InvestingWhat Caused the Credit Crunch
While stock markets across the world have drawn breath as share prices have stumbled, many may be left wondering how the current economic crisis has come about.
According to Edward Jones, an investment adviser, a simplified explanation starts with the sale of sub-prime loans in the US. This type of lending was supposed to help people with a less than perfect credit rating get onto the property ladder. However, while many American firms were happy to offer these bad credit loans, it has become evident that a portion of them will not be repaid because consumers cannot afford to keep up with repayments. And as banks have tallied up how much money they have lost as a result of the unpaid debts, they have also become more wary of handing out cash, with many even cautious of swapping money between themselves.
The group noted that as this has happened, companies that depend on other banks to provide them with short term loans have been brought to their knees as institutions bunker down and withdraw loan offers in an attempt to minimise their exposure to the growing financial storm.
However, the group was quick to point that although conditions may be rough, it looks like the financial climate will brighten up over time. It reminded people that while financial crises can be difficult to cope with, they seem to be a cyclical part of the global economy, with history showing that they tend to strike every 20 years or so.
Advising those who are questioning whether the worst of this particular crisis is over, the group professed: "No one knows for sure. The economy is getting weaker almost certain to hear more bad news about the banks. Normally when we have reached such a pessimistic view of the financial outlook, things get better. We know consumer confidence is extremely low, many headlines are negative and many investors are worried. Instead of guessing about the short-term news, stay focused on your long-term goals and your strategy. The biggest issue is to panic out of fear and miss the upturn when it comes."
For those who are looking to ride on the shirt tails of a resurgent financial system, the group urged investors to keep a keen eye on companies with lots of cash in the bank to tide them over while the storm continues, pointing out that they will be able to extend their business in areas that are underserved as the weaker institutions are washed away. Most importantly, it urges people not to buy into dramatic headlines and instead look for long-term indicators of improvements to the economy as a whole, such as a boost in the housing market or an upturn in consumer spending.
At the end of August, Prudential warned that while the credit crunch seemed to have little effect on consumers on an individual level, many Britons were very worried that price rises would soon be felt. Rising food, petrol and fuel bills were found to be principal causes of concern for consumers looking to limit their outgoings on essential items.