Anatomy of a Credit Crunch: How it Started, What Might Be Done to End It
WASHINGTON -- The administration and the Federal Reserve have cited a "credit crunch" as one of the main reasons the U.S. economy is in recession. The following questions and answers attempt to explain this troublesome phenomenon.</br></br>What is the credit crunch?</br></br>Simply put, it is the widespread reluctance of banks to lend to borrowers to whom they would have lent eagerly in the past. Because banks play a central role in financing economic growth, the credit crunch has broad effects on the U.S. economy. Federal Reserve Chairman Alan Greenspan says it has "very little historic precedent."</br></br>What caused it?</br></br>With more and more loans going sour, the economy weakening and real estate values falling, bankers have grown more cautious. The memories of the excesses and financial failures of the 1980s are crimping lending in the 1990s. In addition, new rules, or capital standards, require many banks to either raise more capital from investors or make fewer loans. Unable or unwilling to raise capital, many banks are pulling back on lending.