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Credit markets - Essay Example

This article try to discuss the relationship between credit market and the 2007 credit crunch. Because the 2007 credit crunch is special started with subprime credit, and one of the reason is the overactive credit market. And after the credit crunch burst, the credit market is stroked heavily. So it is necessary to find the relationship between credit market and credit crunch.

Since 2007, many banks, insurance companies, enterprises failed in their business, big investment banks have to announce to go bankrupt or have to required substantial government assistance, even countries are facing a crisis of bankrupt. The whole world’s economy stepped into a bad situation. The global credit crisis has occurred as major parts of the credit market have failed to function normally leading to failures of financial institutions because they were unable to obtain funding from the market.

Credit market plays an important role in this disaster. On one side, credit market develops rapidly that help the economy get great boom. Credit market making it easier for credit risks to be borne by those who are in the best position to bear them, enabling financial institutions to make loans they would not otherwise be able to make. On the other side, in trying to find reason for the credit crunch, we have to put that kind of credit market development into a prominent villain role. Until now, we are still suffering the credit crunch.

So we must wonder how credit market contributes to the credit crisis. And how did problems that first manifested in a relatively small part of the mortgage market lead to a contagion affecting other types of credit including credit cards, student loans, and others, and then quickly spread to threaten the liquidity and possible solvency of many financial institutions around the world? It is truly a complicated problem, but there are still something we can find to discover the relationship between credit market and the credit crunch.

In this article, we will have a short introduction of the credit market, and review how the credit crunch happened from the very beginning, and then discuss what effect and influence that credit market do to the credit crunch, trying to discover how credit market contribute to credit crunch. There are five parts. First part is introduction, second one is literature review, third is a brief explanation of credit market and credit crunch, the fourth one is trying to discover how credit market contribute to credit crunch, and the fifth one is conclusion.

From the former study, almost all the studies and commentaries on the financial crisis deal primarily with factors believed to have encouraged excessive household debt. For example, according to Pattanaik (2009) and Posner (2008), the movement to deregulate the financial services industry went too far by exaggerating the resilience of the free market economic model. And Taylor (2008) blames the abundance of credit as the chief cause of the crisis. Dell’Aricia et al. (2008a) also think the sharp increase in delinquency rates should take responsibility for the credit boom for.

They prove that it is especially easy credit surrounding periods the most major banking crises occurred. In this period, loan delinquency rates tend to rise with the volume of loan origination. So can come to the conclusion that economic booms associated with fast rising real estate prices were more likely to end up in a financial crisis. Barajas et al. (2007) discuss the effects of monetary excesses but find that while most major banking crises in the U. S. occurred in periods of credit boom, not all credit booms are followed by banking crises.

Dell’Aricia et al. (2008b) also conclude that larger and longer-lasting booms, which coincidingly with higher inflation and lower growth, were more likely to result in a crisis. Rogers (2008) also blames the rapid development of credit market globalization for the eventual economic recession that followed the financial crisis. The deepening wealth-poverty gap that globalization caused makes government encourages subprime credit, which resulted in the transnational banking and economic crisis directly.