What is a Credit Crunch

People are losing their jobs, companies are being shut down, overall, the economies are experiencing a downfall. A situation of credit crunch arises when the problems of debt override the economy to an extent where it suffers a major blow.

What is a Credit Crunch?

Although there is no mention about who invented the term credit crunch - the term was used in a study by America's Federal Reserve Bank, which dates back to the year 1967. A credit crunch is an economic condition in which investment capital is difficult to obtain. During a credit crunch, banks and investors become wary of lending funds to corporations, which results in the mounting prices of debt products for borrowers. Currently, the sub prime mortgage crisis is an ongoing financial crisis characterized by constricted liquidity in global credit markets and banking systems triggered by the failure of mortgage companies, investment firms and government-sponsored enterprises.

Recession Vs. Credit Crunch

There is often confusion between the two terms recession and credit crunch but they are not the same. Recession usually refers to two successive quarters of negative economic growth while a credit crunch is a different term which is a part of recession.

Causes for a Credit Crunch

According to many economics experts, one of the reasons which lead to a credit crunch is a sustained period of careless and inappropriate lending which results in losses for lending institutions as well as investors in debt. A reduction in the market prices of previously 'over inflated' assets also result in a credit crunch.