The term ‘credit crunch’ has been well and truly flogged to death during the recent financial chaos, so it was time for me to dump all this stuff out of my head into this new blog post. As well as cursory explanation of what happened, I’ll chuck in a couple of chuckles as we all need to laugh.
After imprudent lending on a monumental scale to people who hadn’t a chance in hell of ever being able to pay back enormous housing loans, the proverbial has finally hit the fan, as ‘sub-prime’ borrowers default on their loans in ever-growing numbers. The ‘credit default swaps’ (CDS) insurance policies underwriting these sub-prime (high risk) housing loans have now been found to have been woefully under-priced, thus the sellers of these insurance policies have had to face enormous pay-outs as the borrowers default on their loan repayments. Worse, as various investment banks ‘invested’ in this sub-prime debt, they infected themselves to the point of no return, as they discovered when the CDS’s were unable to pay out when the sub-prime borrowers defaulted on their loans. The final straw that broke the donkey’s back was high fuel and food price inflation, pushing up household debt to unaffordable levels. Oh, and a falling house price market, meaning that selling the houses would not cover many of the recent loans. It was the ‘perfect storm’ of the financial world.
The fallout of this initially U.S. sub-prime housing loan problem spread like a cancer around all the financial institutions of the world, leaving almost nothing untouched. We’ve seen banks go bust, banks get nationalised, runs on banks as depositors fear for the safety of their savings, stock markets cease trading as indexes crash, extreme stock market volatility, Icelandic banks deny UK depositors their savings & the UK government make inappropriate use of anti-terrorism laws in order to confiscate Icelandic funds held within the UK as retaliation, and governments inject hundreds of billions of dollars into their financial systems to try to restore confidence in the banking world.
But confidence comes from trust, and people do not trust the banks after the recent volatility, bank collapses and massively falling stock indexes. Indeed, even the banks do not trust each other because they are unable to ascertain the solvency and liquidity of banks requesting to borrow money and, as a result, the LIBOR rate (London Interbank Offered Rate) has increased to high levels, thus discouraging inter-bank lending and borrowing, thus causing credit to cease to flow. As growth needs credit, therein lies the problem. Thus the markets now fear a global recession, and so this is colouring the current stock market falls we are now witnessing, despite multi billion cash injections from national and central banks.
Anyway, to end on a light note, here’s a couple of things related to the ‘credit crunch’ that caught my attention. Enjoy!
Feel free to correct me if I made any glaring errors in my take on events.
The Credit Crunch Song:
The inimitable Deek Jackson from The FKN Newz: ‘AMERICAN DREAM-DELUSION DEBT & DEATH’: