Big Bad Credit Crunch

Despite what we have already heard about how hard the recent credit crunch has been for homeowners and how many have been forced to sell their houses or even file for bankruptcy, we believe that the worst is yet to come. The new problem that the macro economists have to contend with is slowing growth versus rising inflation which if not kept in check can severely damage the economy causing many more casualties compared to the initial credit crunch.

According to many specialists the credit crunch was just a prelude to the development of a greater and more worrying financial situation not only in the US but across the world. Recently, in the English parliamentary seating, the Chairman of the Treasury Committee said that he expects inflation to increase by 33% from the previous years estimate because of the increased interest rates and soaring utility bills.

This situation is much the knock-on affect of the US credit crunch and thus the tightening of credit and also the huge increase in oil prices which have dampened economic growth and increased the prices of normal day-to-day goods significantly. This double negative drives most developed economies into a situation where financial markets are very fragile and can easily be spooked into a selling frenzy.

It is said more and more in the news that central banks and federal reserves are increasingly pushed to step in to form bail-out plans for large financial companies that may collapse if left to market forces. The Bank of England has started the ball rolling by giving assurances of liquidity to financial markets players and also commercial banks if they do come into hardships.

Reports from the Bank of England are that a meeting with Britain’s top bankers have showed that the top bankers have expressed concern about the availability of credit to the average person and how tightening of regulations regarding credit worthiness for loans will have adverse effects on loan availability and thus revenues. The top bankers have asked for the central bank to be more generous and flexible to ease tensions in the fragile financial environment that we are facing now.

The Bank of England has responded that they will agree to have closer dialogues with the objective of restoring a more orderly market condition beneficial to everyone and not only the commercial banks.