Misplaced Pages

This is an old revision of this page, as edited by 210.11.74.62 (talk) at 08:25, 6 September 2007. The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

A "credit crunch" is a recessionary period in a debt-based monetary system where growth in debt has slowed and subsequently causes a drying up of liquidity in an economy. It is often caused as result of lax and innapropriate lending, which results in losses for lending institutions and investors in debt. These institutions may then reduce the availability, and ease of obtaining credit, and increase the cost of accessing credit by raising interest rates for fear of further losses. In some cases lenders may be unable to lend further, even if they wish, as a result of earlier losses restraining their ability to lend.

A credit crunch is the opposite of cheap, easy and plentiful lending practices (sometimes referred to as "easy money" or "loose credit"), the likes of which have been seen around the world, particularly between 2002 and 2007. During this phase in the credit cycle in a debt-based monetary system asset prices experience bouts of frenzied competitive bidding, inducing hyperinflation. This can then cause a price "bubble" to develop in a particular asset market. When new borrowers cannot be found to purchase at inflated prices, a collapse in the price of the asset can occur, along with a dramatic reduction in liquidity in that market. This can then cause insolvency, bankruptcy and foreclosure for those borrowers who came in late to the market. If widespread, this can then damage the solvency and profitability of the banking system itself, resulting in a dramatic reduction in new lending as lenders attempt to protect their balance sheets from further losses. This in turn results in a reduction in the growth of the money supply, often referred to as a "drying up of liquidity."

A reduction in the growth of the money supply caused by a credit crunch can banktupt marginal borrowers and threaten the solvency of marginal lenders, thereby triggering a recession or in severe cases, a depression.

The 2007 subprime mortgage financial crisis may have brought about a credit crunch.

This economics-related article is a stub. You can help Misplaced Pages by expanding it.

• v
• t
• e

• Credit
• Debt
• Economics and finance stubs