The term “Credit
Crunch” can be defined as “a severe shortage of money or credit”. Credit Crunch
and recession always go hand in hand.
People learn
from their past experience and try to prevent not to happen again. It should be
the same in the business world too. In history, there were a number of financial
crisis. All were originated from the credit crisis. But the question is “Have
we all learned? “.
In my
opinion, it looks it does not. Since the fall of the US housing market in 2007,
the credit problem had escalated and spread to many countries. UK had also
suffered.
During a recession,
the spending power of people falls and this has led business into unprofitable
situation which makes people unemployed.
That means people are not able to spend as they use to. Thus makes circling
and it takes years to remedy the situation.
The change of
bank lending behaviour was the main cause of the recent crisis in 2008. The US
Government policy of housing development for poor was one of the culprits which
contributed the change of bank lending behaviour. Relaxing a lot of regulation for the buyers in the housing market had influenced the bank
decision in giving out loan. The lack of
governance in regulation had caused the bank to give loans to the people whose
financial positions were not fit enough.
In reality,
the borrowers were not able to return when it was due; the bank suffered the
loss of loan. To offset the risk, the bank increased the interest rate which
made cost of borrowing was increased. This made the situation even worse. The lenders were reluctant to finance. 2007
Crisis had brought the same situation. The banks were reluctant to borrow money
to each other. In this scenario, the involvement of government was very
important. A good example is the Northern Rock Bank in UK. Finally, the Bank of
England had to fund the bank.
The lack of
governance in lending regulation has pushed the mortgage advisor to make
unethical decision. The more they have made the business profitable, the more
they can enjoy the commission. This encourages them to bring more borrowers/
customers regardless of their financial background.
Regulators
are important in governing the lending decision. All the parties must
understand the responsible lending. The IT sector are also looking into this
matter and trying to observe the best way to tackle. According to financial
service technology, analyse house OVUM claim that it is foreseeable the end of
credit crunch will be in 2018. According to Daniel Mayo, the practice leader,
OVUM says "Lending is picking up and banks are looking to IT to analyse
and understand lending decisions in order to minimise the risk of another
financial crisis. This increase in responsible lending suggests that the end of
the credit crunch is in sight."
As credit
crunch can cause damage to economy, all parties involved; the economists, the
analyst should monitor carefully after a long credit expansion in a country.
For example, China
China builds their
economy on debt. The threat is it is possible to burst. However due to the recent
inflow of the China FDI into domestic market, it appears it is still manageable.
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Therefore,
the two Analysts, Morgan Stanley’s Cyril Moulle-Berteaux and Sergei Parmenov
argue that China is approaching to its “Minsky Moment” (via Zerohedge).
Minsky
Moment is a phenomenon named after the economist Hyman Minsky articulated the periods of speculation and credit growth
inflate assets, only to end in crisis.
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Some
economists and analysts reject their view, they say China is not in Minsky
moment. However, the recent news about the steel mills’ credit squeeze in China (South
China Morning Post) and China solar faces credit crunch (Forbes) are depicting
China is under the threat which can lead to economic downturn.
Furthermore, as always history tells the truth, therefore, it is not possible to say China will
not be affected by Minsky Movement. But it is not deniable it would worth to
watch with care.
Reference:
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