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Progress report - Essay Example

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Student's Name: (approx. Word count – 727 words) Professor's Name: Credit Crunch (Impact on Consumers) 14 February 2011 Introduction The term credit crunch was once an obscure phrase used only by economists. But this term has gained a more widespread currency lately due to the implosion of the housing market in the United States of America which in turn triggered a global financial crisis which affected not only big businesses but even entire countries (like Ireland, Greece, Spain, Portugal, etc.)…
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Download file to see previous pages A credit crunch usually happens during a recession (as what we are in right now) that results in greater difficulty in getting or securing borrowed money from banks and lenders. A crunch occurs because the usual lenders are nervous about lending out their monies due to the reduced prospects of repayment, such as during a recession when the economy is not doing so well and impacts negatively on people’s ability to repay a loan. This brief paper aims to look and discuss how the current credit crunch is affecting all consumers. Most academic research and newspaper reports only talked about a credit crunch and its impact on big corporations but neglected its effect on individuals. It is the objective of this paper to correct this oversight and enlighten people on how the credit crunch affects them individually on a personal level. The rationale for choosing this topic is that a credit crunch has a negative effect on everybody from availability of jobs to the ease of getting a loan and to the interest charged on credit cards and home mortgages; its impact is very wide ranging. Discussion Consumer spending accounts for roughly 70% of the United States economy. GDP is the measure of all the goods and services produced by labour and property within the country (Young, 2011:1). The United States economy has a big impact on the world economy because of its sheer size. However, there are also some constraints to consumer spending, primarily a depressed economy that contributed to a high 9.8% unemployment rate. Even here at United Kingdom, the economy is also largely dependent on consumer spending. Figures produced from the statistics office showed that household final consumption expenditure (HHFCE) had grown by 1% only in the third quarter of last year (at current prices) compared to1.9% growth in the second quarter of 2010 (Clancy, 2011:7). The practical implications of a credit crunch are more expensive credit cards, higher rates for housing mortgages, decreased savings or pension funds reduced in value and perhaps even much worse, personal bankruptcies and repossessions. A cause of the credit crunch that is experienced today can be traced to the “housing bubble” in the US where house prices kept increasing due to low interest rates. An asset price bubble (residential properties) came about when house prices went up without any corresponding change in the fundamental demand. It simply means house prices increased due to speculation (Kroszner, 2005:3). Because of this sudden drop in housing prices, the wealth of most home owners had been wiped out. Structure of this paper follows the trail of effects of a credit crunch on people. It begins with different channels of credit, then how it affects jobs and employment, then on to interest rates and then followed by the implosion in savings and pensions. The last part of this portion talks on the pain of home foreclosures. The next parts of the paper discuss how an asset price bubble will start to form because once a bubble bursts, it results into a recession and a credit crunch. The last part discusses how the central bank deals with it and how people can cope with it. Because of the credi ...Download file to see next pagesRead More
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