The Credit Crunch
We have all hear that the recession has been caused by greedy bankers, but the source of the credit crunch lies in the american shadow banking sector. Due to a period of low iterest rates, banks essentially became bored of low returns and looked to lending to riskier customers. These risky customers are referred to as sub prime, and american mortgage companies competed fiercely to gain new business in this area. However the housing market nose dived, and the rates became unaffordable, with many americans losing there house.
All very sad, but how does this affect people in the UK as well as other countries? Well to do more business, the mortgage companies passed on the debts to banks, in order to have even more money to loan out. Of course when these mortgages were found to be worthless, banks became very suspicous of each other, and a liquidity crisis ensued- the credit crunch.
Banks such as Northern Rock which relied heavily on borrowing from other banks no longer had a source to borrow from- and so the government had to rescue the bank.