What are the origins of the credit crunch? What caused it?

Question

What are the origins of the credit crunch? What caused it?

Answer 1

The credit crunch arose from a good idea gone bad: to lump various mortgages into securities, and sell these as bonds, called collateralized debt obligations (CDO's).  Unfortunately, the actual creditworthiness of the underlying mortgages was not well assessed, and a lot of junk paper wound up buried in CDO's; when the housing bubble burst, and this paper went bad, the entire credit system got rocked.  Bankers are gradually sorting out the mess, but it will take a while, and in the meantime there will be a lot of pain.

Answer 2

The world has stopped demanding dollars and would prefer to receive goods and services for those dollars they already have.  As such, they are not willing to save their money in Western institutions and want their cash back.  Although the nominal cause is excess risk taking, that is really a surface cause.  When you flood a banking system with currency it will make as many loans as it can.  Once the good loans are gone it will try and make bad ones and push them off on others, like a bookie, but has been trapped holding some of the bad loans or at least the liability for them.  Chinese and Indian savers want their money back and want us to provide goods and services instead of dollars and promises.

Answer 3

The credit crunch was caused by lending institutions making loans to people they knew did not have the income or resources to pay the loan back. Primarily in the Real Estate Sector, but also in the Car Sales and other sectors.

The lending institutions then sold the loans to unsuspecting buyers who assumed the loans were made to solvent borrowers and would be paid back plus interest.

The lending institutions that made the loans to unqualified borrowers made a profit, but left the loan buyers with significant losses.

So the current credit crisis was caused by lack of regulation and honesty in the lending institutions. It has moved banker next to used car salesman in terms of trustworthiness.