The Effects of the Credit Crunch Impacted the UK Population In Terms Essay

The Effects of the Credit Crunch Impacted the UK Population In Terms Of Lending, Mortgages And Unemployment - Essay Example Credit normally contracts during a recession, but an unusually large contraction could be seen as a credit crunch. Jeffery, Avis and Wallace (2008) give a similar definition as Bernanke and Lown, stating that a credit crunch is a condition when borrowing money comes at higher interest and the borrower has to pay higher costs. Nevertheless, the economists Clair and Tucker (1993), who analysed the factors affecting the supply and demand of credit from 1986 to 1993, emphasise the causes of a credit crunch, stating that many economists, borrowers and regulators have expressed different views about the causes of a credit crunch, â€Å"like blind men examining an elephant, none of them are completely right or completely wrong†. However, this is due to every significant body of literature being viewed from different dimensions. Clair and Tucker (1993), in their journal, also state that bankers cite the cause of a credit crunch as lack of high quality loan demand, legislators blame ov erconfident regulators, borrowers say banks are too conservative and economists define a credit crunch as the cyclical decline in credit demand. ... cker (2008) argued that the heavy inflow of funds with low interest rates between 2002 -2004 has contributed to easy credit conditions, which encouraged both housing and credit bobbles; the Mortgage Backed Securities (MBS) was believed to be a part of the housing and credit boom. In addition, FT Intelligence (2009) emphasises that, between 2004 and 2006, US interest rates rose from 1% to 5.4%, causing a slowdown in the US housing market. Homeowners who couldn’t afford to keep up with the high interest rate began to default on their mortgages. Ellis (2008), on behalf of GLA Economics, states that high risk loans to people with weak credit histories soared to record levels and the impact of these defaults has been felt across the financial system because most of the mortgages had been packaged and sold on to investors and banks. Parkinson, Michael, Blake and Key (2009) analysed the impact and implication of the credit crunch in the UK. They define a credit crunch as a sudden cut in the availability of credit or loans, including mortgages, credit cards and interbank lending as banks worry about a lack of liquidity, and these financial crises are felt throughout the financial system. Brummer (2008) emphasises that the credit crunch, which began in August 2007, was due to the poor health of America’s mortgage intermediaries Fannie Mae and Freddie Mac. It shocked the financial market around the world and led to the economic crisis. As a result, the Lehman Brothers and Washington Mutual were the first dominant financial institutions to collapse in the credit crisis and become insolvent, say Dashan and Fabrikn (2008); other banks like Barclays and UBS announced fundraising via rights issue to boost capital ratio. Parkinson, Michael, Blake and Key (2009) have a similar