The Credit Crunch and You

Well, you must have heard about the new kid on the block - the infamous Credit Crunch. For the past year, it has been carving out a name and a place for itself by being the disruptive maverick to our daily lives.

I was taken aback when I overheard a fellow passenger proudly announcing to her colleague that the credit crunch did not affect her at all.

Something tells me that there are probably loads of other people out there who share her belief. Well, as bad as the credit crunch has been to us, we certainly do not envy those lots for sharing residence with Osama.

Based on my understanding of the global phenomenon, it affects everyone who uses, handles or requires money to transact business.

The credit crunch stemmed form the collapse of the US's sub-prime mortgage market. In this market, lenders grant loans to borrowers who have bad credit history, little or no job security and are generally bad at repaying debts. It was their subsequent defaults on their mortgage repayments which culminated in the financial crisis.

It affected the UK banking system because quite a number of our prominent banks have investments which are tied to the sub-prime market. Literally billions of pounds had to be written off which counted as losses.

Banks became reluctant to lend to one another, except at higher rates, fearing they will not be repaid. Understandably, depositors and regulators are on the edge about the safety of deposits, especially after the Northern Rock debacle. Its fatal mistake was granting 100% mortgages while relying on the money market for finance. When the money market collapse after what occured in the US, Rock had no choice but to turn to the lender of last resort. This was a rare occurrence. This explains why it created widespread panic among depositors which led to a major run on the bank.

The preceding events culminated in a tightening of the credit market. Mortgages and other loans are simply more difficult to obtain as lenders are introducing robust lending criteria. Fewer mortgages are being approved nowadays and experts have warned that the situation is likely to worsen. We hope that their premonition fall through, but don't hold your breath.

As credit is becoming increasingly harder to access for both personal and business purposes, the economy is feeling the pinch. Consumers have less money to spend and many business are being forced to off-load staff and re-locate to smaller offices.

You must have noticed how basic food prices have rocketed in recent times while wages remain fixed. If you are lucky enough to be earning the same amount of money as you were before the nightmare began, don't be deluded into believeing that the credit crunch is not affecting you. The purchasing power of that money is far less than it was before.

Against this backdrop, it is clear that everyone is feeling the pinch in one way or another. For instance, a recent study into the crisis has revealed that some city workers have lost their sexual prowess owing to the constant stress that they face over the financial crisis.