Credit crunch

As you may or may not know, for the past half year the media has been spending some significant time in covering what is known as the financial crises or credit crunch. If you, by any chance, failed to notice this particular event you have probably been living in a cave for the past half year. Because the truth is, is that this crises started over more than a year ago, and since it affects us all - mainly the business world – it is rather interesting to know how it all began.

So what is exactly a credit crunch? A credit crunch is a sudden reduction in availability or tightening of conditions required to obtain loans/credit. The credit crunch mentioned in the above paragraph started in the United States, July 2007, when investors lost confidence in securitized mortgages, mainly caused due to careless and inappropriate lending. One of them of which I believe is lending money to individuals to buy houses which they could not afford and caused house prices to drop. In turn the stock market lost confidence too, after it was publically made that several major finance companies went bankrupt, causing investors to massively dump their stocks on the market causing companies to enter in liquidity problem. This ultimately led to a global crisis since the US market has some significant influence on other stock markets. It caused European companies to go bankrupt, for example a major Benelux bank “Fortis”, and other companies’ stocks to decline into the “depth of the ocean”.

Now that we have cleared out what the credit crunch actually is. To determine what the actual influences are in human lives depends on whether you are active in the business world. For me as a student the effects are rather minimal, I mainly survive on governmental grants and I had a stable job at my uncle’s French fries shop. Other than that the fact that some of the stocks in the stock market simulation game I play in on the internet declined for about 70% (for example stock of General Motors), I would rather say I am pretty well off.
But for those who were active in the business world, the effects are much greater. For example those who owned GM stocks would find their equity to have shrunk by 70%, meaning each dollar they had invested in the company is currently worth only 30 cents. Those who own a business would find it rather difficult to find investors ready to invest in their company. Those who were sadly employed in one of the not-so-well-off companies would find themselves on the street, unemployed. The ones who bought houses who could not have afforded it would find themselves homeless. Suffice to say, those who were average and were not ambitious enough to be active in the business world have rather come off pretty clean of the crisis, and those who were active would find themselves worse off than when they started, as many analyst have said: “2008 was a bad year to have invested in”.
As for the actions being taken by governments to help out companies is rather ridiculous, yes it may be good to help out companies to preserve jobs, but basically what they are doing is rewarding companies for doing a bad job in the market. What they are basically doing is throwing money in a bottomless pit, because who will decide when the aids to the companies will finally end? And to begin with, the governments probably do not have the funds to bail the companies out anyway. What they will do is probably loan money from the World Bank, or issue bonds, of which on both cases money is created out of thin air. What will happen is that, actions such as these will sadly lead to inflation of the currencies. Meaning, there is no direct solution to the crisis, what needs to happen is to let the market forces do what they are meant to do, and that is to eliminate the weak and let the strong survive.