Who is to Blame for Credit Crunch?

Who is to Blame for Credit Crunch?

Estate Agents

Estate agents would be a populist target. However, I don’t think they can be blamed for cause of the credit crunch. They may give bad advice, like trying to encourage people to buy at the peak of a boom, but, the price of houses are determined by market forces and not estate agents.

Banks for Making Poor Loans

In the boom years, banks made an increasing number of loans with little regard to bad credit. Banks found ways to increase the number of mortgage loans through strategy’s such as interest only, 100% mortgages and lending to people with poor credit history. The result is that more homeowners are at risk of mortgage defaults. It is this rise in mortgage defaults that is leading to bank losses and reducing their willingness to lend.

• UK banks could argue that they have been positively responsible compared to their American counterparts. UK banks will argue that without the US Subprime debacle, the mortgage industry wouldn’t have collapsed like it has. Mortgage repossessions in the UK, although increasing by 40% in last 12 months, are still a small % of the total mortgage market.

Speculators

Rising house prices encouraged people to buy houses. In London, many houses were snapped up by foreigners, this contributed to the boom. It is in these areas where house prices are now falling rapidly. However, this merely exacerbated volatility of house prices rather than causing the credit crunch

The Government

It could be argued the government should have done more to regulate banks who were lending irresponsibly. The credit crunch has shown that financial institutions can easily abuse systems of self-regulation. The big question is whether government bail outs of banks in trouble has created moral hazard. – By preventing banks going under, have the governments given tacit approval for future bad decision making?