Credit Crunch
1. O Background of the Study
The worldwide problem on the issue of credit crunch seems to be debilitating for some: several countries are struggling to cope with economic slowdown and avoid recession, while others are virtually unscathed. Forecasts of growth in developing countries have been downgraded significantly. Credit crunches are usually considered an extension of recessions. It means it is nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults, which results in higher rates. The consequence is a prolonged recession (or slower recovery), which occurs because of the shrinking credit supply. Under the credit, crunch lenders stop lending and start hoarding cash because they are afraid of rising bankruptcies and mortgage defaults. It leads them to charge higher interest rates or reject all but the safest loans (2008). For an economy that has been fueled by easy access to borrowed money, tighten credit means trouble for companies that need loans to pursue their business plans and for consumers who want to buy big-ticket items.
In addition, the crisis began with the bursting of the United States housing bubble and high default rates on “sub prime” and adjustable rate mortgages (ARM), beginning in approximately 2005–2006. Government policies and competitive pressures for several years prior to the crisis encouraged higher risk lending practices which lead to the global financial crisis that was stretched across the world, a crisis which started in developed countries and is now been spread to the across the developing world ( 2007). According to the World Bank, the global credit crunch unleashed is combining with runaway food and fuel prices to put the squeeze on developing countries.
2.0 Statement of the Problem
The achievement of subsistence despite of the universal problem of the credit crunch is the main issue here. What are the effects of this global phenomenon on developing countries? How deep and for how long will these difficulties stretch, which countries will be affected more than others, and what are the channels through which this might be solved? What will this mean for long-term efforts to promote growth and poverty reduction in developing countries? Mechanisms to limit the damage of the financial crisis to low income countries including financial sector support must be implemented by the government.
What the local government as well as the investors is doing in protecting and sustaining the demands of the consumers when it comes to getting finance is critical. Evidence suggests that developing countries will feel the tightening of credit as well as the real economy effects on exports, remittances and commodity prices more than emerging market economies and so they must be on track to adopt government regulations and they should be empowered enough to realize they may have different standards.
3.0 Objectives of the Study
The main purpose of this study is to analyze the several activities or events that jeopardize effective resolution to the credit crunch phenomenon. This research, specifically, purports to determine how these activities affect the consumers and discuss the events surrounding the 2007-08 credit crunches. The credit crunch itself occurred when house prices fell and sub prime mortgage defaults increased. These events caused investors to reappraise the risks of high-yielding securities, bank failures, and sharp increases in the spreads on funds in bank markets. This research seeks to evaluate the actions of the authorities that provided liquidity to the markets and failing banks and indicates areas where improvements could be made. Similarly, it will examine the regulation and supervision during this time and argues the need for changes to avoid future crises.
4.0 Research Methodology
This study will use the descriptive type of research. A descriptive research intends to present facts concerning the nature and status of a situation, as it exists at the time of the study and to describe present conditions, events or systems based on the impressions or reactions of the respondents of the research (1994). It is also concerned with relationships and practices that exist, beliefs and processes that are ongoing, effects that are being felt, or trends that are developing (1970).
In this study, primary and secondary research will be both incorporated. The reason for this is to be able to provide adequate discussion for the readers that will help them understand more about the issue and the different variables that involve with it. The primary data for the study will be represented by the survey results that will be acquired from the respondents. On the other hand, the literature reviews to be presented in the second chapter of the study will represent the secondary data of the study.
The research will be presented in written form with the addition of data charts, which will present the project’s results. Pie charts and network charts will be needed to illustrate some of the analyzed data. This cannot be confirmed, however, until the research data have been analyzed.
5.0 References
Credit:ivythesis.typepad.com
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