Credit crunch between 2007 - 2009 - Essay Example

Download file to see previous pages... Credit crunches are usually considered to be the predecessor of recessions. A credit crunch makes it almost impossible for business organisations to borrow as lenders are scared of insolvencies or defaults, which produce in high interest rates. The outcome of such scenario is extended slow recovery resulting from the supply of credit having shrunk (Duca & et. al., 2010). Credit crunch was caused in 2006 when the housing market crumpled. At the time of credit crunch, a certain numbers of the mortgages were intended for a division of the market, specifically subprime mortgages, their designed interest payment rates involving to refinance them within undersized phase were tried to be launched to avoid hikes in the mortgage rates. The mortgage refinancing demonstrates the fact that the prices related to housing market would likely to increase. Thus, the disintegration in the housing market defines a flow of the future non-payments in the subprime areas (Acharya & et. al, 2009). The financial crisis of 2007 initiated in the subprime mortgage industry in the United States. Apart from being restricted to the real estate market, the effects of the subprime fall down spread throughout the US economy as well as the global markets. The impact has been mainly severe on the financial industry, as numerous investment banks had a short but wide records of utilising Mortgage-Backed Securities (MBS) as a way to spread risk and free up other capitals (IESE Business School, 2009). The households and the institutions such as pension funds along with life insurance companies and mutual funds are the ultimate lenders investing in support of households. It is worth mentioning that certain credit will be offered to the borrowers directly from the lender, as is the case with municipal bonds and corporate bonds as well as treasury securities. The vastness of the credit financing intermediated in the economy through the banking system, deduced broadly. It is quite significant to comprehend the operation of financial intermediation as well as a way in which the emergence of banking system took place since the past few years. It is also vital to recognise the global financial crisis that took place in the year 2007 and thus generate standards such as short-term and long-term crisis management standards so that a flexible financial system can be generated (Adrian & Shin, 2010). The main objective in this study is to illustrate the economic impact on the US that have taken place due to the credit crunch, economic crisis and to reassess the measures that have been taken by the authorities to address the crucial issues that have generated those events. Economic Impact of Credit Crunch in the US There has been a certain significant economic impact of the credit crunch in the period of 2007-2009 in the US which coincided with the global recession. The economic impacts have been discussed below: Housing Bubble: The bursting of the housing bubble in the US affected banks to write down large losses that had been extremely amplified and also created a large number of confusions in the financial markets, and also resulted in the defaults, the liquidity dry ups, the bailouts of banks and financial institutions. As consistent flow of financing is an absolute obligation for the economic system, the financial disruption caused a growing doubt about the macroeconomic position, a wide-ranging increase in risk aversion and a strong deterioration in the actual economy, with unfavourable ...Download file to see next pagesRead More