What is Credit Crunch? Definition of Credit Crunch, Credit Crunch Meaning and Concept

Credit Crunch is a credit contraction resulting from a financial crisis where a severe restriction on credit is imposed by banks or by the tightening of the conditions of access to loans by them.

Under this circumstance, the Central Banks pursue the lowering of interest rates in order to face this situation in order to control economic and monetary policy.

Credit Crunch example

The clearest example of credit crunch is found in the crisis of 2008. After the financial crisis in the US and the risk of contagion to countries that had bought packages of securities backed by subprime mortgages in a context where they begin to raise rates of interest and unemployment begins to be generated, a credit restriction begins to occur in a fulminating way.

Consumption and investment are contracting, indebtedness soars and unemployment rates in many countries rise considerably. Faced with this situation, the Central Banks begin to raise interest rates and reduce the money supply in circulation. In turn, banks stop lending or toughen credit access conditions, having a direct impact on entrepreneurs and the population as a whole.

If to this we add the significant unemployment rates that are generated plus a very important liquidity crisis, we can say that the 2008-2012 crisis has been one of the strongest in history.

Applications in the US and European Union

The macroeconomic outlook was disastrous, with very different economic policies between the US and Europe. In the US it was decided to introduce quantitative liquidity injection programs to generate confidence. The purpose of this was for banks to lend money again and in this way, they could lower official interest rates.

On the contrary, in Europe there was a climate of confusion and delayed reaction. This was led by contractionary monetary policies of contraction of spending to sustain inflation, without worrying about employment and by an improvement in access to credit that will generate confidence.

In addition, the lowering of interest rates was carried out very late and this had a direct impact on its economy and on all macroeconomic variables.

While it is true that the US has been criticized for its excessive indebtedness after the QE (Quantitative Easing) programs, it is no less true that it has great financing potential since all countries consume dollars directly or indirectly.

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