What on earth does the 'credit crunch' mean?

Question

It's got to have been the buzz word of the decade and still I can't figure it out.

Can any of you brilliant economists out there explain to me in very simple (as if telling a toddler) what the h**l it means?

Cheers.

Answer 1

its a new breakfast cereal...

Answer 2

it means a whole bunch of people went out and spent alot moe money than they could afford to spend, now they cant pay their bills because of all of the debt they have amassed.  

Answer 3

Credit Crunch means the economy is crashing and we will have to squeeze and squash the last bit of toothpaste out of the tube.

Answer 4

credit crunch - basically means getting credit is harder. the trust is lost to give credit.

Answer 5

Okay - simply put, banks make their money by lending people money at a rate of interest. So over time, they get a steady income from everyone's monthly payments, and get back more than they gave out. So banks make lots of money (mortgage interest rate).  Extend this principle to all the other money services - credit cards, and so on - that's how they all work. So we have this credit-filled (debt-filled) economy.

However, this only works providing everyone pays back. If they can't and they have no money, the bank loses out. It's given out 100k and gotten nothing back. Re-possessions cost and they are unlikely to claim back what they spent. And they end up not getting that steady income over 20 yrs they were expecting.

And in the last 10 years, to make more money, they started to lend money to those people who were more at risk  of not being able to pay - they had saturated the 'prime' market and went for the 'sub-primes' - people of less financial stability. And when you think you are going to get a lot more money back in the next 10 years, you start to lend that 'money' out - to other people and other banks (it's a circular thing - you lend money to people; then lend out the potential money you think you'll be getting back from them to others. And so on and so on ... all imaginary money in bank accounts of course).

For a while this worked, but as they tapped this market more and more, fewer and fewer people were paying back until the bubble burst and suddenly the banks weren't getting enough to cover their loans (yes, banks, like any company are heavily in debt to one another and their government).

So they reversed the trend and said, okay we're not doing that risky stuff any longer. No credit from us. This hit not only you and me, but also other banks and companies, who rely on loans to survive (I'll pay you in three months when people have paid me back some of what they borrowed, and so on).

So credit is no longer freely available, but everyone has become used to it. Used to borrowing 5 x their salary for a big house; used to buying stuff today and paying back over 5 years. Without this credit freedom, there's less people buying stuff, and less loose cash in the economy.

That's the credit crunch in a nutshell. Nobody's getting the sort of returns they thought from the sub-prime market, lots of defaulting, and the knock-on is a tightening of banking belts, which inevitably hits the consumer.

Answer 6

In any good economy there has to be an equal state of supply and demand.  

Since Reagan, we have for the first time in our country, switched over to Supply side economics.  That means the government basically did everything they could to give the rich tax breaks and even tax incentives, "trickle down economics".  Productivity went through the roof and yet there was this little problem --- if people don't have money, they can't buy all the c**p companies are selling.  

So Greenspan in all his greedy wisdom decided instead of increasing wages (minimum wage), that he should deregulate the banks so citizens could BORROW money on credit to maintain the lifestyle they had previous to Reagan.  There was a major effort by the corporate mass media to get credit cards, etc.  Reagan busted unions so competetive wages continued to decline and 30years later, we are maxed out, our wages are lower than they were in 1980 and we're screwed.  That's the credit crunch (maxed out, no assets to borrow against and the banks are stressed too).

The disparity of wealth (richest versus poorest) has never been as great as it is in this moment thanks to Reagan and the presidents that didn't change his policies much since he came into office (McCain has same policies).  The last time it was anywhere near it was, guess, just guess, 1929 -- when the great depression hit.  Buckle up.