Credit Crunch

Credit Crunch is defined as a serious shortage of money. it shows that lending institution credit money to high risk people and institutions, and at that time real estate market is slump and the price start to decrease. In 2008 credit crunch started French bank Paribas. Then it liked domino effect. Credit crunch spread to the whole world. In US, the biggest companies called Freddie and Fannie Mac were takeover by US government. In addition, Lehman Brothers and Morgan Stanley also faced risk of bankrupt. In European so many countries’ bank suffered same situations.Meanwhile, the companies are difficult to finance and survive in this situation.

The Fed pumped money into the US economy and slashed its main interest rate which the Federal Funds rate decrease from 3.5% in August 2001 to a mere 1% by mid-2003. The Fed held this rate too low for too long. The Credit Crunch was exploded under this policy. The US sub-Prime mortgage market is one of the reason causing Credit Crunch. In US many America consumers having lower salary have to sold their owning property. This was because the banks were lending at a cheap rate. And this led people were willing to accept mortgage. With the increase of leading amount, the banks make the debt turn into the form of a CDO (Collateralised Debt Obligation). This led this situation-if the morgages were pooled together, this was a risky investment; however, if the morgages was the repayment pooled together, this was less risky. These behaviours attract to investors to invest this market.

However, when people could not pay their mortgage, the problems increased. Other banks/lenders did not cooperate with them since they can nor sure if they re-mixed again because of lack of transparency of the market. This made a lowest levels of interbank lending.