Credit Crisis 101 – The Cause of the Credit Crisis

The world is facing a growing credit crisis. How has it come to this? When did it start and where is it going? Generally speaking, the subprime mortgage crisis is associated with the reduced liquidity in the credit market in correspondence with troubles pertaining to the banking system. To go along with this, a struggling real estate market with  decreasing values of property in combination with bad lending practices, among other downfalls, has compounded the credit crisis.

Although the credit crisis has been brewing for quite some time, it started to rear its head during the latter part of 2007 and throughout 2008.

When did the actual credit crisis begin? While it is difficult to pinpoint an exact date, most experts agree that the start was the bursting of the housing bubble in 2005 and 2006. In years prior, mainly from 2000 to 2005, lenders lowered their lending standards and the housing market boomed. But once interest rates began to climb and the value of homes took a turn for the worse, the bubble burst and the credit crisis began.

To go along with problems within the real estate market, there are many other issues that have led to the credit crisis. Some of them include high risk loans, inaccurate credit ratings, fraud within the mortgage industry, bad government policy and the difficulty of banks in putting a value on the rising debt on their books.

Currently the liquidity of cash is based on global investment banking principles which allow banks to borrow inexpensively. They turn their debts into securities which they then sell on. But it has become increasingly difficult to put a value on that debt. Banks currently need a way of continuing to keep their doors open and do business, though they have large quantities of debt on their books, which they cannot value. The difficulty in valuing the debt is the root of the current banking crisis.  For this reason the United States government is providing some liquidity for the markets by creating government backed vehicles to acquire the bad debt from these financial institutions.

As you can imagine, these are not all problems which can be addressed and fixed in a short period of time.

Take for example the government policies that were and still are in place. Many experts feel that they are outdated, and simply not able to handle the current economy. In September 2008, President George Bush said, “Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st century global economy remains regulated largely by outdated 20th century laws. Recently, we’ve seen how one company can grow so large that its failure jeopardizes the entire financial system.”

It is no secret that government policies and related structures are outdated and in dire need of change. But as President Bush stated, it is difficult to move forward with these changes in the midst of a credit crisis.

The current credit crisis has been a long time coming and it will be a long time fixing. For more information on the crisis and related details, take a closer look at the subprime mortgage crisis article at Wikipedia.  This article gives a detailed account of all the major events and issues that have given rise to the current financial state of affairs. In addition the article is always being updated with the latest financial events and policy adjustments.

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