Credit Crunch

TKline

I came across this article today. It talks about the dangerous phenomenon of credit bubbles and how they normally lead to a credit crunch that ruins economies and destroys asset values. I thought it was a good read and goes some way to explaining why the western world is in its present predicament!

Low interest rates encourage borrowing, and the expansion of credit results in an expansion of the money supply due to the money creation process inherent in fractional reserve banking. This causes an unsustainable credit boom where the excessive easy credit seeks out new and increasingly risky investment (or malinvestment) opportunities.

A credit crunch then becomes inevitable when this exponential creation of credit can no longer be sustained, at which stage the supply of money contracts sharply, forcing available resources to be allocated back to more appropriate uses....

Continued here --> Credit Crunch - an explanation

Cheers,

Tom Kline.

Hasschu

Here is a link to an article that slightly demystifies why this debacle was not nipped in the bud. Properly foot noted to satisfy those with academic leanings. It is in English.


mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf