What Caused the Credit Crunch & What is a Recession?

Question

As a novice to this kind of thing, can anyone give me a brief explanation of what caused the credit crunch? How come the banks are all in such a mess? Why could tax payers money be use to "bail the banks out" and what would happen if there is a recession?

Answer 1

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It's interesting that you separate the two, a lot of people think that the Credit crunch and the recession are the same thing, but you have correctly identified a difference.
The Credit Crunch is a result of badly sold debt - ie money lent to those who would not be able to repay - the lenders assumed that the collateral (homes) could be re-sold to pay off the loans (repossesed) in the meantime, they sold the debts to some major banks who just lapped it up without checking (hard to believe but oh sooo true..).
http://www.thecreditcruncher.com/2008/06…
This had reduced the banks reserves of available credit to fuel the economy as a whole.
this has coincided with recession where a nation's Gross Domestic Product declines for two straight quarters - admittedly only the Irish Republic has so far declared a recession, but the rest of us will follow suit shortly...!
http://www.thecreditcruncher.com/2008/09…
The recession is an indicator of the slow-down of economic activity which is a result of people spending less, this causes jobs to be lost and therefore even less money is spent spiraling the economy downwards.
Our collective governments are throwing (borrowed) money at the problem to try to stimulate growth, my fear is that this is a MASSIVE gamble - the politicians cannot know that this will work, but they ARE willing to commit our money to it.

Source(s):

http://www.thecreditcruncher.com/

Answer 2

Predatory lenders who offered sub prime loans to people who didn't deserve them caused the credit crunch, so banks & creditors are now more likely to be cautious in who they lend money to. There are now more higher requirements than before for people to open lines of credits and borrow loans b/c of it. The banks are all in a mess b/c of the same reason. The borrowers defaulted on their mortgages and couldn't continue making payments to the banks, and then their home values dropped due to the market and the banks lost the spread in between so even if they sold off the house to make up for their losses they still lost money in the end. Tax payers money will keep the banks functioning and keep employees from losing their jobs, and hopefully save the banks where plenty of people have their money tied up there. If they don't get bailed out, one would think that it would cause a huge chain effect across the economy b/c people have 401ks, IRAs, mutual funds, mortgage backed securities and all sorts of other securities tied to the banks. We practically are in a recession right now. Basically jobs will be lost and the economy will not grow as one would hope it would.

Answer 3

banks lent money to people who couldnt pay back their loans (too many of them.) so the banks took the houses off these people and have tried to sell them to get their money back but because there are so many houses for sale, no one is buying them. the banks therefore are losing money big time and because they are losing money they cant give loans out (which is how they survive.) so to put it in a few words, banks are going broke and money is hard to get.
in a recession, businesses make losses instead of profit so people lose their jobs and negative things like that....
businesses need money from banks to operate but because banks are not able to give credit, many businesses may not be able to operate and make profit..so it may cause a recession.

Answer 4

One of things that contributed was the banks and mortgage companies were pressured by a group called Acorn. They demanded that high risk people/ low income get home loans. If you do a little reading on that it will give you one of the reasons.

Answer 5

Recession is when you have negative national growth for 2 quarters

Answer 6

Greed and economic decline. The government need to keep tabs on things.