Credit Crisis: Blip or Full-Blown Recession?

In 2008, having entered its second year, there seems to be little chance of the credit crisis easing forcing most financial analysts to re-evaluate their position and work out how severe it will get and how much longer it will prevail. Indeed, a recent UK survey has highlighted that customer confidence is at its lowest level since the strike-ridden days of 1974 as the media continues to report abundant stories of financial doom and gloom.

But, where did it all go wrong? Few experts could have predicted that the sub-prime lending crisis in the USA would have such a disastrous knock-on effect throughout the world. However, it was only after the extent to which global banking organisations were involved in the seemingly domestic US crisis that a collective deep breath was taken.

It soon transpired that world banks were lending vast unsecured sums to each other and made worse, when, because of the sub-prime crisis they no longer trusted the ratings of each other’s loans. The distrust almost forced a complete global breakdown in lending at anything other than premium rates and then only on extremely secure options. That caution soon passed into retail markets as lending products were rapidly withdrawn, particularly in the mortgage and unsecured markets.

That too, had a knock-on effect in the housing market. House prices have fallen rapidly as most people find it hard to obtain a mortgage in the current financial climate. Record numbers of repossessions are also being reported, with recent figures showing that 48% more families lost their home up to the end of the second quarter of 2008 when compared to the previous year. That is the worst set of figures for twelve years, leaving many people in a daze. Only 12 months ago everything seemed so rosy, with the average house price rising at ?1,000 per week. Now that figure is in reverse and with the market slowing to a snail’s pace seems only set to get worse.

But, it’s not just the housing market that is suffering. Retail organisations are reporting a slow-down as people now have less disposable income to spend, and credit cards are being used less. Indeed, within months of the credit crisis hitting the UK shores credit card companies started to decline record numbers of applications, and even started reducing the credit limits of customers they identified as being high risk.

Now, many people in the UK are saving more and are cutting their expenditure as they prepare for the possible hard times ahead. Depending upon which economists you believe, this current credit crisis is either only a small blip or the start of years of economic recession; only time will tell whether it’s the optimists or the pessimists who got it right.

Disclaimer: Matthew Pressman writes for a wide variety of commercial clients. This article is intended for information purposes only and readers should seek additional information before taking any actions based on its content.