All entries for Wednesday 15 October 2008

October 15, 2008

Credit Crunch…..

We just finshed a lecture on credit crunch and I am here in the break time righting about it. Boy it was interesting.

It all began when bank started lending money to people they should not have for buying houses. The banks did that with the assumption that real estate would only go up. Banks also borrowed money from other banks. It had formed a chain. One bank taking a loan from bank b, which took loan from bank c.

So when one bank did not recieve its money back from the people it had to default and shut down, which lead to other banks to default. It thus formed a chain. No one knew who is in the top of the chain and who is in the middle....

Banks borrowed money on short term but lent long term. This is because they thought that people who banked with them would not take back the money as people have the notion that their money is safe in banks. So banks started packaging loans to people who they should not have

This is one of the biggest reasons for the sub prime morgage crisis in the USA.

Now governments have started to intervene. Some have started buying stakes in banks and recapitalizing banks and reduced their bad debt. US has a liability of about 3 trillion dollars while UK has about 7 trillion dolloars...(Its either dollars or pound for both US and UK....I am not sure)


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