World Financial Crisis

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CREDIT CRUNCH : WORLD FINANCIAL CRISIS

Any large business house , consumer expenditures or governmental schemes may borrow public money in the form of selling shares . It is the function of large financial institutions , such as banks , to issue or generate credit transactions . A smooth inflow of credit between the borrower and the lender is what establishes ideal market conditions . A credit crunch occurs when there occurs a lack of obtainable credit in the market and the borrowers cannot find adequate finance . Usually such

a phenomenon happens when the creditors are unwilling to invest more money or hike up their interest rates to such exorbitant levels that it becomes virtually impossible for the lender to borrow . The central question , then , is why do the creditors suddenly refuse to invest more money ? Actually , far from being an isolated fact , it is a part of a complex chain reaction . The lenders reel under deficit money supply when they fail to realize the interest or even the actual capital they had invested on companies or institutions , which accrued a disastrous amount of losses . Such loss incurring companies cannot return the money they had borrowed from the creditors and have to default payment . However when the prices begin to fall , even the bank has to sell out at considerably lower prices and suffer huge losses . Consequently , their ability to lend money is severely crippled . In certain cases , the banks are required to raise the level of capital reserves and to...