Credit Crunch Revision Pack!

• INTRODUCTION:

What is credit crunch?Credit Crunch also known as a "liquidity crisis" or a "credit squeeze", the banks won't or can't lend. Investors can't or won't buy debts. Suddenly it's very difficult to borrow money. There is a lack of easy money. Consumers and businesses have less to spend. There could be serious ramifications for an economy.
A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs).

This update comprises of three main sections.The first is concerned with the background to the credit crunch in order to give some historical context to what happening.The 2nd section will look at some of the implications of the credit crunch and how businesses arebeing affected.Final some curricular linked activities and concepts will be relater to the issue.

• SECTION 1:BACKGROUND:

Banks and other financial instituitions did a similar thing as David Bowie,he had all of the money up front rather than having to wait for it.Those people like him hoped that they would earn more in the long run rather than the money they paid for these bonds.

Mortgages are loans against the house,that is to say most poeple need to borrow money when they buy a house.Usually ,a person saves up a deposit and rest from a bank or other financial institution like a building society.Then they pay this off over a period of time,usually around 20 years.This means that the bank will be receiving money for a long while.There fore if they sell off these loans to someone else,they get their money back,amke some profit and can lend it again very quickly and make even more money though.This is called securitisation,which also means that the banks that buy the mortgages will earn good money over a period of time.

Well so that,especially in the USA,house prices rose rapidly as people found it easier to get a loan.However,the increase in money available in the US led to a large increase in loans to people who didn't fall into this traditional 'prime' category and the growth in "sub-prime".Because these poeple are at the higher risk of notpaying their mortgage back ,they are charged a higher interest rate ,which makes it more prfitable to lend to them.Finally,some banks lent money well in excess of the value of the property.

So this is teh summary of what happenned:

• Lots of lending available because of "securitization"
• European and Brittish banks buy a lot of the mortgages from American banks
• House prices increse rapidly
• Bank lending to riskier customers increases a lot and lending in general is at record levels
• The world economy is doing very well(Economic Growth)

But what went wrong???:

• House prices in the US started to fall
• BAnks who lent money started to lose money
• Banks in the UK & Europe who had purchased the securitised mortgages lost a lot of money
• People and businesses started to lose confidence so invest less,made people redundant which made the situation worse.

In the Uk the situation is already starting to spend less because of the interest rate rosed to keep down the inflation fears cause by an increase in the petrol,food and utility prices.

• SECTION 2:IMPLICATIONS OF THE CREDIT CRUNCH
  

This section will be sub-devided to deal with these separate issues:

1. The Financial Sector:

• Brittish based banks are in severe financial difficulties
• Brittish based banks are making record losses
• Some Brittish based banks have been nationalised or the government at least has a majority share in them.
• Consumers are worried about their bank deposits
• Businesses are finding it very difficult to borrow money on reasonable terms.
• The government have set up a scheme to try to aid small businesses obtaining finance.

2.The retail industry:

• Consumer spending is generally down and this has ;ed to some high profile businesses going bust such as Woolworths.
• Those businesses that are in a weak position before 2007 are unlikely to survive the Credit Crunch because they will find it difficult to obtain credit and demand will further fall.
• Customers are trading down,this will find it difficult to obtain credit and demand will further fall
• Price competition is becoming harder
• Product ranges and marketing strategies are changing
• There is a risk of a downward spiral of prices.
• Retailers are reducing costs by making redundancies,shutting branches and reducing expenditure where possible.
• Sales in 'big ticket' items are falling very fast.
• There are opportunities for some businesses,especially in discount goods and on-line retail.
• Businesses that supply the retail industry services such as marketing are suffering.

3.Manufaturing:

• MAnufacturing output is in fast decline
• This has impacted upon car manufacturers very badly
• In an attempt to reduce costs wages are being frozen and short term is being implemented
  
• Job uncertainty is having an interesting impact upon worker motivation
• Tension is increasing regarding industrial relations and the risk of industrial action is relatively high.
• Falling exchange rates should provide a stimulus for the manufacturing industry
• The stimulus is not happening,however ,because of the global nature of the crises and the increase in the cost of imported raw materials and components.

AND THIS IS AN EXTRA STUFF THAT I FOUND:
This shows what is happening to the UK house prices in terms of credit crunch.


The data used to create the graph above is publicly and freely available from the Nationwide Building Society. It's a graph that is very valuable to timing when I buy a property, and it will be to you once you have finished reading this.

Now that the UK government can no longer hide the fact that house prices are falling, lets see how we can use this to our advantage.

The Last Crash: 1989 - 1996
It took 7 years for the crash to bottom out (B) , wiping out 30% of the price of an average home in the uk. If anyone was convinced by the government to buy on the downslope (A) they risked massive falls in the value of their homes and also negative equity or even repossession! You should never buy on a downward slope as you simply don't know when you are going to hit the bottom.



This Crash: 2008 -
We have JUST started our decline this time around, the tipping point was 2008. Point (C) is the current point in our crash, the continuing black line is there for illustration as to what might happen next, based on the last crash. I am confident that we are going in to a dip, I just don't know how long or deep this crash is going to be this time around.
You can at least agree that if you buy now, you are staring in to a chasm with no idea how far you are going to fall.



When to buy:
The best time to buy is after the bottoms (B,D), but "what if you miss the bottom?" I hear you say. It does not matter! Even if you miss the bottom by 1 year, as long as you are buying on the UP slope you wont be a loser, all you have to do is monitor the data above and sit back and wait - my personal opinion is that you have at least 5 years - think of the deposit you could save!



Green shoots of recovery:
You should now understand why when the government talk about the green shoots of recovery it is a complete embarrassment. Why do the government want to trick you in to buying on to the down slope? They are not happy only with increasing your taxes to bail out the banks, they want you to also PERSONALLY sign up to massive amounts of mortgage debt to save the banks. Money , which could be better spent on your family.

We are only at point C - yet labour are actively telling people to buy before prices start going up again.



Well - now you know, the next time a politician on TV tells you to work as a mortgage slave for the rest of your life, you can tell them where to go - just keep tracking the above graph.

OH FINALLY,I FINISHED THIS TOPIC!!!!!
CONGRA TO LEX!!!!