What is a Credit Crunch

People are losing their jobs, companies are being shut down... overall, the economies are experiencing a downfall. People are talking about the credit crunch...for all those people who are not aware about what the credit crunch is, here is an attempt to introduce you to the basic elements and factors of the credit crunch or the recession!

What is a Credit Crunch?

Although there 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.

Is recession and credit crunch one and the same?

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

What are the possible reasons for a credit crunch?

According to many economics experts, one of the reasons which leads 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.