Major economic problems such as a credit crunch can be caused by a period of recklessness in the economy.
Typified by an era of low interest rates, very cheap credit, and soaring house prices, irresponsible lending is often the result. However, once a tipping point is reached, the true extent of bad debts emerge credit becomes more expensive and house prices tumble, a credit crunch is usually the result.
Credit crunch is usually very bad for businesses, particularly those with high levels of exposed risk to bad debts. Low consumer confidence and lower availability of capital can damage business in almost all sectors.
When a credit crunch becomes serious, credit becomes extremely strained. The companies or institutions that caused the credit crunch in the first place may find it very difficult to survive in this kind of economic climate.
When a credit crunch endures for some time, cheap and easy borrowing becomes a thing of the past. The 2007/2008 credit crunch was caused by sub-prime mortgage lending to poor credit borrowers during the early part of the 2000s.
Massive volumes of bad debt were packaged up and sold internationally, meaning that throughout the world numerous companies had heavy exposure to the sub-prime market. Once interest rates soared and house prices started to fall, the market quickly collapsed, with financial services companies worldwide at serious risk.