The credit crunch has already lasted for over 12 months. There are still signs that more loan defaults may work their way into the financial system causing more problems for banks with already depleted balance sheets.
A Look at the credit crunch one year on
Recent news that oil prices are falling, may give some grounds for optimism, but even lower inflation rates may not really help. The credit crunch is caused by bad loans that banks have had to right off. Lower interest rates merely lessen the pain for borrowers, but, do not tackle the fundamental problems. In fact, many argue that it was low interest rates that helped contribute to a boom in reckless borrowing.
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Marriner S. Eccles, was the Chairman of the Federal Reserve from 1934 1948
In his 1951 memoir Beckoning Frontiers, Eccles detailed what he believed caused the Great Depression.
Our current situation is eerily similar.
Eccles wrote:
“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery.
Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.
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