertwined with the credit crunch of 2007 is the U.S. subprime mortgage crisis. In 2007, the subprime mortgage crisis dealt a huge economic blow to America and then had a great impact on the world economy. As a result, the over-expansion of credit in the housing market suddenly turned into a tightening of credit. Although several actions were taken, the crisis still had severe and long-lasting consequences, which make the world economy still in a slow recovery so far. The credit crunch of 2007 was triggered by several factors, analyzing the cause of credit crunch can help us reduce the probability of it and explore some implications of credit crunch for policy.

This essay consists of two parts. At first, it will describe the trends leading up to the credit crunch, including the subprime mortgage crisis in America and a popularity of securitization. Then it will discuss the role of five different market participants in the process of risk accumulation.

2. The Background of Credit Crunch of 2007

The U.S. Housing and Subprime Mortgage Market
When we want to discuss about the credit crunch of 2...

... middle of paper ...

...ting, these agencies may also provide consulting and risk management to other clients, which was likely to affect the interest of each side. Then the interest conflict between different parties occurred. Furthermore, the lack of transparency was also a factor that contributed to the moral hazard. Thus,

All the factors mentioned above finally resulted in a decreasing in the lending standards and a boom of cheap credit. It interacted with the expansion of subprime mortgages market and triggered the housing frenzy. It resulted in tremendous loss for financial institutions and a fighting of credit. The crisis influenced not only the mortgage market, but also created a turmoil in financial market. Instead of affecting only the U.S., its impact transcended the national boundaries and finally triggered the most several financial crisis since the Great Depression.

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